Artemis Financial Recruitment » IFRS 17

IASB delays IFRS 17 by one year

Hatty — Mon, 19 Nov 2018 14:18:21 +0000

November 2018

The standard setter has deferred the effective date for International Financial Reporting Standard (IFRS) 17 – Insurance Contracts – to annual periods beginning on or after 1 January 2022

This, the International Accounting Standards Board (IASB) said, was so that any amendments being explored would not disrupt its implementation.

“Together with the significant change that IFRS 17 will cause, this constitutes exceptional circumstances that justify the deferral,” the IASB said. Fourteen board members voted for the change.

IASB also chose to defer the expiry date for the temporary exemption to IFRS 9 in IFRS 4 by a year. All insurance entities must apply IFRS 9 for annual periods on or after 1 January 2022.

This more contentious deferral – which would mean some entities not applying the standard up to four years after all other entities – gained 13 votes.

IASB said, “Without the deferral there would be two sets of major accounting changes in a short period of time, resulting in significant cost and effort of the preparers of financial statements”.

Philippa Kelly, head of Financial Services at ICAEW, said, “Additional time will allow insurers and those working with insurers the time needed to ensure they have the technology required to effectively implement the standard available and in place.”

She said that insurance companies should make good use of the additional time to deliver on high quality implementation.

Alex Bertolotti, IFRS 17 leader at PwC said that some insurers have been lobbying for this for some time and others have been requesting clarification due to the costs of moving ahead.

He noted that the full impact of deferral “can only be fully assessed after reviewing potential changes to the standard which the IASB board will consider in December”.

“The additional time will help alleviate some risk from existing plans, however many companies still have a lot to do and cannot afford to press pause,” Bertolotti said.

“To stand still is to fall behind”, he added.

Francesco Nagari, global IFRS insurance leader at Deloitte, described the IFRS 17 deferral as a “parallel shift of the deferral in IFRS 9 mandatory adoption” that insurers will largely welcome.

A recent survey from the Big Four firm found that 90% of insurers were either “somewhat” or “very” confident at meeting the previous 2021 deadline, but there have still been recent calls to delay, he said.

“Substantial effort is already underway to implement the standards, with budgets in some instances expected to exceed €50m (£43.4m),” said Nagari.

While investors and regulators are eager for what IFRS 17 will bring, the additional time will allow for insurers to prepare, which Nagari said is a “reasonable compromise between the two stakeholder groups”.

The IASB said that the proposed deferral will be subject to public consultation, which is expected next year, and the board expects to discuss the merits of potential amendments during its December meeting.

IFRS 17 to be more costly than Solvency II

Hatty — Mon, 14 May 2018 09:27:53 +0000

May 2018

The overwhelming majority of UK insurers believe the incoming reporting standard IFRS 17 will be more costly than the Solvency II directive, new research has found.

A survey of senior insurance professionals by analytics firm SAS has found that a whopping 97% expect IFRS 17 to increase the complexity and cost of operating in the industry.

Approximately 90% are preparing for costs greater than those incurred by Solvency II, with 93% predicting that the reporting standard will completely change their business models.

“UK insurers must not wait excessively for a clearly defined interpretation of what IFRS 17 compliance means,” SAS UK & Ireland head of risk business solutions, Lee Thorpe, said.

“The changes are significant and will change the face of financial reporting. Insurers should be prepared to start planning and considering their options early.”

IFRS 17 takes effect on 1 January 2021, and is expected to usher in a significant transformation for insurance companies, encompassing all areas of financial reporting.

Despite insurers preparing for significant costs, it was found that 92% believe IFRS 17 will improve financial transparency, with 87% believing it is “crucial” to the survival of the industry.

Approximately 97% think the standard will result in improved processes and automation, while the same number believe it will help them modernise their financial systems.

Almost all said they are confident they will have achieved compliance before the enforcement deadline, with 61% already starting preparation for the changes.

However, most insurers say their current systems are not up to the task and are preparing for major alterations.

