The International Accounting Standards Board has issued a global standard for insurance contracts.

The IFRS 17 will help investors and others better understand insurers’ risk exposure, profitability and financial position at a time when investment suitability is a key topic at private banks in Singapore and Hong Kong.

IFRS 17 replaces IFRS 4, which was brought in as an interim Standard in 2004.

IFRS 4 has given companies dispensation to carry on accounting for insurance contracts using national accounting standards, resulting in a multitude of different approaches. As a consequence, it is difficult for investors to compare and contrast the financial performance of otherwise similar companies.

IFRS 17 solves the comparison problems by requiring all insurance contracts to be accounted for in a consistent manner, benefiting both investors and insurance companies.

Insurance obligations will be accounted for using current values – instead of historical cost. The information will be updated regularly, providing more useful information to users of financial statements.

The effective date is 1 January 2021 but companies can apply it earlier.

According to Willis Towers Watson, it is first ever global accounting standard for insurance contracts.

Speaking to Citywire Asia on the impact on Asia, John Nicholls, senior consultant and Willis Towers Watson’s lead on IFRS for insurers in Asia Pacific said: 'We have seen in recent years that new insurance legislation can have a significant impact on investor attractiveness, product design, pricing and distribution.

'Under IFRS 17 the emergence of profits may be very different, both compared to the current situation in each country and between ostensibly economically similar products offered by insurers operating in the HNW market. 

'Universal life, for example, could be treated quite differently to whole life participating business.  This could impact the relative attractiveness to the organisation and potentially its willingness to invest in any given product, distribution channel or market.

'However, each insurer’s perspective will be very different and it is too early to say whether certain products will tend to be favoured over others,' he noted.

Implementation challenges

Analysis by Willis Towers Watson notes that some of the biggest challenges for insurers include:

1. IFRS 17 is truly principles-based, which in most cases will mean it is the insurer’s responsibility to ensure policies and disclosures
comply with the standard’s requirements, rather than it being able to rely on prescriptive and detailed rules.

2. The hybrid model proposed will increase volatility compared to existing models, particularly those based on locked-in assumptions.

3. Explaining IFRS 17’s impact on profits and equity, and the variances to current GAAP and reporting under applicable regulatory regimes will require robust processes, a keen grasp of the individual differences and a transparent communication strategy. This may affect dividend-paying capacity, management bonuses and market-wide performance metrics.

The International Accounting Standards Board (IASB) is an independent, private-sector body that develops and approves International Financial Reporting Standards (IFRSs). The IASB operates under the oversight of the IFRS Foundation.