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IFRS 17 – new accounting rules for the insurance industry

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

IFRS 17 will enter into force on 1 January 2021 and replaces the existing interim IFRS 4, which has been in effect since 2005. The new standard regulates the principles with regard to the identification, method, valuation, reporting and the disclosures for insurance contracts. IFRS 17 aims to provide current, transparent and comparable accounting information for insurance contracts in order to make their effects on a company’s assets, financial and earnings position as well as payment flows comprehensible.

The standard must be implemented as EU law once it has been published. The EU Commission has asked the European Financial Reporting Advisory Group (EFRAG) to come up with an adoption recommendation, which is expected in the fourth quarter of 2018.

Time to act

The year 2021 may seem far in the future, but the clock is ticking. 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 2020. 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 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 peculiarities – IFRS 17 poses new, far-reaching requirements. This will make the systems in which insurers reproduce regulatory requirements much more complex.

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 designation 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.

Important information is still pending

Although the text of IFRS 17 has now been published, important information such as opinions, handouts, etc. is still being developed. On the one hand, the International Actuarial Association (IAA) has announced various documents, particularly the IAA example standard (ISAP 4) and comprehensive International Actuarial Notes (IAN 100) as an explanation. On the other hand, the IASB offers training materials such as webcasts on various subject areas available. As you know from other newly developed IFRS, a Transition Resource Group discusses pending questions concerning the implementation of IFRS 17. However, the companies concerned should already begin implementation in the policy administration systems.

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.

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

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