Data management systems will experience the greatest upheaval, with 84% planning to upgrade or replace them, while accounting and actuarial systems will also see significant change.

“Insurers should adopt an iterative approach to compliance and 60% are planning a tactical strategy before refining the solution closer to the deadline,” Thorpe continued.

“Systems and processes with a strong emphasis on data management and governance will be crucial, and preparation for IFRS 17 may see the aggregation of existing data sources into one platform to centralise data.”

Whopping 92% of insurers unprepared for IFRS 17

Hatty — Mon, 15 Jan 2018 12:19:12 +0000

January 2018

The vast majority of insurance companies worldwide are not prepared for the incoming accounting standard IFRS 17, despite recognising the significant risks it poses to their business

Data from 240 insurance firms reveals that 92% have yet to put their solutions in place, and that 88% know they will need to invest in new processes to support disclosure requirements.

That is according to a new report by Aptitude Software, with chief technology officer, Martin Redington, warning IFRS 17 will be the “most significant change to insurance accounting that has ever taken place”.

“Time is of the essence. It is a massive project with significant risks, and there is not a one-size-fits-all solution, bespoke solutions are required,” he said.

“Insurers need to be selecting their vendors now and working on implementing IFRS 17 financial accounting solutions to avoid the skills shortage and ensure they comply in time.”

The report shows that 78% of insurance companies are still in the early research and impact analysis phase of implementing the accounting standard, which comes into effect at the start of 2021.

It identifies a wide range of challenges that insurers will need to overcome, with 84% of firms having cited having a disparate actuarial environment as being a constraint to delivering consistent calculations.

In addition, it was found that 39% of insurance companies expect to kick off their implementation projects in the second quarter of this year, suggesting a huge demand for expertise at the same time, and a potential skills shortage.

Ernst & Young estimates that smaller life insurers with less than $10bn (£7.4bn) of gross written premium will need a budget of $25m to comply with IFRS 17, while those with more than $25bn will need to spend approximately $150m.

“Insurance company profits are under duress as many sectors have become commoditised and many firms recognise the need to innovate their offerings and operations,” Redington continued.

“In a post-IFRS 17 world, it will be difficult for CFOs to service the many financial and regulatory requirements without an approach that centralises control of reporting and financial data.

“IFRS 17 is already proving to be the straw that broke the camel’s back, driving insurance CFOs to modernise their financial systems.”

Munich Re CFO calls for delay to IFRS 17: report

Hatty — Tue, 05 Dec 2017 11:34:13 +0000

December 2017

The CFO of Munich Re has become the latest senior (re)insurance executive to criticise the incoming IFRS 17 global insurance accounting standard.

IFRS 17, which will be mandatory from January 2021, will make companies recognise profit when insurance services are delivered, rather than when premium payments are received.

Carriers will also have to provide information about insurance contract profits that are expected to be recognised in the future.

Jörg Schneider told the Financial Times that IFRS 17 would be very expensive for insurers and “due to its complexity, it will be difficult to understand for the public and the media”.

He called for a delay to the proposed 2021 implementation date, while conceding that the new system is an improvement on the current framework.

“In light of the necessary testing and potential refinement, a delay to IFRS 17 would be good. The more time we get to prepare, the higher the quality and consistency we can deliver,” he said.

Schneider’s comments follow criticism of IFRS 17 from several industry figures.

Earlier this year, Prudential CFO Nic Nicandrou said the new standard would involve “eye-watering” costs without necessarily bringing significant benefits. He added that the potential implementation costs for UK firms could be between £1bn and £2bn ($1.35bn to $2.70bn).

General insurance: The wide-ranging implications of IFRS 17

Hatty — Tue, 13 Jun 2017 15:28:17 +0000

13th June 2017

The new accounting standard for insurance contracts, IFRS 17, will have wide-ranging implications for (re)insurers, and many firms are preparing for significant changes to their business operations

08 JUNE 2017 | LAURA BARELLA AND ALICE BOREMAN

After 20 years in the making, the International Accounting Standards Board (IASB) has published the new accounting standard for insurance contracts, IFRS 17. It will be effective from 1 January 2021, with prior-year comparative reporting required. Here we provide a taster of the key changes to the recognition and valuation of insurance contracts that will affect general insurers.

