IFRS 17 Insurance Contracts was issued by the International Accounting Standards Board (Board) on 18 May 2017 and subsequent amendments a few years ago. With entities required to apply IFRS 17 for annual periods beginning on or after 1 January 2023, it’s time to consider how AASB17 (IFRS17) may fundamentally change the accounting for entities that issue insurance contracts.
Changes will impact both the income statement and balance sheet – management will need to make a number of decisions and choices when implementing the new standard.
IFRS 17: The implementation plan
Areas that should be considered as part of the implementation plan include:
- identifying changes to accounting treatments;
- required system changes;
- business impacts;
- impacts on compliance with financial requirements;
- disclosures required in financial reports prior to the effective dates of the standards;
- possible continuous disclosure obligations; and
- the impact on any fundraising or other transaction documents.
Considerations for those charged with governance
IFRS 17 Implementation project
- Strong project management and an appropriate governance structure are critical to the successful implementation.
- Project governance and oversight should include a committee (the committee), supported by executive sponsors, that includes representation from all relevant business functions so each function can provide its input and understand the impact that IFRS 17 will have on them.
- An IFRS 17 strategic implementation and transition project plan should be developed and steered by the committee to establish and track strategic milestones for the project.
Internal control environment changes
- IFRS 17 introduces more estimation and judgement, and increases the frequency with which assumptions need to be revisited. This will increase the need for high quality and reliable data sets to underpin the valuation models generating these estimates, and entities will need the ability to capture, process and store significantly more data.
- Entities will need to ensure that they have the appropriate systems in place to deal with these data requirements and importantly, robust controls throughout their process to ensure consistency, completeness and accuracy of all the data sets used.
Resources and training
- Project teams will be required to have a strong understanding of the new accounting requirements and their application, combined with knowledge of other business functions, such as actuarial, IT and underwriting. Greater cross-functional interaction may be required than has been necessary in the past.
- Potential re-evaluation of KPIs and performance reporting and monitoring. In addition, entities may want to review the business consequences of reporting on an IFRS 17 basis, for example considering possible changes to the design and pricing of certain products, re-evaluating how products are distributed or intermediaries remunerated.
Management's involvement with industry groups
- The application of IFRS 17 is intended to increase comparability in overall financial reporting and in the measurement of insurance contracts. To realise these benefits, it will be important for entities to be cognizant of how their peers and industry groups are interpreting and applying IFRS 17.
Technology needs / changes
- Insurers will need to implement system changes to comply with IFRS 17. This will give insurers the opportunity to review their technology landscape and architecture to examine various options for the future and ensure changes will benefit the organisation for the longer term.
- Those charged with governance should be informed about IFRS 17 technology solutions because of the impact these changes could have on the IFRS 17 project, budget, operations and the financial reporting process.
Impact on and communication with key stakeholders
- Given the importance of insurance entities to the global financial system and the wider economy, the effective implementation of the new standard has the potential to benefit many parties. Conversely, a low-quality implementation will result in disruption and risk to many key stakeholders. As such, it is important to understand the key considerations of those stakeholders.