Top 3 Insurance Accounting Aspects Most Impacted by IFRS 17

Posted by Rick Yvanovich

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The adoption of IFRS 17 will bring profound changes to insurance accounting, fundamentally transforming how insurers measure, report, and disclose insurance contracts. For finance executives, navigating this transition will require careful planning, collaboration, and investment in resources to ensure a successful adoption of the new standard.

In this blog post, we will examine the key areas of insurance accounting where IFRS 17 will have a significant impact.

Table of content

I. Risk Adjustment

II. Contractual Service Margin (CSM)

III. How the accounting team performs their duties

Risk Adjustment

IFRS 17 significantly impacts risk adjustment in insurance accounting. Here's how:

1. Increased Focus on Risk

A core principle of IFRS 17 is the emphasis on forward-looking risk assessment. Unlike IFRS 4, which primarily relied on historical data, IFRS 17 requires the use of current estimates and risk adjustments to account for the inherent uncertainties associated with insurance contracts.

2. Impact on Financial Statements

Risk adjustments affect the measurement of insurance liabilities under IFRS 17. These liabilities represent the future cash flows an insurance company is obligated to pay under its insurance contracts. By incorporating risk adjustments, the reported liabilities better reflect the potential for future losses due to unforeseen events or adverse experiences.

3. Risk Adjustment Methods

IFRS 17 allows for various risk adjustment methods, including discounting for risk, probability of adverse experience (PAE), and collectively with risk margins. The choice of method depends on the specific type of insurance contract and the level of risk involved.

Here's a deeper dive into the different risk adjustment methods:

Discounting for Risk: This method considers the time value of money and the uncertainty of future cash flows. By discounting future liabilities at a risk-adjusted rate, the present value reflects the potential for future losses.

Probability of Adverse Experience (PAE): This method takes into account the likelihood of events that could lead to higher-than-expected claims or expenses. By incorporating a PAE, the insurance company recognizes a provision for potential losses that might arise due to adverse circumstances.

Collectively with Risk Margins: This method allows for the inclusion of a risk margin directly within the insurance liability calculation. The risk margin represents the expected profit from the insurance contract, adjusted for potential risks.

Overall, risk adjustments mandated by IFRS 17 provide a more realistic assessment of an insurance company's financial position by accounting for potential future losses.

This increased focus on risk promotes stronger risk management practices within insurance companies.

While risk adjustments add complexity to the accounting process, they enhance transparency for investors and other stakeholders by providing a clearer picture of the uncertainties inherent in the insurance business.

Insurance accounting for IFRS 17

Contractual Service Margin (CSM)

IFRS 17 affects the Contractual Service Margin (CSM) in a nuanced way. While it retains the concept of CSM, which represents the expected profit an insurance company earns as it delivers services under an insurance contract, IFRS 17 creates significant impacts on the way CSM is measured. Here's how:

1. Changes in Fulfilment Cash Flows

IFRS 17 requires adjustments to the CSM based on changes in estimates of future fulfilment cash flows. These are the cash flows the company expects to receive from premiums, minus claims and other benefits paid out. If there's a change in the estimate of these future cash flows, the CSM will be adjusted accordingly.

2. Experience Adjustments Not Included

Experience adjustments, which are the differences between expected and actual cash flows for past periods, are not reflected in the CSM under IFRS 17. These adjustments are recognized directly in profit or loss.

Previously, under IFRS 4, both changes in estimates and experience adjustments might have impacted the CSM. IFRS 17 separates these concepts, aiming for a clearer distinction between expected future profitability (CSM) and past performance (experience adjustments).

Overall, IFRS 17 promotes a more forward-looking approach to CSM measurement, focusing on updated estimates of future cash flows.

Additionally, the separation of experience adjustments from CSM allows for a clearer picture of the expected profitability from ongoing insurance contracts.

The impact of IFRS 17 on CSM can vary depending on the specific types of insurance contracts and the company's experience with claims.

Companies will need robust actuarial modeling capabilities to accurately estimate future cash flows and determine the CSM.

How insurance accounting teams perform their duties

Finally, IFRS 17 also has major changes in the way the accounting team of an insurance company performs their duties.

1. Data Management Challenges

Implementing IFRS 17 effectively requires a robust data infrastructure capable of capturing the level of detail mandated by the standard. This might necessitate significant investments in data management systems and processes.

2. Need for New Skills

The finance function within insurance companies will need to adapt to the new standard. This might involve upskilling existing staff or hiring new personnel with expertise in actuarial modeling, risk management, and IFRS 17 specifics.

3. System Upgrades

Financial reporting systems might need upgrades or replacements to accommodate the demands of IFRS 17. This can be a costly and time-consuming process for insurance companies.

Overall, IFRS 17 is a significant change that goes beyond just accounting methods. It necessitates a cultural shift within insurance companies, emphasizing transparency, forward-looking analysis, and a data-driven approach. While the initial implementation presents challenges, the long-term benefits of increased transparency, improved comparability, and a more accurate reflection of financial health can be transformative for the insurance industry.

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Rick Yvanovich

 Rick Yvanovich
 /Founder & CEO/

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