Currently, comparisons across different industries, products, companies and jurisdictions are difficult. The IASB wants to achieve consistent accounting for all insurance contracts by all companies around the globe (although the US has opted out and US GAAP will persist) and enable comparability with non-insurance products.

Not only will this affect general insurers’ operations, but it will also introduce changes to the presentation of results in the financial statements as well as potentially having an impact on the financial results themselves.

General measurement model

The general measurement model for liabilities under IFRS 17 is known as the building block approach (BBA) and all (re)insurance contracts will be measured as the sum of:

‘Fulfilment’ cashflows (updated at each reporting date), which are defined as:

– The present value of probability-weighted expected cashflows (best estimate cashflows); plus
– An explicit risk adjustment for insurance risk

Contractual service margin (CSM), which is the expected profit from the unearned portion of the contract

Under the BBA, the CSM is amortised and profits are recognised over time as insurance services are provided over the coverage period of the contract (over the term of the policy). However, losses from onerous (or, more simply, ‘loss making’) contracts are recognised immediately. After the end of the coverage period, any future profit or loss from the run-off of the liabilities (which, in general insurance, usually extends past the end of the coverage period) will flow straight through into the income statement.

Possible simplification

One of the most important questions for general insurers will be whether to use a simplification option known as the premium allocation approach (PAA). This is an alternative to the BBA. This simplification is only permitted in certain circumstances and is only applicable to unexpired risks, but the incurred claims liabilities must still follow the BBA model. Under the PAA approach, the CSM is not required. Rather, at inception, the liability for unexpired risks, or the “liability for remaining coverage” as it will be known under IFRS 17, is calculated as the premiums received less associated acquisition costs. Over time, the liability for remaining coverage is updated to reflect additional premiums received (if any) and the profit that has been recognised in the income statement for the coverage that was provided in that period; that is, the premium earned over the period. Again, similarly to the BBA, any losses from onerous contracts must be recognised immediately at inception and, after the end of the coverage period, any future profit or loss from the run-off of the liabilities will flow straight through into the income statement.

This approach will be permitted for contracts where the period of cover is one year or less, or where the measurement of the liability for remaining coverage would not differ materially from that estimated using the BBA. The standard states that the latter requirement is not met if, at inception, there is expected to be significant variability in the fulfilment cashflows affecting the measurement of the liability for remaining coverage during the period before a claim is incurred. Further, it states that variability in the fulfilment cashflows increases with the length of the coverage period of the contract. In other words, this means that multi-year policies covering risks such as construction, energy, engineering, accident and health, directors and officers, credit and surety, mortgage indemnity and warranty business may not meet the PAA eligibility criteria. Where a firm wishes to use the PAA approach, this will need to be justified, and agreed with its auditor as an appropriate approximation.

Similarities with Solvency II

These core valuation principles for measuring liabilities for insurance contracts may sound familiar from Solvency II; however, there are a number of key differences, as detailed in the table below:

As can be seen from this comparison, the standard leaves a number of areas open to interpretation or offers options for individual companies to make suitable choices. The Solvency II balance sheet is, by and large, prescribed, so there are a number of additional judgments that need to be made by companies in translating between the bases. In order for general insurers to get to grips with the new standard, there are a number of key areas to think about, and firms will need to decide what these changes mean for them. For example:

Eligibility to use the PAA simplification option (discussed above)
Level of granularity for measurement and recognition of onerous contracts
Accounting policy for determining and reporting risk adjustment
Discount rate selection
Additional complexities around accounting for outwards reinsurance
Reporting and disclosures

Level of granularity

Under the new standard, there are requirements on the level of granularity at which the recognition and measurement principles should be applied. Specifically, the principles should be applied at a ‘portfolio’ level, where portfolio is defined as a group of contracts with similar risks which are managed together.

