The adoption of the International Accounting Standards Board (IASB)’s IFRS 17 will pose a major challenge for insurers and investors, Willis Towers Watson has warned.
In a response to the publication of the new reporting standard, Willis Towers Watson said that it was more than 'just' an accounting change and will have a wide and significant impact on insurers' operations.
“The current standard, IFRS 4, has allowed local GAAP approaches to be used in each country which has meant very little consistency across countries and multinationals. 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,” said Kamran Foroughi, director at Willis Towers Watson, adding that it will take some time for investors to understand the new information.
Insurers across the globe will be required to use IFRS 17 for accounting periods from 1 January 2021 in what is the first ever global accounting standard for insurance contracts.
Willis Towers Watson said that the standard will impact profit, equity and volatility, as well as reserving and financial reporting processes, actuarial models, IT systems, and potentially executive remuneration, warning that insurance companies should not underestimate the work required.
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.
Meanwhile, 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.