IFRS 17 has been a long time coming. After multiple delays, the accounting standard is expected to take effect from January 2023. Many are apprehensive at the potential costs of implementation — according to Deloitte, 1/3 of insurers expect to spend over £45 million complying with the standard. However, 50% of insurers also believe that the benefits of IFRS 17 outweigh the costs. So, what are the potential benefits?
What is IFRS 17?
To quickly summarise, IFRS 17 is the first comprehensive accounting standard that details reporting requirements for insurance companies. It replaces IFRS 4, which allowed companies to use local accounting requirements such as national GAAP. The key aspects of IFRS 17 are that insurance liabilities are measured at current fulfilment value, and that organisations use a more uniform approach to metrics and reporting of financial information.
One of the key aims of IFRS 17 is improving the quality of insurers’ financial information. In particular, correcting current issues with performance metrics and relevance of information used for risk assessment. For example, many companies currently use out-of-date metrics to evaluate risk, such as old interest rates, which obscure the true value of a company. In a further example, risks that are not economically matched by assets are not appropriately visible on financial reports.
The new IFRS 17 requirements will provide greater insight into risk associated with issuing insurance contracts and clarify company performance. This shift will provide benefits to both company analysts and external investors. Most importantly, greater transparency helps to foster long-term stability in the insurance industry: a benefit which will serve everyone for years to come.
Currently, it is extremely difficult to compare financial information between insurance companies, even when looking at a very similar contract within the same area. Under IFRS 17, companies will have to apply a consistent accounting framework across insurance contracts, reducing much of the existing diversity in reporting.
It’s clear that this change will provide significant benefits for investors. However, multi-national insurance companies will also gain, as the consistent accounting framework will streamline operations for analytical teams, human resources and more.
Implementing IFRS 17 will require intensive cross-functional collaboration across insurance companies. Many organisations currently use a silo-based approach (e.g., separate departments for claims, finance and others), but the consistency and transparency required by the new legislation requires an approach of seamless information sharing.
Adopting an agile approach has been suggested as a method to facilitate and reduce costs of IFRS 17 implementation. Organisations that fully embrace agile could gain from the enhanced communication, higher job satisfaction and faster development times that the approach aims to deliver — all of which will serve businesses far beyond IFRS 17.
62% of surveyed insurers predicted that IFRS 17 would have a moderate or significant impact on their corporate culture. There is a clear demand for skilled accountants and actuaries, however, organisations will also need those experienced in change management and leadership.
For organisations who embrace the changes of IFRS 17, the standard can serve as a catalyst for company-wide transformation. IFRS 17 compliance requires motivated and digitally skilled staff at all levels. However, there is still a shortage of such professionals. Proactive investment in technology, new expertise and training could smooth the progress of the IFRS 17 transition and prepare for future challenges.
IFRS 17 is expected to be highly disruptive — the time and financial investment required should not be underestimated. However, the accounting standard also promises a multitude of exciting business benefits. Many of which will accelerate change within insurance organisations, and help the industry prepare for a more stable future.
Get in touch with our Finance & Audit Team to see how they can help.