What impact does IFRS 17 have on the insurance industry?

IFRS 17: What impact does this framework have on the insurance industry? 

In the ever-evolving arena of financial reporting, IFRS 17 represents a transformative milestone for the insurance industry. Since coming into effect in early 2023, it has introduced a standardised framework that redefines how insurers measure, recognise, and disclose insurance contracts. Reforming the limitations of its predecessor, the IFRS 4, we explore the key changes that this framework has brought, the impact it has made on insurers, and what opportunities it presents.  

Understanding IFRS 17 is essential for navigating insurance landscape accounting and its effects on broader financial systems on a global scale. We’ve summarised what it means to implement the framework and remain compliant with it when producing financial reports. 
 

What is IFRS?  

IFRS is an abbreviation of the International Financial Reporting Standards. The foundation was created in 2001 and developed by the International Accounting Standards Board (IASB). These standards have been globally adopted and trusted by investors. In such a dynamic landscape, the IFRS is constantly evolving and improving to adhere to global initiatives and market changes. 

The purpose of this is so that international entities have common accounting rules that result in more consistent financial statements to improve reliability, and results that are comparable between other countries that also use these rules. Thus creating a more transparent reporting system that is reflective of the current landscape. 

What is IFRS 17 for insurance?  

IFRS 17 brings significant changes to insurance accounting and reporting. The aim of the standard focuses on improving transparency and compatibility across the industry, but doing this requires adjustments to operations, such as new systems and reporting processes. Whilst the standard affects financial reporting by reforming the timing of profit recognition and requesting detailed disclosures, the overall aim is to provide a clearer and consistent picture of the financial health of insurers and entities. 

What is the difference between IFRS 4 and IFRS 17? 

IFRS 4 was introduced as an interim standard in March 2004, with the aim of improving transparency in insurance reporting. This was to be in place until a more comprehensive standard could be developed and introduced - which is the IFRS 17, introduced on January 1 2023. To understand the key differences between the two, we can look at what improvements have been made to the initial 2004 standard. 

Liabilities measurements 

Under IFRS 4, insurers had the ability to use various measurement approaches which were based on local accounting practices, which ultimately resulted in inconsistencies. IFRS 17 takes a more uniform approach, meaning that insurance contact liabilities require current valuations and explicit risk adjustments. 

Profit recognition through CSM  

Where IFRS 4 did not have a standard method for profit recognition over the contract duration, IFRS 17 introduced the Contractual Service Margin (CSM). This system defers and recognises profits as insurance services are provided. The purpose of this is to ensure a consistent revenue recognition pattern that works to improve transparency and comparability.

Financial statements 

IFRS 4 provided few guidelines for presenting financial statements including insurance revenues and expenses. IFRS 17 has given clear requirements for these presentations, again working to improve transparency and comparability of financial statements. 
 

Has there been an impact for insurers since the implementation of IFRS 17?  

The European Insurance and Occupational Pensions Authority (EIOPA) conducted a study to analyse the impact of IFRS 17 on insurers after it was implemented in 2023. The findings of this study show that there have been significant changes in the valuation of insurance liabilities, which are mostly due to the adoption of different valuation approaches, but can also be attributed to the introduction of the CSM. Overall, the study suggests that the combination of increased liabilities due to explicit and current assumptions, deferred profit recognition, and recalibrated discount rates has led to a net reduction in shareholders’ equity under IFRS 17 when compared to the previous standard, IFRS 4. 
 

The next steps for insurers in the wake of IFRS 17 

A number of insurance companies still remain in the transitional phase over two years since the introduction of IFRS 17. They are yet to fully integrate the IFRS 17 protocols into their routine operations and enhance their financial reporting mechanisms accordingly.  

To align accounting practices with the new benchmark, a multifaceted approach is essential.

• IFRS 17 process enhancement: Ensure that reporting aligns with the new standards of accuracy and compliance by initiating a dedicated project focused on critically assessing and refining the current IFRS 17 reporting procedures.
• Process automation and standardisation: An efficient underlying process is crucial for IFRS 17 reporting. Incorporating automation, standardisation, and streamlining workflows can lead to substantial improvements in both productivity and consistency.
• Control environment strengthening: The robustness of control environments underpinning financial reporting is indispensable. By strengthening these frameworks, insurers can help prevent inaccuracies and non-compliance, paving the way for improved financial governance.
• System testing and validation: Ensure that the systems that support IFRS 17 reporting are functioning optimally by conducting comprehensive testing. This step ensures the reliability and precision of the financial data produced.
• Advanced analytics and AI integration: Embracing cutting-edge analytic tools and AI solutions can revolutionise data interpretation, allowing for more comprehensive and profound insights. These technologies simplify the complex calculations required, helping usher in a new era of data intelligence in financial reporting.
• Delivery team training enhancement: Equip the teams tasked with IFRS 17 reporting with the necessary skills and knowledge by investing in specialised training. This will allow them to navigate the new reporting landscape with greater confidence and capability.
• Continuous improvement culture: Integrating ongoing enhancement into the company ethos will help create a culture of continuous improvement. Establishing dedicated continuous improvement groups can help ensure that the IFRS 17 reporting processes evolves alongside regulatory and business environment changes.
• Communication clarity and transparency: Transparency of internal and external communications regarding IFRS 17 outcomes is key to stakeholder engagement. Clear, understandable communication builds trust and ensures that stakeholders have a comprehensive understanding of the company's financial standing in the context of the new IFRS 17 standards.
   

Facilitate a smooth transition to compliant reporting with XPS 

Insurers know that the industry is dynamic and there are ever evolving requirements and initiatives. It is vital that they stay compliant with these changes.  

At XPS, we have a sound understanding of these changes and can help insurers with financial reporting strategies that align with the requirements of IFRS 17. To find out how we can help you, contact our insurance consulting team with any enquiries, or view our latest insights and briefings to learn more.