In May 2017, the International Accounting Standards Board (IASB) finally issued IFRS 17. Billed as the first truly global accounting standard for insurance contracts, it represents a new era for users and preparers of insurers’ financial statements. Eleanor Hill looks at the key differences between it and its predecessor, IFRS 4, and how the new standard will impact the insurance industry.

Effective as of January 1, 2021, IFRS 17 Insurance Contracts replaces IFRS 4, the interim standard issued by the IASB in 2004.

There are three significant ways in which the two differ.

1) Comparability of insurers

Since IFRS 4 was put together in a fairly compact timeframe, just ahead of the EU’s adoption of IFRS Standards, it aimed for minimum rather than maximum harmonisation. Under IFRS 4, companies could therefore carry on using national standards when accounting for insurance contracts. This made comparability extremely tough, which is never great for investors. IFRS 17 aims to ensure companies across all IFRS jurisdictions apply consistent accounting for all insurance contracts, regardless of product.

2) Transparency and quality of investor information

The new standard looks to equip investors with better information about insurance contracts and how each insurer creates value. According to the IASB, IFRS 17 achieves this by:

  1. Combining current measurement of future cash flows with the recognition of profit over the period that services are provided under the contract.
  2. Presenting insurance service results (including presentation of insurance revenue) separately from insurance finance income or expenses.
  3. Requiring an entity to make an accounting policy choice of whether to recognise all insurance finance income or expenses in profit or loss or to recognise some of that income or expenses in other comprehensive income.

3) Confidence and cost of capital

Since these will bring greater transparency around insurers’ operations, industry observers believe that the new standard may help to rebuild confidence in the insurance sector and therefore drive M&A activity. Some of the largest insurers may also see their cost of capital reduce as a result.

What does IFRS 17 mean for insurers?

Much more than an accounting change, IFRS 17 requires significant implementation work from insurers across their operations – potentially including new or upgraded technology, as well as revamped processes and controls. Talent, either in-house or hired externally, will also be needed, not only to understand the technical impact of IFRS 17, but also to translate that into the reality of daily business.

The role of the Big Four

Insurers will undoubtedly turn to the Big Four and their panel of trusted advisors, including specialists within the financial institutions teams at banks, for support on the required business transformation. As such, advisory firms will be looking to distinguish their insight around IFRS 17 in order to become the partner of choice around its implementation. This means standing out from the crowd and going beyond the basic implementation processes to help insurers realise the opportunities within the change.

Communicating IFRS 17 to investors

Meanwhile, insurers themselves will have significant communication projects to undertake as a result of IFRS 17. The new standard will cause greater volatility in insurers’ financial results and equity as a result of using current market discount rates. This will need to be clearly explained to stakeholders; insurers would do well to make investor education part of their IFRS 17 strategy.

For further information on how to leverage content to communicate effectively with stakeholders about IFRS 17, or how to build a thought leadership campaign around the new standard that sets your advisory services apart from the rest, get in touch with Editions Financial today.

BY Eleanor Hill

Formerly editor of Treasury Today magazine, Eleanor specialises in turning technical concepts into clear and accessible copy. She has written about and worked in the financial sector for over a decade – and holds the Investment Management Certificate and the SII Diploma in Regulation & Compliance. In her spare time, Eleanor enjoys walking her dog in the Kent countryside.