IFRS 17 is the new accounting standard that replaced IFRS 4 Insurance contracts. IFRS 4 was an interim standard that was to be used on interim basis before the International Accounting Standards Board completed its project on insurance contracts.
In May 2017, the Board finalized its project on insurance contracts and issued IFRS 17. IFRS 17 set out the principles for recognition, measurement, presentation and disclosure of insurance contracts.
IFRS 17 was to be applied for annual reporting beginning 1 January 2023. Earlier applications were also permitted as long as IFRS 9 was applied. IFRS 17 is the most significant change to insurance accounting and the standard presents unprecedented challenges as well as opportunities. IFRS 17 provides opportunities to harness data more effectively, to improve the structure of finance, actuarial functions, and to ensure informed decision making within insurance companies. IFRS 17 has been postponed twice, which illustrates the complexity of the new standard and the challenges expected.
The issuance of IFRS 17: Insurance Contracts is the most significant change in insurance accounting in more than 20 years. Because IFRS 17 is more than an accounting standard, the significance of this change, cannot be overemphasized. The standard has led to significant implications on profitability and alignment of key performance indicators. The replaced IFRS 4 did not guide on insurance contract valuation methods and as a result, insurers applied in-country regulatory requirements. Inevitably, this led to inconsistency across different countries and across life and non-life segments.
Adoption of the new accounting standard commenced with a gap analysis which entailed a review of the current policies, procedures, models, data and infrastructure, and an identification of deficiencies between current practices and IFRS 17 requirements. The results of such an analysis are critical in the development of an entity-specific IFRS 17 implementation roadmap.
Insurance contracts are comprised of aspects of both a financial instrument and a service contract. Several insurance contracts generate cash flows with substantial variability over a long period.
IFRS 17 provides key insights on insurance contracts in the following ways;
• Puts together the current measurement of the future cash flows with the recognition of profit over the period that services are provided under the contract;
• presents insurance service results (including insurance revenue) separately from insurance finance income or expenses;
• requires an entity to make an accounting policy choice of whether to recognize all insurance finance income or expenses in profit or loss or to recognize some of that income or expenses in other comprehensive income.
The key principles of IFRS 17 standard are:
• Recognizes insurance contracts as those contracts under which an entity accepts significant insurance risk from another party by agreeing to compensate the policyholder if a specified uncertain future event adversely affects the policyholder;
• Separates special embedded derivatives, distinct investments components and distinct performance obligations from the insurance contracts;
• differentiates contracts into groups that it will recognize and measure;
• recognizes and measures various types of insurance contracts at: a) a risk-adjusted present value of the future cash flows that takes into account all of the available information about the fulfilment cash flows in a way that is in line with observable market data and b) an amount representing the unearned profit in the group of contracts;
• recognizes the profit from a group of insurance contracts over the period the entity provides insurance contract services, and as the entity is released from risk. In the event a group of contracts start making losses, an entity should recognizes the loss immediately;
• presents separately insurance revenue (excluding the receipt of any investment component), insurance service expenses (excluding the repayment of any investment components) and insurance finance income or expenses;
• The standard discloses information to enable users of financial statements assess the effect that contracts within the scope of IFRS 17 have on the financial performance, financial position and cash flows of an entity.
The first year of implementation of the standard in Kenya has not been easy for many insurance companies. The compliance cost was in the tune of millions. Many companies that had limited budgets encountered difficulties in the implementation of the new standard. The costs associated with acquiring new software, actuarial systems, and hiring of personnel were among the many challenges insurers faced. The cost of implementation varied across the industry with major areas to spend being acquiring new technologies such as a software specifically for IFRS 17 and the training of staff. It was estimated that cost of implementation of the standard was between Ksh 60 million and Ksh 70 million. The insurance companies that begun the implementation in good time enjoyed the full benefits of the standard and are emerging more competitive as a result.
A comprehensive and holistic approach to IFRS 17 implementation is recommended. Many different departments within an entity need to adapt, upskill and work together in order to comply with the standard. The key to a successful IFRS 17 implementation is not a particular accounting system or consultant. The key is actually to approach implementation as a transformative catalyst that breaks down information and operational silos and delivers long-lasting value. The IFRS 17 standard is designed to require data and analysis that supports sustainable, transparent assumptions and decisions. The standard requires digitally fit, upskilled staff and leadership.
Some insurance companies had to request for more time from various regulators for failure to publish audited reports as per deadlines set by the regulators. There was also a high demand for individuals with actuarial skills and consultants with expertise and experience on the new accounting standard.
At a high level, IFRS 17 has significantly changed the way that insurance contract liabilities are measured and disclosed. This has led to significant implications to insurance companies’ systems, data and resources. IFRS 17 is a game-changer for the insurance industry, globally and in the East Africa region, because it requires all insurance companies to capture and disclose their results in a consistent manner. For the first time, this has been made it possible to evaluate the real drivers of success for industry players. Consistency in reporting will provide a level playing field for insurers to compete and earn the trust of customers, investors, regulators and other stakeholders.
Auditors will now issue an audit opinion regarding the proper preparation of financial statements for (insurance companies )in accordance with the requirements of International Financial Reporting Standards number 17 and other applicable standards. Insurance companies are advised to involve their auditor throughout the IFRS 17 implementation journey. IFRS 17 is a major policy change and staying updated to the industry and developments will help insurance companies adapt and adjust swiftly.
As CGA Consult CPAK, we are always ready to assist. We have been offering consultative, comprehensive services throughout the implementation process, from training and gap analyses to financial impact evaluations to implementation support including model design and testing, all the way through to support with financial reporting and redefining KPIs. We have broad technical expertise with the IFRS 17 standard, as well as best practices derived from multiple engagements with insurers in the East Africa region. Drawing upon the collective strength of our staff, we continue to support insurers on this journey from beginning to end.