Dividing into these portfolios sounds eminently sensible. However, because the implication of recognising losses immediately means that loss-making contracts should not be allowed to offset profitable ones, insurers will need to split portfolios further. Portfolios will need to be split into groups (once at inception only) which include contracts written within the same 12-month period and contain: 1) onerous contracts (if any); 2) contracts that have no significant possibility of becoming onerous subsequently (if any) and; 3) the remaining contracts in the portfolio (if any). There is, however, an exemption where regulatory pricing constraints exist – for example, currently, loss-making male drivers would not need to be separated from profit-making female drivers because of the EU Gender Equality Law. Further, when using the PAA, it should be assumed that no contracts in the portfolio are onerous at initial recognition, unless facts and circumstances indicate otherwise.

Accounting policy options for risk adjustment

If using the BBA, for most general insurers, the profit from the CSM will be released over a short time period providing little flexibility. The risk adjustment, however, will run off gradually over the full term to settlement of all insurance obligations. Therefore, the risk adjustment will be a key driver of the profit profile over time (sometimes referred to as the profit signature). The risk adjustment on gross cashflows is defined as the compensation that an insurer requires to make it indifferent between the present value of uncertain cashflows and the present value of certain cashflows. For ceded cashflows a risk adjustment must be held to represent the transfer of risk from the insurers to the reinsurer from the underlying insurance contracts.

The insurer needs to decide on the appropriate policy, methodology and assumptions for setting the risk adjustment. Guidance is provided on factors to consider; these are predominantly focused on appropriately reflecting the risk characteristics of the insurance contracts. However, IFRS 17 does not prescribe an approach and so there is significant flexibility. Accounting policy should be considered carefully, given its impact and how the approach will respond appropriately to changes over time – for example, risk changing over the underwriting cycle.

Discount rate selection

The discount rate should reflect the risk characteristics of the cashflows arising from the insurance contracts. It should not reflect risk characteristics of financial instruments held by the insurer unless the insurance contract cashflows have the same risk characteristics.

The discount rate can be determined using either a top-down (starting with an actual or expected reference portfolio rate) or a bottom-up (starting with a risk free rate of return) methodology.

IFRS 17 provides insurers the option to choose to take the volatility due to changes in discount rates straight to profit and loss or through other comprehensive income (OCI). This accounting policy choice is connected to the classification of financial instruments in IFRS 9 (many insurers will have the option to defer the implementation of IFRS 9 from 2018 to 2021, such that IFRS 9 applies at the same time at which IFRS 17 becomes effective).

The treatment of changes in current discount rates in IFRS 17 for insurance contracts creates a potential opportunity to reduce accounting mismatches.

Additional complexities around accounting for outwards reinsurance

Under IFRS17, you must model outwards contracts in the same way as inwards business. This means calculating:

Discounted best-estimate cashflows
Plus allowance for credit risk
Plus risk adjustment (reflecting the risk ceded)
Plus contractual service margin (if applicable).

With the PAA eligibility test having to be applied to outwards contracts too, multi-year reinsurance coverage may have to be measured on a BBA basis. Careful consideration will also need to be taken on how retrospective reinsurance covers are accounted for.

All of this may lead to potential asymmetry between gross and ceded profits/losses.

Presentation and disclosures

Financial statements will look different under IFRS 17. Perhaps the biggest change will be to the income statement, which will no longer show written premiums (these will be disclosed in the notes instead) and revenue and expense will be recognised as earned (not received) or incurred (not paid). Disclosures will be more burdensome under IFRS 17 and in particular will involve detailed reconciliations between opening and closing balances as well as disclosure of the confidence level of the insurance liabilities.

