IFRS 17: Insurance Contracts is set to be implemented at the beginning. This leaves financial institutions—insurance providers, in particular—with a little more than a year to ensure that they’re ready to comply with this new set of guidelines determined by the International Accounting Standards Board (IASB). The new accounting guideline is set to supersede IFRS 4, a similarly titled set of guidelines that applies to all insurance contracts, save for a few exceptions. The shift from IFRS 4 to IFRS 17 is set to completely overhaul how insurance contracts are perceived in financial reporting, improving the transparency of the whole process of 2023.
Adopting IFRS 17 Guidelines Prior to the Implementation Date
Financial entities that issue insurance contracts have the option to start implementing IFRS 17 guidelines for their financial reports if it is practical for them to do so. Companies that are able to take this step can start preparing their processes for full retrospective application by using IFRS 17 software solutions to make the process more streamlined. As an alternative, those who are not able to adopt the guidelines ahead of time can take modified approaches by prioritizing different paragraphs and sections of IFRS 17.
Key Differences between IFRS 4 and IFRS 17
It’s important to get to know the key differences between these two accounting guidelines to highlight how much change insurance companies need to expect once IFRS 17 replaces IFRS 4. While IFRS 4 gave entities more freedom to come up with interpretations for their calculations of reserves and revenue recognition, IFRS 17 presents more consistent accounting for insurance contracts issued by financial institutions. Once the clock strikes 12 on January 1, 2023, financial reports should reflect the current information in the market instead of accepting estimates for long-duration contracts. At the same time, they should apply discount rates depending on the contract cash flow and reflect time value where needed. Overall, IFRS 17 presents stricter criteria that financial entities should meet prior to disclosing and disaggregating insurance contracts.
Sooner or later, though, insurance companies that are aiming to improve their compliance efforts will have to contend with the changes that IFRS 17 brings to the table. They can ease the transition between IFRS 4 and IFRS 17 by utilizing new technologies and streamlining their core processes, in order to:
Improve the Integrity and Reliability of Measurement Models
Compared to its predecessor, IFRS 17 demands extreme granularity. This is something that financial institutions should observe strictly in order to minimize their compliance expenses. The guideline requires insurance providers to group policies together as well as consider the entire lifetime of the accounts and policies during reporting. As many businesses are still in the process of adopting this new guideline, these companies don’t have established protocols for grouping the policies that they offer their clients. It’s possible to use historical data as a basis for calculations and other decisions, but how the guideline will affect the current standards of measurement that many companies are still using cannot be determined yet. Refining these standards and focusing on their system’s capacity to accommodate extreme granularity can help companies implement adjustments easily once the rollout date arrives.
Identify Insurance Contract Portfolios and Group Them Appropriately
Having a solid basis of measurement for insurance policies is a must for financial agencies that will be affected by the IFRS 17 rollout, but they shouldn’t stop there. Their processes should also be capable of putting these measurements and standards into action so that the system can automatically separate policies into their respective groups. Automating this separation and grouping process early on can significantly reduce the time, money, and manpower that financial institutions will require in order to come up with IFRS 17-compliant financial reports.
Invest in Improving Human Resource Capabilities
People are another factor that financial institutions should consider. Are their staff members prepared to take on the task of working with a new set of insurance contracts guidelines? Prior to the implementation date, has the company conducted training and coaching sessions that will allow their specialist and generalist staff members to adjust to their new roles, responsibilities, and processes once 2022 comes to an end? Hiring staff members who can share insights on how the IFRS 17 can affect the company is a great step in ensuring that an insurance provider will be able to respond to any hiccups that they may encounter during the transition process.
It’s not yet too late for insurance providers and other financial institutions to seriously consider the step-by-step process of their transition from IFRS 4 to IFRS 17. The earlier they can position themselves for this milestone, the better prepared they will be to immediately deal with possible snags and technical issues on the implementation day and the dates following it. This, in turn, will help ensure that their company can reduce compliance costs and minimize the likelihood of fines from regulators.