The implementation of IFRS 17 will be a major challenge to insurers and investors, fundamentally changing accounting and reporting practices, according to Willis Towers Watson (WLTW).
Published today by the International Accounting Standards Board (IASB), the reporting standard will replace IFRS 4 for accounting periods from 1 January 2021.
It represents a major milestone for the industry as the first ever global accounting standard for insurance contracts, with the intention to provide consistency across countries and multinationals.
"IFRS 17 is more than 'just' an accounting change, and will have a wide and significant impact on insurers' operations," WLTW director, Kamran Foroughi, said.
"The big change under IFRS 17 will be more transparency, giving investors a clearer picture of the returns they realistically expect on their investment and the risks to those expected returns. However, it will take some time for investors to understand the new information."
Some of the biggest challenges identified by WLTW include:
Interpretation and judgment: IFRS 17 is truly principles-based, which in most cases will mean it is the insurer's responsibility to ensure policies and disclosures comply with the standard's requirements, rather than it being able to rely on prescriptive and detailed rules
Dealing with volatility in profits: The hybrid model proposed will increase volatility compared to existing models, particularly those based on locked-in assumptions
Managing stakeholder expectations: Explaining IFRS 17's impact on profits and equity, and the variances to current GAAP, and reporting under applicable regulatory regimes, will require robust processes, a keen grasp of the individual differences and a transparent communication strategy, which may affect dividend-paying capacity, management bonuses and market-wide performance metrics.
After speaking to clients worldwide, FIS Global Risk Solutions leader, Martin Sarjeant, has identified four different approaches that insurers are likely to take to IFRS 17, each presenting their own challenges. These are:
Trailblazers: Insurers that have started to implement the standard before it is final
Pragmatic planners: Those that have carried out impact assessments and modelled potential changes to the balance sheet, as well as looking at the regulation's impact on their systems and requirements for hardware, data and people
Wait-and-see-ers: Insurers that have not done much analysis or securing of budgets, and will have to be quick in implementing IFRS 17 when it comes into force, but may have saved the costs of repeated impact assessments
Ostriches: Although not observed by Sarjeant yet, the fact that the standard will affect more than 100 countries means it is likely some firms are ignoring IFRS 17, and hoping it will be delayed.
"For all of these categories, the finalisation of IFRS 17 will give insurers plenty more to think about, whether adjusting their plans or taking their first steps towards implementation," Sarjeant said.
"Most firms will need to seek further guidance from consultants, auditors and the IASB's own support services as they interpret some of the more ambiguous principles. But with the final standard being published, the countdown to 2021 begins in earnest."