New accounting standard for insurers

New accounting standard for insurers
Friday 19 May 2017

The new insurance contracts accounting standard published overnight by the International Accounting Standards Board (IASB) brings greater comparability to financial reporting for insurers, but will require a major implementation effort.

KPMG welcomes the publication of the new, long-awaited accounting standard for insurance contracts, IFRS 17. This new, comprehensive accounting model is 20 years in the making. Due to take effect on 1 January 2021, the new standard is the result of years of discussion, exposure drafts and debate. Although it has long been recognised that current accounting practice did not offer sufficient comparability between the financial positions and performance of insurers in different countries and with companies in other industries, the complexity of insurance accounting meant that agreeing on a new standard was an extremely challenging task.

“The benefits of the new standard are clear: greater comparability and greater transparency, which will benefit users of financial information. It will open up what is sometimes perceived as the ‘black box’ of insurance accounting. Insurers may also reap benefits, such as the potential for a lower cost of capital, however these and many other potential benefits will only come through the hard work of implementing the new standard, which we expect will raise several challenges for the sector.”

Jamie Munro, Head of Insurance for KPMG New Zealand

Key effects of the new standard
The new standard will give users of financial statements a whole new perspective. Increased transparency about the profitability of new and in-force business will give users more insight into an insurer’s financial health than ever before, and there are likely to be a number of other effects – including, but certainly not limited to, the following.

Greater comparability could result in broader, more international insurance peer groups, which could facilitate merger and acquisition activity and greater competition for investment capital

Separate presentation of underwriting and finance results will give added transparency about the sources of profits and quality of earnings

Premium volumes will no longer drive the ‘top line’

There could be greater volatility in financial results and equity due to the use of current market discount rates.

Impact on insurers will vary widely
The impact of the new standard will vary significantly between insurance companies. The significance of the impact of the new standard will depend on an insurer’s previous accounting policies, and will impact accounting for life insurance products more profoundly than for general and health insurance.

“There will be no ‘one-size-fits-all’ effect for insurers. But every insurer is certain to see impacts on its reported numbers in one way or another. Insurance accounting will never have been so revealing.”

Jamie Munro, Head of Insurance for KPMG New Zealand

Implementation challenges
The implementation date of 1 January 2021 may seem a long way off – but the timescale will be a challenge for many.

Implementing the new standard will require substantial effort, and new or upgraded systems, processes and controls. Significant resources will also be required because insurers will need to show the effects of the new standard retrospectively. The task will be still more challenging given the long time horizons over which many insurance companies operate and the legacy systems that many still use.

“For life insurers, adopting the new standard for the first time will have a bigger impact and be a greater challenge than adopting IFRS in the first place. A co-ordinated response will be essential. Functions such as Finance, IT and Actuarial will need to work together like never before. The time to watch and wait is over. The need for planning starts now – and, indeed, many forward-looking insurance groups have already started analysing what the changes mean for them. With changes of this magnitude, the need to evaluate and test new systems and processes, and educate business users and investors on what the standard means should not be underestimated.”

Jamie Munro, Head of Insurance for KPMG New Zealand

“The journey isn’t over yet, the new standard will trigger a second wave of activity by local accounting and prudential regulators. In particular, everyone will want to know how the new accounting requirements will interact with capital requirements.”

“We see leading insurers using these changes as a catalyst to achieve greater efficiency in finance and actuarial operations, data management, and IT systems. For the confident, change is opportunity.”

Kay Baldock, Head of Financial Services for KPMG New Zealand
Read more
Our KPMG SlideShare presentation can help you to understand the requirements and the possible impacts:

http://www.slideshare.net/kpmg/ifrs-17-insurance-contracts-76087512.html

If you’re unable to view the presentation online, a PDF version (PDF 264 KB) is available:

https://assets.kpmg.com/content/dam/kpmg/xx/pdf/2017/05/ifrs-17-insurance-contracts-accounting-new-perspective.pdf

Our ‘First Impressions: IFRS 17 Insurance Contracts’ will be published soon and will help you assess the potential impact of the new standard on your business. It will explain the key requirements and will feature KPMG’s insights on IFRS 17.

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