An avid follower of all insurtech startups and a critical thinker, he has also contributed several papers in organization wide technical paper contests.
- Bank Reconciliation - November 29, 2022
- London Bridge Risk:A Protected Cell Company - January 2, 2022
- Side Pockets in (Re) Insurance investments - July 20, 2021
What is IFRS 17
This is the accounting standard for insurance contracts issued by the International Accounting Standards Board (IASB). It was introduced by IASB in 2017 but most recently has been revised to replace IFRS 4 comprehensively by 2021. IASB issues a set of reporting standards, International Financial Reporting Standard (IFRS) as a guidance for insurance carriers and other entities issuing insurance contracts.
Why is a new accounting standard required
IFRS 4 is the accounting standard that is being replaced by IFRS 17. That’s because, with IFRS 4, there was no clear guideline on how to meet the disclosure requirement in the financial statements about the amounts arising from insurance contracts. This resulted in each company arriving at the numbers from insurance contracts differently therefore sometimes giving rise to a material difference in the information presented versus actual. Also, it did not give a common ground for all listed entities to report such liabilities from insurance(re) contracts since each jurisdiction could report differently
With IFRS 17, the guides are clearly stated to recognize, present and disclose the accurate liability for long term insurance contracts as well as the reinsurance contracts held by the entity. Such guidelines are for the users of the financial statements to arrive at the financial position of the reporting entity more accurately than ever at each reporting period. This in turn helps the capital markets in terms of the stock price as well as in further securitized products to be priced accurately for investors.
How are the liabilities to be calculated with IFRS 17
Long term insurance contracts (primarily life insurance) differ from short term (primarily property and casualty) in that it is difficult to ascertain liabilities of a long-term contract accurately over the length of contract. This is because of several changes that can occur to the performance of the contract and without an accurate reporting framework, the investors don’t get an accurate as of the reporting date. The IASB has come out with the concept that insurance contracts represent financial risk as well as service risk, and therefore liability of both aspects must be reported to investors.
Essentially this means that the unearned profit/loss
(expenses) over the period of service of the contract (i.e. incurred claims and
other insurance service expenses) must be combined with the present value of
future cash flows. This will be a clear demarcation of insurance finance income
or expense and insurance service results. The liabilities also need to be
adjusted for the timing and uncertainty of the cash flow. The IASB also states
that if there is an embedded derivative or an investment component to the
insurance contract, these must be separated out in the financial statements.
Advantages of IFRS 17
- Gives the investors more accurate view of the financial position of the company. If the insurance contract became loss making, it is immediately recognized thereby giving investors options to weigh in their choice of investment
- Results from insurance revenue, service expense and insurance finance (investments) are separated out.
- Recognition of the liabilities for the insurance contracts related to the performance obligation of the remaining service in the contract.
- Same principles applied to the reinsurance contract held by the entity
- Risk adjustment for amount, timing and uncertainty (liquidity characteristic) of the future cash flow.
- Early recognition of onerous insurance contracts (those that represent net outflow instead of inflow)
- Only applicable to long term contracts so the entities having short term contract (less than 1 year duration) can still follow the simpler premium allocation approach.
References
- https://www.idc.ac.il/he/specialprograms/accounting/fvf/Documents/IFRS17/WEBSITE155.pdf
- https://www.pwc.com/id/en/publications/assurance/ifrs-17-insurance-contracts.pdf
- https://insurance-analyzer-info.com/what-is-ifrs4-scope-definition-and-more/
- https://www.actuary.org/sites/default/files/files/publications/Practice_note_on_Actuarial_Practices_Relating_to_Accounting_for_Insurance_Pursuant_to_International_Financial_Reporting_Standards_mar2011.pdf
