IFRS 17 and IFRS9 – Insurance contracts – are you ready? Ask Synergy Software Systems

June 1st, 2021 by Stephen Jones Leave a reply »

IFRS 17 is the newest IFRS standard for insurance contracts and replaces IFRS 4 on January 1st 2022. Mainly to make the financial statement easier to compare across insurance companies and among industries

It states which insurance contracts items should by on the balance and the profit and loss account of an insurance company, how to measure these items and how to present and disclose this information.

This is a big change for insurance companies because data administration, financial presentation and actuarial calculations will need to change!

IFRS 9 explains the classification and the measurement of financial instruments. Hence IFRS 9 helps to improve the information disclosure around financial instrument. Many perceive the information disclosure around financial instruments during the financial crisis as inaccurate for example impairments on financial instruments were taken too late and the amounts were too little.
IFRS 9 makes the classification of each financial instrument more logical and principle based. There are two questions which need to be answered for the classification:
• Why is the company holding the asset; just for collecting the cash flows from the underlying asset, or is the asset also held for trading?
• What kind of asset is the financial asset? Is it a derivative, an equity or a debt instrument? With the SPPI (solely payment of principal and interest) model it can be tested whether an instrument is really a debt instrument.
The classification determines:
• which accounting principle is used;
• should the instrument be measured at fair value or at amortized cost
• and whether earnings and losses should go through the profit and loss account or through the OCI (other comprehensive income) account.
IFRS 9 also includes a more dynamic credit loss model instructing when an insurer should take an impairment on financial assets. The model is forward looking thereby also expected future losses should be taken into account with the impairment.
IFRS 9 also makes hedge accounting possibilities more rule based, thereby being in line with how risks are managed within insurers.

Why are IFRS 9 and IFRS 17 implemented together?
• The insurance liability (IFRS 17) is always closely connected to the financial instruments (IFRS 9) within insurers.
• When a client buys an insurance, the insurance liability is created and with the paid premiums are financial instruments bought.
• Insurers want to reduce the volatility in their earnings and there are some choices within IFRS 9 and IFRS 17 which they can make which can impact the volatility.
• Under IFRS 17 insurers can decide whether results of changing financial risk assumption go through OCI or through the profit and loss account.
• Under IFRS 9 insurers can decide whether changes in equity will go through profit and loss or through OCI.
Both standards will impact earning volatility and hence balance sheet management choices are connected. Consequently, the IFRS board decided it is better that insurers are granted the option to implement both standards together.

Likely impacts
• New concepts and terms are introduced. for example components like unbiased Cash Flows, Risk Adjustment, Discount Rate and CSM
• The standards will have an impact on the presented numbers. Under IFRS 17 the insurance liability needs to be based on updated assumptions which is currently not the case with IFRS 4.
• Faster disclosure is needed, which needs faster processes within the organization
• Insurance liability needs to be specified in a different way, the importance of gross written premiums disappears, while equity will be impacted.
• Risk engines are needed to calculate the CSM and cope with all the different groups
• The general ledger system will change as new measurements are introduced
• Big impact on presentation of the balance and P&L
• More data is needed. with finer granularity and with more history, which challenges internal data quality and consistency and IT performance.
• Reporting timelines are also shortened. both challenging the systems but also the cooperation between different departments.
• Staff training will be needed.

To find out more about the requirements contact us or your auditors.
To update your financial software or to acquire software to support IFRS 17 please call Synergy Software Systems on 009714 3365589


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1 comment

  1. Thanks very interesting blog!