IFRS 17 Insurance Contracts: Practical Implementation Strategies

IFRS 17 is a global accounting standard incorporated by the International Accounting Standards Board (IASB). The sole purpose of the IFRS 17 is to ensure transparency and honesty in the insurance sector dealing with financial contracts and insurance policies. In this blog, we will be highlighting a wider spectrum of IFRS 17, its purpose, implications, necessity, and overall applicability. 

What is IFRS 17 and Why Does It Matter?

IFRS 17 Insurance Contract is a framework that signifies the recognition, measurement, and disclosure of insurance contracts in the financial statement by the insurers. The modified IFRS 17 model proposes several measurement principles and mandates to mitigate non-financial risks. The significance of IFRS 17 lies in the fact that it provides clear financial information to the stakeholders about the insurance contracts. IFRS 17 Insurance Contract matters because it gives transparency, consistency, and comparability to the insurance industry’s financial reporting. 

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What is IFRS 17 and its Purpose for Insurance Contracts?

IFRS 17 is a regulation that supervises whether insurance companies maintain complete transparency and comparability while disclosing their financial information in insurance contracts. IFRS 17 is a global accounting standard that restricts insurance contracts to create discrepancies in the financial reporting of insurance companies worldwide. The purpose of insurance contracts is to ensure that stakeholders, including investors and regulators, have more accurate and useful financial information to assess the health and performance of insurance companies.

The Key Objectives and Benefits of IFRS 17

IFRS 17 is a regulation that aims to bring transparency and comparability in the financial reporting of insurance companies.  

The key objectives of the IFRS 17 include the following: 

• Standard method: IFRS 17 aims to bring a global standard method for financial reporting to insurance companies 
• Uniformity: Another key objective of IFRS 17 is uniformity. It is a globally recognized standard of how insurance liabilities, revenue, and profits are recognized and measured, enabling better comparability between companies and jurisdictions.
• Transparency: It enables the financial insurers to maintain transparent details on the financial accounting to its stakeholders. 
• Risk management: IFRS 17 ensures that insurers reflect their true financial position by requiring the recognition of revenue and profits over time, matching the provision of insurance services with associated costs.

IFRS 17 Summary: Understanding the New Standard

IFRS 17 is a global unified standard for insurance companies to maintain transparency and comparability in their insurance contracts. IFRS 17 aims to bring clear communication about financial information to the stakeholders so that there is no scope of discrepancy or misleading financial information. IFRS 17 came into implementation on January 1, 2023. IFRS 17 is a revised version of IFRS 4 which helps in easy comparison of the financial statements. 

Key Elements of IFRS 17 for Insurance Companies

The focus of the key elements of IFRS 17 is to clear a more transparent base for insurance computing companies. The key element in the IFRS 17 is to focus on how insurance contracts should be evenly informative and comparable for detailed understanding. 

• Recognition of the insurance contracts 
• Measurement Models

IFRS 17 uses several measuring models to maintain integrity and balance in the insurance contracts leading to complete transparency. IFRS 17 uses models like the General Measurement Model, Premium Allocation Approach, and Variable Fee Approach.

• Recognition of profit or revenue 
• Maintenance of Cash Flow 
• Maintaining Risk Assessment 

Differences Between IFRS 17 and Previous Standards (IFRS 4)

How IFRS 17 Transforms Insurance Contract Accounting

IFRS 17 Insurance Contracts is a set of accounting principles that changed how insurance contracts are recorded, measured, and reported. It was issued in May 2017 and became effective in January 2023. 

IFRS 17 changed insurance contract accounting by:

• Increasing transparency

IFRS 17 provides more information about an insurer’s financial health, making it easier for users to compare insurers. 

• Using current values

IFRS 17 requires insurers to use current values instead of historical costs. This means that insurers account for insurance obligations using current estimates, rather than data from when the policy was taken out. 

• Using a risk-adjusted model

IFRS 17 uses a model that considers the risk of future cash flows to measure the value of insurance contracts.

Practical Steps for Implementing IFRS 17 in Insurance Firms

Implementing IFRS 17 could be a vital decision that includes several significant changes in the entire accounting process, system practices, and reporting. Some practical’s could be undertaken for the smooth implementation of the IFRS 17: 

• Understanding the standard: The first crucial step in the implementation of the IFRS 17 is that the senior financiers understand the key concept of the Standard including the measurement models, revenue and profit recognition principles, risk adjustments, and disclosure requirements. 
• Assessment of the current practices: For easy implementation of IFRS 17, it is required to understand and assess the present standard that is being implemented in the organization. Assessing the existing IFRS 4 Accounting principles would help in finding the gaps and mitigating those gaps. 
• Transition Plan: The next step would be to focus on a transition plan from IFRS 4 to IFRS 17. This transition includes framing timelines, key milestones, resource allocation, and internal responsibilities.
• Training: For IFRS 17 to be implemented properly in the organization, it is significant to provide training to the staff and financial personnel about the key concepts of the standard. 

IFRS 17 Implementation Challenges and Solutions

Implementation of any new standards comes with challenges and difficulties. However, powering through those challenges helps in a smooth transition in the implementation process. 

Challenge: 

Measuring the cash flow: IFRS 17 needs to measure the future cash flow and determine the non-financial risk, which is a long-term activity. 

Solution: The possible solution to this challenge can be to develop Actuarial Models that can be implemented to determine future cash flow. Using AI tools and techniques can also help determine the cash flow rates in the future. 

