With the upcoming introduction of IFRS 17, the new insurance contracts standard, the Financial Stability Board (FSB) is calling for implementation as soon as possible. Under IFRS 17, insurance obligations will be accounted for using current values, instead of historical cost. Martin Sarjeant, Global Risk Solutions Expert, FIS, below provides Finance Monthly with a thorough account of why firms should welcome the change.
With concerns over costs and a perceived lack of benefits among some insurers, there’s a prevailing mood of doom and gloom about IFRS 17. But rather than striking a deathly blow to the balance sheet, I believe that the new accounting standard for insurance contracts spells good news for insurers and stakeholders.
From this radical “glass half full” viewpoint, I’ve identified seven big benefits that IFRS 17 will bring to the insurance industry:
- Liabilities valued at market value
By bringing the valuation of insurance contracts in line with both the assets that back them and valuations made in other industries, IFRS 17 will initiate better product design and greater transparency. As IASB chairman Hans Hoogervorst explains: “Proper accounting shines light on risks that might otherwise go unnoticed – both by companies themselves and by investors.” So, although the standard may appear initially to weaken some insurers’ balance sheets, it will actually encourage better pricing of insurance contracts and strengthen the balance sheet over time.
- Truer reflection of profits
In some jurisdictions, insurers have designed products to maximize early profits. For example, if an insurer sells a 10-year insurance contract, with premiums paid for one year, it generates massive profits in the first year and then small losses afterwards. IFRS 17, by contrast, measures profit in line with the services performed and spreads it over the contract’s life in a series of smaller cash flows – giving more insight into how profit emerges. The standard also excludes deposit coverage from revenue calculations, which will especially affect the accounting of thinly veiled savings contracts – and, again, help better reflect reality.
- Nearly global consistency
A consistent and high-quality accounting standard for all insurance contracts across most jurisdictions has to be a good thing, right? Particularly for multinational insurers, it will reduce the long-term costs of compliance and make it easier to compare business units and aggregate results and financial statements. What’s not to like?
- Collaboration between actuaries and accountants
Both actuaries and accountants look after the interests of stakeholders and help manage insurers’ finances and risks. But in many organizations, these are still siloed functions with little interaction or understanding of each other’s activities. IFRS 17 will drive them to work together and establish mutual respect and cooperation, which would mean good news for stakeholders and improve the way the company is managed in the future.
- Better governance of actuarial systems
For more than a decade, many insurers have been raising their governance game and reaping tremendous benefits such as lower operational risks and reduced ongoing costs. Others, however, continue to use actuarial systems without the control and automation that IFRS 17 demands. Improving governance standards will not only help achieve compliance but also reduce costs, minimize manual errors and make it easier to access risk insight, all leading to better management of the business.
- Greater protection for policyholders
IFRS 17 will help strengthen insurance company balance sheets (see benefit 1) and offer more protection to policyholders as a result.
- Investor confidence
All the above improvements to the accounting standard give investors proper insight into insurance companies, allowing them to compare one firm with another more consistently. This can only improve investors’ confidence in and understanding of insurers – surely another reason to be cheerful.
However you look at IFRS 17, nothing will stop it from coming into force in more than 100 countries in 2021. So, why not ditch the despair, seize the opportunity for change, embrace the benefits – and see the many positive sides of compliance?