IFRS 17 for insurers: PwC

IFRS 4 was an interim standard which was meant to be in place until the Board completed its project on insurance contracts. IFRS 4 permitted entities to use a wide variety of accounting practices for insurance contracts, reflecting national accounting requirements and variations of those requirements, subject to limited improvements and specified disclosures. At this early stage, many US companies that are subsidiaries of foreign companies are waiting on instructions from their foreign headquarters. But with potential implementation issues that may require significant time and resources to address, it is never too early to start the conversations.

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This section addresses accounting and reporting of the insurance industry including topics of financial statements of mutual companies, statutory and GAAP accounting practices, separate accounts, income taxes, and SEC financial reporting. The need for robust and adaptive accounting practices becomes increasingly paramount as the insurance industry continues to evolve amidst technological advancements, regulatory changes, and market dynamics. The ability to navigate these changes while maintaining stringent accounting standards is critical for insurance companies’ continued success and reliability. Regulatory compliance and reporting are fundamental aspects of accounting in the insurance industry.

IFRS Accounting

It then accounts for fixed-fee service contracts like other service contracts with customers and financial guarantee contracts under the financial instruments standards. PwC can help you navigate the existing and new accounting for insurance contracts by insurance and reinsurance entities. Insurers are likely to face major changes as they implement FASB’s new standard on long-duration insurance contracts. The compensation an entity requires for bearing the uncertainty about the amount and timing of the cash flows arising from non-financial risk as the entity fulfils insurance contracts.

Summary of IFRS 17

Applying the general measurement model will require companies to track certain historical information to determine the contractual service margin (e.g. tracking of discount rates to determine the present value of estimates of future cash flows). Many legacy systems are still in use and may not be capable of accommodating the new data needs of IFRS 17, resulting in necessary systems and processes upgrades. Companies will also have to develop controls around any system and process changes and develop or upgrade existing controls for business as usual after transition. A successful implementation effort will need cross-functional collaboration between IT, actuarial, finance, accounting and operations. IFRS 17 also includes new disclosure requirements aimed to deliver clarity and transparency for users of financial statements.

Additionally, many US insurers may have the extra effort of potential changes to the accounting and disclosures for long-duration insurance contracts under US GAAP, and statutory accounting requirements under principles-based reserving requirements. Ideally, companies should consider these changes and their related effects on their people, processes and systems holistically. Before the 1930s corporate accounting and reporting focused on management and creditors as the end users. Since then GAAP has increasingly addressed investors’ need to be able to evaluate and compare financial performance from one reporting period to the next and among companies.

1. The implementation of IFRS 17 will be a major challenge for the insurance industry, fundamentally changing accounting and reporting practices.
2. This guide will take you through the fundamentals of insurance accounting, diving into specialized topics like premium revenue recognition, reserve estimation, investment accounting, and regulatory compliance.
3. From the recognition of premiums to the complexities of claim settlements and reserve accounting, the financial narratives of insurance companies are distinct and multifaceted.
4. We shared stories of the varied ways companies around the world are tackling their IFRS 17 programmes, and discuss some of the issues that have arisen along the way.
5. The term statutory accounting denotes the fact that SAP embodies practices prescribed or permitted by state law.
6. In the ever-evolving landscape of the insurance sector, understanding the accounting aspects is not just about compliance and number crunching; it’s about grasping the industry’s heartbeat.

In the ever-evolving landscape of the insurance sector, understanding the accounting aspects is not just about compliance and number crunching; it’s about grasping the industry’s heartbeat. Accounting in insurance is unique, blending traditional accounting principles with specific practices tailored to the insurance business model. From the recognition of premiums to the complexities of claim settlements and reserve accounting, the financial narratives of insurance companies are distinct and multifaceted. The aggregation of contracts into ‘groups’ as defined by IFRS 17 is required at initial recognition and is not reassessed subsequently. Contract grouping is performed in a manner that limits the offsetting of profitable contracts against loss-making ones and cannot include contracts issued more than one year apart; however, exceptions apply in certain circumstances on transition. Generally, this will result in the grouping of contracts for presentation purposes below the portfolio of insurance contracts level as some companies may do now.

Helping you to plan and understand how you can use IFRS 17 outputs to better inform your decision making is our priority. Our credentials, capabilities and experts span across the globe, with over 160 IFRS 17 territory champions who are ready to help to support you in this journey. For more information and contact details of your local territory experts please contact Stuart Low, Global IFRS 17 Business Driver, PwC UK. IFRS 17 Managed Service provides access to a PwC developed solution in the 17 Solved calculation engine, coupled with ongoing support from a reliable global IFRS 17 implementation leader. The Managed Service fills the gap for many insurers who do not have the time and resources available to develop an in-house IFRS 17 capability and to purchase a vendor solution. IFRS 17 presents opportunities to harness data more effectively, to improve the structure of your finance function and to better inform your decision making.

Understanding the fundamentals of insurance accounting is crucial for anyone involved in the insurance industry. Unlike traditional accounting, insurance accounting has its principles and practices shaped by the unique nature of the industry. This section delves into these foundational aspects, providing a clear overview of how insurance accounting operates. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation.

The FASB recently revised the disclosures for short-duration contracts, and is working on an ASC 9443 project to improve, simplify and enhance the financial reporting for long-duration contracts issued by insurance companies (see below). However, those changes are likely to differ significantly from the requirements of IFRS 17. Unfortunately for dual reporters, there are no convergence plans between ASC 944 and IFRS 17. Under IFRS 4, a US company that applies IFRS may account for insurance contracts using US GAAP. That will no longer be an option under IFRS 17, which means that dual reporters will need to maintain at least two different sets of financial reporting records upon adoption of IFRS 17 because of the different accounting models.

Insurance companies collect premiums upfront, often not paid out in claims until much later. This time gap allows insurers to invest these funds to generate additional income and strengthen financial stability. These investments range from bonds and stocks to real estate and alternative assets. However, noninsurers that issue contracts that meet this definition, and either are required or choose to apply IFRS 17, will no longer be able to apply their preexisting accounting policies as they did under IFRS 4.

Companies will have to consider the level of detail necessary to satisfy the disclosure requirements, which may result in some companies disclosing information at a more granular level. The required reconciliations help to explain drivers of change in the contract liability and different types of information about the insurance service results. August 1, 2017, the IASB issued its comprehensive new accounting model for insurance contracts, IFRS 171 – replacing its 2004 ‘temporary’ standard (IFRS 4). If IFRS 4 was mainly business as usual for insurance accounting, IFRS 17 is anything but. The new standard will require fundamental accounting changes to how insurance contracts are measured and accounted for.