Challenge:

Integration of bulk amount of Data: Implementation of IFRS 17 involves a complex step of integrating and culminating a huge amount of data which is often fragmented in IT systems and databases. 

Solution: A centralized data management system can be a solution to this challenge. A centralized data center would give easy access to the data, otherwise, it can be confusing. 

Data integration tools can also be used for easy filtering and sorting of the data. 

Challenge: 

Change in the KPIs: Implementation of the IFRS 17  standard involves a change in the series of the KPIs which is a huge task.

Solution: Conduct simulations and forecasting to understand how IFRS 17 will impact balance sheets, income statements, and KPIs (e.g., profit margins, return on equity). Communicate these changes to investors, auditors, and other stakeholders well in advance.

Overcoming Data and System Integration Hurdles

Data and system integration hurdles often become a huge obstacle because of the bulk data management process. Implementation of the IFRS 17 by the International Accounting Standards Board (IASB) standard requires the collection of huge amounts of financial data. Therefore, the integration of these data can be carried out smoothly with the help of a centralized data management system. A centralized data management platform helps in finding all financial data accumulated in one single place. Moreover, advanced AI tools can also help in overcoming these hurdles. AI tools can integrate and filter out data for fast and smooth transitions. 

Technology Tools for IFRS 17 Compliance

Some popular tools that can be used for IFRS 17 compliance include:

• Prophet (by FIS)
• Moses (by Moody’s Analytics)
• Towers Watson’s ResQ
• Milliman’s Vantage
• SAP S/4HANA for Insurance
• Oracle Financial Services Analytical Applications (OFSAA)
• Microsoft Dynamics 365

Automating Calculations and Reporting Under IFRS 17

Automating calculations and reporting under IFRS 17 can help insurance companies manage large volumes of data and meet reporting requirements. 

Reduce manual work: Automation can reduce the amount of manual work required to extract and transform data.

Improve accuracy: Automation can help ensure the accuracy of reporting.

Save time: Automation can save time by simplifying the process of managing data.

The Financial Impact of IFRS 17 on Insurance Statements

IFRS 17 makes a huge impact on the entire finance and accounting management. Speaking of insurance statements, the implementation of IFRS 17 can leave a primary accounting change in the insurance statements. The volatility and imbalance in the income statement can be significantly reduced by the automation of IFRS 17. However, the implementation of the IFRS 17 would have no impact on the organisational strategy or the dividend that the organisation is paying. 

IFRS 17 and its Effect on the Balance Sheet and Income Statement

The automation of the IFRS 17  can leave a stable impact on the balance sheet and income statement of the organisation. Let us dissect it a bit: 

For Income Statement: 

• IFRS 17 introduces new concepts in the income statement like insurance revenue, insurance service expenses, and insurance results. 
• IFRS 17 requires companies to separate insurance service results from insurance finance income or expenses.

Balance sheet:

• Separate presentation
• IFRS 17 requires companies to separately present the carrying amount of insurance contract assets and liabilities. 
• Contractual service margin

Early Preparation and Stakeholder Engagement for IFRS 17

The primary benefit of early preparation and stakeholder enhancement for IFRS 17 is that it helps increase financial transparency in reporting insurance contracts. With the help of IFRS 17 automation, the organization would be able to bring a unified framework that enhances the comparability between the insurance companies. 

Obtaining a Diploma in IFRS: Enhancing Your Knowledge for IFRS 17 Implementation

Obtaining an IFRS diploma helps your skill set and knowledge in the implementation of the IFRS 17 certification. The diploma in IFRS course could help you to get both physical and theoretical knowledge in the IFRS 17 certification and implementation. The diploma in IFRS would help you to implement automation with an in-depth knowledge of accounting management and financial reporting. A Diploma in IFRS typically covers all IFRS standards, including the latest updates and detailed guidance on IFRS 17, allowing professionals to thoroughly understand its principles, concepts, and application.

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Conclusion: Preparing for the Future of IFRS 17 in Insurance

With the advent of the time, the need for IFRS 17 implementation will be growing at a high rate. The need for transparency and systematic automation in insurance contracts has been one of the highest check factors in the need for IFRS 17 in the upcoming future.  IFRS 17 establishes the principles for the recognition, measurement, presentation, and disclosure of insurance contracts within the scope of the standard. Implementation of the IFRS 17 has its key takeaways in the fairness and transparency of the contracts. The stakeholders would be able to get a completely clarified idea of the breakdown of liabilities in the insurance contracts. IFRS 17 reflects how risk is managed by entities. This could provide an opportunity for risk management and financial reporting teams to integrate management and financial reporting, thus reducing the amount of work to prepare financial and management reports.

FAQs on IFRS 17 Insurance Contracts

What is the purpose of IFRS 17?

To bring in equality, transparency, and comparability in the insurance contracts 

How will IFRS 17 affect insurance?

It will provide transparency and a complete breakdown of the liabilities for the insurance contracts. 

What is the boundary of an insurance contract under IFRS 17?

The boundary of the IFRS 17 is involved in the cash flow obligations 

Does IFRS 17 apply to reinsurance?

Yes, IFRS 17 needs the insurance companies to apply for reinsurance.

Anant Bengani, brings expertise as a Chartered Accountant and a leading figure in finance and accounting education. He’s dedicated to empowering learners with the finest financial knowledge and skills.