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International Financial Reporting Standard 17

IFRS 17 – new accounting rules for the insurance industry

After 20 years of project work, the time had come: on 18 May 2017, the International Accounting Standard Board (IASB) published IFRS 17, the new international accounting standard for insurance contracts. This marked the first time there had been a globally uniform basis for the accounting of insurance contracts.

The complex set of regulations known as IFRS 17 will likely enter into force on 1 January 2023 and replace the existing interim IFRS 4 which has been in effect since 2005. The initial application of IFRS 17 was actually planned for financial years from 2021 onwards. However, due to the extensive need for amendment, the IASB decided on two separate occasions to have the standard come into force one year later. In this context, it was also decided to extend the temporary exemption from IFRS 9. The new standard regulates the principles with regard to the identification, method, valuation, reporting and the disclosures for insurance contracts.

A time-consuming process

As has been standard practice with other newly developed IFRSs, a transition resource group – a public forum for representatives of the insurance industry – was formed in order to discuss unanswered questions concerning the implementation of IFRS 17. In light of the concerns of the transition resource group and the resulting proposed changes, the IASB had the date of introduction postponed in order to give the businesses more time. Based on the transition resource group’s proposals, the IASB released the ‘Amendments to IFRS 17’ on 25 June 2020. This postponed the planned date of introduction to 01 January 2023.

However, the new standard still has to be implemented into EU law (this is referred to as endorsement). To this end, the EU Commission asked the European Financial Reporting Advisory Group (EFRAG) to come up with an adoption recommendation. EFRAG issued a draft adoption recommendation on 30 September 2020. A date for the adoption does not yet exist.

Time to act

Companies that are required to or want to report as well as create quarterly financial reports in accordance with the International Financial Reporting Standards (IFRS) need an opening balance sheet as early as 1 January 2022.  Most likely, policies taken out before this date will also be at least partially treated as though they had been accounted for pursuant to IFRS 17 from the beginning.

All insurers for whom IFRS is an issue should prepare themselves actively and take on the topic of implementation in their policy administration systems soon. The implementation of IFRS 17 has a considerable impact on the IT architectures of insurers. While the previous IFRS 4 largely allowed for the retention of previous accounting practices – other than some individual special features – IFRS 17 poses new, far-reaching requirements. This will make the systems in which insurers reproduce regulatory requirements much more complex.

Despite certain similarities with the Solvency II regulations, IFRS 17 poses even greater challenges for businesses in terms of interpreting the standard, changing processes and the work required to implement it. For example, Andreas Brandstetter, CEO of the Uniqa Insurance Group, stated in his presentation of the preliminary figures for 2018 that the company would have to spend between 50 and 60 million euros to transition to IFRS 17. This amount is twice as much as the costs incurred as part of the implementation of Solvency II at the time. According to Brandstetter, there will then no longer be known factors such as premiums, losses and benefits.

New valuation model

One of the key changes of IFRS 17 is the introduction of a new valuation model. To evaluate an individual policy, you first need a so-called fulfilment value, which is determined with a modular approach on the basis of the cash flows of the individual policy. In addition to the determination of the cash flows and the time value of money (discounting), a risk-related adjustment (risk adjustment) for the non-financial risk must be carried out.

Additionally, the fourth element is the so-called contractual service margin (CSM). The CSM is not determined for individual policies, but for groups of policies. For this purpose, a two-stage collective formation is to be carried out, i.e. classification. The individual policies in the policy administration system are to be designated accordingly. Once used, this portfolio/group formation of the contracts can no longer be changed. The policy groups should be introduced at an early stage, as subsequent additions to the portfolios become more complex with increasing history.

The variable-fee approach (VFA) also introduced special regulations for policies with direct participation in surplus that account for the special features typical for the German Life segment. This is intended to ensure that these policies do not give rise to any undue fluctuations in earnings.

In addition to this, the new standard makes sure that the insurance and investment components of an insurance contract are separate. The investment component is the amounts that the insurance company has to pay back to the customer ‘by all means’, regardless of whether an insured event has ocurred or not. In accordance with IFRS 17, this investment component has to be separate from the insurance component in the income statement and disclosure and have to be deducted from benefits payments as a result.

There are still some points outstanding

The amendments to IFRS 17 also still have some questions left unanswered, or have not been answered with the interests of the Insurance segment in mind.

The most important point for life insurers is the discussion of whether the formation of annual cohorts is appropriate when using the variable fee approach (VFA), because it largely ignores balancing in the collective and creates unnecessary complexity.

Implementation of IFRS 17 requirements with solutions from msg life

To be able to implement the new accounting requirements, existing IT landscapes have to be adapted, new functions integrated and systems expanded. Experts talk about a ‘mammoth project’ for insurers. With our policy administration system for the Life segment, msg.Life Factory, we offer a flexible and powerful platform that replicates all of the necessary requirements. msg.Life Factory enables the highly efficient handling of all business processes by using the relevant historical information. To support IFRS 17, the portfolio/group formation of the contracts and the investment components are shown here.

msg.Life Factory

The standard software msg.Ilis offers the ideal platform for the provision of cash flows of individual policies and therefore the basis for all other policy-related calculations. The additional component msg.Ilis offers centralised data storage where all data necessary for forecast calculations, evaluations and risk assessments are managed. The solution enables the audit-proof storage of data as well as the reproducibility of the calculations.

msg.Ilis

Like msg.Life Factory, msg.Ilis is also integrated in the complete solution msg.Insurance Suite.

msg.Insurance Suite

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