New accounting standards will have wide-ranging consequences for life insurers, says expert

A new accounting standard, International Financial Reporting Standard (IFRS) 17, must be fully adopted for accounting periods from 1 January 2021; although insurers can apply it earlier if they are also in compliance with IFRS 9 on financial statements and IFRS 15 on contract revenue. IFRS 17 is "the first truly international IFRS Standard for insurance contracts", and will enable investors to compare and contrast the financial performance of otherwise similar companies, according to the International Accounting Standards Board (IASB).

One of the biggest changes that will be introduced under the new standard will be a requirement to record the revenue from insurance policies throughout the life of the policy, rather than recording all of the profits up front. For this reason, insurance law expert Bruno Geiringer of Pinsent Masons, the law firm behind Out-Law.com, said that life insurers would be more impacted by the changes than general insurers.

"The revenue from insurance policies will have to be reported systematically over the coverage service period and, for life insurers, this is a major change," he said.

"The long-term coverage underpinning life insurance policies, together with the more common presence of options and guarantees in life policies, will require a much more granular set of accounting and actuarial data. To accommodate the granularity of data needed to comply with IFRS 17, I would expect a large number of life insurance companies will take this opportunity, if they have not done so already, to revamp and update their legacy systems as part of their IFRS 17 implementation project or other existing transformation projects," he said.

Although the ultimate profits accounted for by insurers would not change "the emergence of those profits could change significantly, particularly for life insurers, as they have to be spread across the term of the policy", Geiringer said.

"This will have wide-reaching consequences on reserving, actuarial models, IT systems and possibly how senior executives are remunerated," he said.

IFRS 17 will replace the existing IFRS 4, which was brought in as an interim accounting standard in March 2004. The existing system allows different countries and local regulators to apply their own accounting standards, which means that there is currently no universal approach to recording otherwise similar insurers' financial performance.

Under the new standard, insurance contracts will have to be accounted for using current values instead of historical cost. This will apply across all types of insurance contract, including reinsurance contracts. Companies will be required to distinguish between the groups of contracts on which they expect to make a profit, and the groups on contracts on which they expect to make a loss. Any expected losses should be accounted for as soon as the insurer determines that the losses are expected.

Insurance expert Bruno Geiringer said that this approach would "cause a huge change in the way insurers undertake actuarial and financial reporting".

"The new rules will set a global standard for how insurers account for insurance policies and will bring greater transparency to insurance accounting, commonly referred to these days as the 'black box' to those outside the accounting and actuarial worlds," he said. "The measurement of insurance liabilities will have to reflect market interest rates and the impact of policyholders' guaranteed benefits."

"Despite having gone through huge and costly changes recently, such as having to implement the EU Solvency II directive, the implementation of IFRS 17 is going to be yet another challenge to the insurance industry and its sustainability," he said.

IFRS accounting standards are currently either required or allowed by more than 100 countries worldwide, including all publicly listed companies in the EU. They do not, however, apply to US companies, which instead use the US Generally Accepted Accounting Principles (US GAAP), overseen by the Financial Accounting Standards Board (FASB).