Closing remarks

The standard will go live on 1 January 2021 and it is therefore important for general insurers to begin considering the changes now. As actuaries, we should get involved in the transition to IFRS 17 within our own companies; questions you may want to consider are:

Does this affect the company you work for (are you operating domestically or under US GAAP)?
What will be the impact on your financial results at transition and going forward? Include thinking about accounting policy choices around PAA eligibility, discount rates and the risk adjustment.
What is the operational impact on data, systems, processes and people?
Is there a working group already set up in your company? Who is on it?

Are there projects already under way to transform finance/actuarial processes? Are they thinking about IFRS 17? How does this integrate with IFRS 9 work, which may already be under way?

We think that 2017 should see firms begin a process of engaging with key stakeholders, establishing timelines to perform impact analyses and making plans for implementation. This should set companies up to be able to have a timely implementation with time for a dry run before 2021.

Latest findings

The IFoA set up a Working Party in 2015 to consider IFRS 17 for general insurers, and we are exploring the implications together with practical suggestions for implementation. The Working Party presented at GIRO 2016 and will be presenting at GIRO 2017 to provide an update on our work.

This article reflects the understanding of the IFoA’s IFRS 17 General Insurers Working Party up to the point at which the final IFRS 17 Standard was published.

Laura Barella is chair of the IFoA IFRS 17 General Insurers Working Party, and senior actuarial manager at PwC

Alice Boreman is a manager in Deloitte’s actuarial insurance practice and a member of the IFoA IFRS 17 General Insurers Working Party

New IFRS model poses a major challenge, experts say

Hatty — Thu, 18 May 2017 13:26:31 +0000

May 2017

Insurers implementing the International Accounting Standards Board (IASB)’s new IFRS 17 will find the process a major challenge due to the huge scale of the operation, according to Willis Towers Watson.

From 2021, insurers across the world will be expected to use the IFRS 17 reporting standard – the first global accounting standard for insurance contracts.

The current standard, IFRS 4, has allowed local Gaap to be used as a guide in each country, leading to little consistency across borders and among multinationals.

The big change under IFRS 17 will be to increase transparency, giving investors a clearer picture of the returns they can realistically expect on investments and the risks involved.

The new rules require companies to recognise profit when insurance services are delivered, rather than when premium payments are received, as well as to provide information about insurance contract profits that are expected to be recognised in the future.

Complying with the new accounting practices is expected to impact profit, equity and volatility, as well as reserving and financial reporting processes, actuarial models, technology systems and, potentially, executive compensation.

The IASB has warned that applying IFRS 17 will require many insurance companies to gather new information, employ or develop people with appropriate skills and make changes to their financial systems.

Companies are also expected to incur costs in educating staff, updating internal procedures and communicating changes in their reports to external parties. Such activities may involve significant time, effort and cost, the IASB said.

Insurance companies are also expected to continue incurring costs in applying IFRS 17 on an ongoing basis. These will mainly arise from gathering the necessary information to update assumptions for measuring insurance contracts on a current basis.

However, carriers with operations in multiple jurisdictions are expected to reduce costs by applying a globally consistent model for their contracts, which will replace the current country-by-country system.

In addition, the new standard will simplify the measurement of some short-term contracts, such as those with a coverage period of 12 months or less, while a carrier will be able to apply the new requirements to a group of contracts, rather than on a contract-by-contract basis.

And IFRS 17 does not apply to some common contracts issued by non-insurers, such as most product warranties.

Kamran Foroughi, director at Willis Towers Watson, said IFRS 17 was more than just an accounting change and would have a wide and significant impact on insurers’ operations.

“The big change under IFRS 17 will be more transparency,” for investors, he continued.

“However, it will take some time for investors to understand the new information.”

Martin Bradley, EY’s global insurance finance, risk and actuarial leader, called the new standard “the most significant change to insurance accounting requirements in 20 years”.

His colleague Kevin Griffith, EY’s global IFRS 17 accounting change lead, added: “While the standard will not become effective for a few years, the impact is likely to be felt much sooner by insurers.

“Investors are likely to ask for expected impacts ahead of the implementation date, and the decisions made by insurers at the date of transition to the new standard will have a significant impact on future profitability.”