The International Accounting Standards Board (IASB) has published IFRS 17, a new set of reporting standards that stand to dramatically alter the profits of insurance firms across the UK.
The changes are considered to be among the most significant ever made to international accounting requirements, and will move the industry to a current valuation approach, away from its existing historical accounting treatment.
Insurers will need to apply IFRS 17 for annual periods beginning on or after 1 January 2021, but can be applied sooner if the company in question chooses to do so.
IFRS 17 replaces IFRS 4, a temporary standard put in place in 2004 by the IASB that produced national accounting standards, resulting in multiple, diverse methodologies.
Current insurance accounting practices vary greatly, and IFRS 17 is intended to simplify and standardise the complex and disparate financial statements found in the insurance world, allowing investors to more easily compare between international companies.
According to the IASB the standards have taken 20 years to write and are the first ever global accounting standard for insurance contracts.
Profits could be hit
Life insurers stand to be affected more than property and casualty insurers, as under IFRS 4 annuity profits were recognised straight away, but under IFRS 17 they will be recognised across the contract’s lifespan.
Mark McQueen, IFRS 17 accounting lead at Deloitte UK, estimated that the implementation costs for many insurers will be as large as those incurred in the European Union for the adoption of the Solvency II regulations – estimated between €3-4bn.
“Deloitte expects that implementing these new IFRS 17 requirements will entail major changes to insurance companies’ actuarial and finance reporting processes, systems and data,” said McQueen.
Alex Bertolotti, PwC global IFRS insurance leader at PwC, commented: “One thing is clear, particularly for life insurers – whilst ultimate profits will not change, the emergence of those profits can change significantly.
“Both insurers and their analysts will need to assess the full impact in terms of telling the performance story of their companies. Key performance indicators and income statements will look significantly different following implementation.
“Systems and processes will likely change significantly to accommodate the granularity of data needed to comply. We have already noticed a trend of companies taking the opportunity to revamp and update legacy systems, as part of wider transformation projects, to get a bigger return for their investment.”
In a statement reacting to the publication of the standards Richard Martin, head of corporate at ACCA, said: “The scope of this standard is limited because it applies only to the relatively restricted number of insurance companies, but they do form a very significant sector in the economy”.
However, for those companies affected Martin believes the impact will be very significant – both in terms of the changed accounting numbers that they will report and in terms of the data that may need to be assembled.
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