Shake-up in the numbers: How will your earnings look under the new IFRS 17 for insurers?

After nearly 20 years of development, the new accounting standard for insurance contracts (IFRS 4 Phase II or IFRS 17 as it will be) is finally expected to be unveiled in the first half of 2017, ahead of a likely go live date in 2020 or 2021. While the switch won’t change how much profit you make, the timing and trajectory of your IFRS earnings could look very different. And the long-term nature of life insurance contracts means that the potential shift in profit recognition and reported earnings will be especially pronounced. What’s driving the change and how can you manage the impact?

Following the upheaval of Solvency II implementation, the move to IFRS 4 Phase II might look like an unwanted headache. Yet being the only major industry without a full IFRS accounting standard has made insurance look like a potential outlier to the generalist investor.

The new IFRS isn’t a magic solution – analysts will continue to use a range of measures to rate insurers. But moving from a patchwork of different national accounting rules to a consistent IFRS will make it easier to compare the performance of insurers in different markets and potentially evaluate them against other industries. However, US (and some Asian) operations will continue to be covered by their own distinctive accounting principles as US GAAP and IFRS will not converge for insurance.

Fundamental shift in earnings

While IFRS 4 Phase II might make insurance more comparable across countries and potentially with other industries (though this can debated), looking at the new numbers next to the old ones will definitely be a challenge.

There will be an end to both the recognition of profit on day one from writing new business and the cash-based profit recognition for with-profit business. Significant changes in assumption (such as for annuitant mortality or persistency) are likely to be smoothed over the lifetime of the business rather than immediately recognised in profit. In addition, the retrospective nature of parts of the liability model (the contractual service margin – CSM) may result in the recycling of ‘old’ or loss of ‘new’ profits on transition to the new IFRS.

As soon as the finalised standard is published, analysts are likely to be pressing for disclosure on the likely impact. It’s therefore important to begin evaluating how your reported numbers are likely to change and think about what is available to manage the impact.

Tough operational challenges 

“Clearly, there are significant technical and operational hurdles in moving to a radically new basis of accounting”.

As of writing, the International Accounting Standards Board (IASB) is conducting targeted field tests to assess the practical feasibility and implication of their planned approaches. Key areas of focus include how narrow to make the unit of account (similar contracts that can be aggregated together for measurement). The smaller the unit, the bigger the modelling challenges and implications for the results. Among the other areas covered in the field tests of particular relevance to UK life insurers are the relief to reduce accounting mismatches where there are hedges in place and the assessment of the CSM for existing business on transition to the new IFRS.

Big leap

IFRS 4 Phase II will represent a leap in the dark, which will stretch reporting capabilities further and put strategy and performance under a renewed spotlight.

If you would like to find out more, I’ll be giving a talk with members of the Institute’s Financial Reporting Group on the impact of the new IFRS at the IFoA Life Conference in November – I hope to see you then. Otherwise please feel free to contact me.

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Anthony Coughlan

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