What the new insurance contracts standard means

Organisations have less than ten months before the new ‘insurance contracts’ standard, IFRS 17, becomes effective. This standard, Issued in 2017 and mandatorily applicable for annual reporting periods beginning on or after 1 January 2023, defines clear and consistent rules that will significantly increase the comparability of financial statements.

The standard applies to any organisation that issues insurance contracts, not only insurance businesses. However, for insurers, the transition to IFRS 17 will result in changes to their financial statements and key performance indicators.

As we count down to next year, organisations should assess their preparedness for transitioning to IFRS 17 across the following areas.

Firstly, organisations should confirm that relevant stakeholders across the organisation have a good understanding of the provisions of IFRS 17. It includes functional areas such as finance and accounting, internal audit, actuarial, risk management, treasury, legal, information technology and systems, to name a few.

It will enable organisations to assess the financial reporting impact of IFRS 17 and the operational changes required to operate in an IFRS 17 environment. For example, IFRS 17 introduces three new measurement approaches for different insurance contracts.

However, by now, organisations should have clarity on which measurement models apply to the insurance policies they issue.

For instance, organisations that write long-term contracts exceeding one year, such as life policies, are likely to experience a change in the pattern of their revenue recognition on the transition to IFRS 17 compared to those issuing contracts of one year or less such as annual motor policies.

The new standard also requires lots of data when applying the measurement models. It is an aspect every organisation should prepare adequately before transition, ensuring they have the appropriate systems and technologies in place to deal with the large volumes of data that need to be processed accurately.

Systems are a significant investment many organisations have made from choosing to merely comply and make minimal investments or deciding to go all the way and have a comprehensive finance transformation project for IFRS 17.

Organisations should be clear by now where on this scale of systems investment they sit and why it's considered appropriate.

Organisations should also have performed a quantitative impact assessment of the new standard. It will help identify changes to their financial statements and key performance indicators and keep stakeholders informed of the new performance measures across the organisation.

Related to this is the transition approach selected by the organisation. IFRS 17 provides three different transition approaches for organisations to choose from depending on their specific circumstances. Each transition approach would likely result in different results.

Also, the complexity of the various transition approaches and the cost of transition to IFRS 17 is a function of the information available. The transition approach could also impact the ability to pay future dividends, solvency capital or taxation depending on local legal and regulatory requirements.

The presentation and disclosure requirements of IFRS 17 are extensive, and since 2017, when the standard was issued, there have been certain amendments and changes to address reported concerns.

Therefore, organisations need to closely monitor these developments and take account of their circumstances in preparing their disclosures.

IFRS 17 allows organisations that had previously adopted IFRS 9, the ‘financial instruments’ standard, to revisit their classifications for financial assets associated with insurance, while insurers applying IFRS 17 and IFRS 9 for the first time in 2023 should ensure their IFRS 9 classification is optimal to reduce volatility in their performance statements.

Finally, organisations should have commenced parallel runs on IFRS 17 systems and reporting to ensure a smooth transition for IFRS 17.

Mr Awodumila, an associate director at PwC Kenya, writes and speaks widely on corporate reporting topics