IFRS 17 overhauls accounting for $13 trillion insurance business

The introduction of IFRS 17 Insurance Contracts will completely transform the accounting rules for insurance companies as they are forced to move to a current valuation approach from the existing historical accounting treatment, reports Sara White

This radical change to insurance accounting is likely to have significant impact on the balance sheets of insurers as they move to a standardised approach from the current jurisdictional approach.

The current system is totally disparate with no universal rules or transparency. At the moment, countries and local regulators operate within their own virtual accounting rules to the extent that entities at a local level can even apply their own accounting treatment within the very broad premise of IFRS 4 Insurance Contracts.

The International Accounting Standards Board (IASB) has accepted that the new standard, which replaces IFRS 4, first introduced in 2004 and never updated to reflect other changes to International Financial Reporting Standards (IFRS), will represent a radical departure from the current accounting requirements.

IFRS 17 not only changes the financial reporting but also requires different levels of judgment, more akin to the approach taken by the actuarial world.

Darrel Scott, member of the IASB Board, said: ‘Coming into the Big Bang IFRS adoption in 2005, IASB did not have a new standard for insurance so companies would have had to use the Conceptual Framework. Instead at the time the Board decided to do a grandfathering approach with some required disclosures and permitted entities to change their practice.’

There was no consistency and there was a lack of transparency around the real value of insurance on books.

IFRS 17 is the first worldwide standard for insurance and it will require extensive retraining and restructuring of data collection and accounting treatment with the ditching of historic accounting.

As a result, the new standard will have a three-and-a-half year introduction period to give insurers time to implement the changes for accounting periods ending in 2021. For the first time, under IFRS 17, companies will have to start reporting contracts using current values instead of historical cost.

‘Now for the first time there will be worldwide standardised accounting for insurance contracts. The degree of radical change depends on what companies are doing now,’ said Scott.

‘Within the European context, Solvency II is coming relatively close in terms of balance sheet reporting and additional disclosures. But some companies in Europe and elsewhere will have to make significant changes.

‘In the UK, those following Solvency II will be in a better position but they will be reliant on what other entities in the group have been doing as this is a worldwide standard. Before Solvency II this information was not gathered but since Solvency II went live 18 months ago, insurance companies have been gathering the data.’

 ‘There are some transition benefits – this allows companies that cannot go back in time for some years to opt out. If you do have the information and can go back, then you are required to do so. With the three year plus lead time companies will be able to report the current information for the next three years and probably have it for at least the last two years.

But there will be problems with the move from accounting based on historical assumptions to measured, current values. These include the impact of using current interest rates, assumptions of cashflow and adjustments for changes in currency.

The issue raising the most concern is the application of current interest rates, which have been heavily affected by the economic downturn since 2008 when the global financial crisis occurred.

‘If measuring liabilities using higher interest rates, future cashflows become bigger numbers,’ said Scott. ‘You can expect the liabilities to increase. Companies can, if they acquired assets which match the duration of the contract, revalue the liability. There will also be issues for those running an open position as there will be a reduction of equity on the balance sheet.

‘There is also a new judgmental approach. As insurance is quite a complicated industry, it is judgmental. It is about determining whether contracts are low end, high end, medium range, risk levels. These judgments are already required in actuarial work.’

Implementation costs

Although the IASB has not provided a detailed cost analysis of the implementation costs for business, it expects there to be a number of significant transition costs.

‘There are systems implications, but the [same] processing and application happens in actuarial systems, and this is why there is long lead-in period for this standard,’ Scott added.

Insurance companies are also expected to continue incurring costs in applying IFRS 17 on an ongoing basis. These costs are mainly expected to arise from gathering the necessary information to update assumptions for measuring insurance contracts on a current basis.


There will be some exemptions to IFRS 17, with a distinction between insurance provided as a service, instead of as money.

For example, a provider of insurance cover for satellite TV, which attends properties to repair or replace a product, is providing a service. The same would apply to product warranties. The exemption would also extend to the automotive sector as car sales are often bundled with various insurance policies, such as service contracts and roadside assistance, for example.

Scott said: ‘Motor vehicle sales often include insurance contracts and these companies will have to review their insurance contracts to see whether they want to step outside the standard, as they are providing a service and would therefore be able to choose whether to step outside the standard and instead apply revenue recognition reporting [under IFRS 15 Revenue from Contracts with Customers].

IFRS 17 will require current valuation of all insurance liabilities, not just life, but also non-life. All insurance contracts will have 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

This will significantly increase comparability between insurance companies and between insurance and other parts of the financial industry, such as banks and asset management.

It will also improve comparability, particularly on when analysing current and future profitability of insurers. But the transition will not be straightforward.

Iain Coke, head of ICAEW’s financial services faculty, said: ‘People talk about the “insurance industry” as a single business but this standard is trying to design a single reporting model for 450 listed companies across the world, which are responsible for over $13 trillion (£10 trn) in assets.

‘They have a vast range of short and long term products that are all valued and measured differently. Current accounting practices in insurance vary greatly – perhaps more than any other sector.

‘Reaching this point has taken 20 years and one of the most extensive consultation exercises ever undertaken by a standard-setter or regulator. Inevitably, this has led to compromises which mean added complexity. Publishing the standard is not the end of the story, it's the beginning of the next phase.'

Effective date 2021

IFRS 17 has an effective date of 1 January 2021 but companies can apply it earlier.

The IASB plans to set up a Transition Resource Group and the Board is now calling for members.

IASB IFRS 17 webinars

The IASB is running webinars on IFRS 17 Insurance Contracts on 18 May at 9am and 3pm BST. Click here to register.

Futher information on IFRS 17 is available here

Sara White

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