Huge insurance accounting shake-up coming

Major change could potentially cost insurers billions

Huge insurance accounting shake-up coming

Insurance News

By Jordan Lynn

Insurers in more than 100 countries are bracing for a major accounting change which could see costs spiral and more volatile earning reports.

The introduction of a new, global accounting standard has been 20 years in the making and aims to make it easier for investors to compare how much global insurers earn from policies.

The new rule, called IFRS 17, will be introduced by the International Accounting Standards Board (IASB) and will affect 450 listed insurers who manage US$13 trillion in assets.

Analysts have warned that the changes could cost billions in compliance costs as insurers update IT systems to recalculate millions of contracts each reporting period, Reuters reports.

The new IFRS 17 framework will see insurers calculate income from policies like motor insurance to annuities, using interest rates and market information which will be updated each reporting period.

Previously, insurers could use data from when a policy was purchased.

John Nicholls, senior consultant and Willis Towers Watson’s lead on IFRS for insurers in Asia Pacific, said that while the new system will improve transparency, it will take time for investors to understand the changes.

“IFRS 17 is more than ‘just’ an accounting change, and will have a wide and significant impact on insurers’ operations,” Nicholls said.

Asia features a diverse range of current accounting practices, Nicholls noted, which will see adoption of the new scheme prove to be particularly challenging.

The new standard will replace IFRS 4 in January 2021 and will become the first global standard for the industry.

“The new standard will impact profit, equity and volatility, as well as reserving and financial reporting processes, actuarial models, IT systems, and potentially executive remuneration, so insurance companies should not underestimate the work required,” Nicholls continued.

A survey from accounting firm Baker Tilly found that 60% of insurers are not prepared for the implementation of the new regime.

Jonathan Zeigler, CPA, partner with Baker Tilly’s insurance industry practice, said that as the first effective date of the changes approaches, firms need to review how they will be impacted.

“Implementation may affect a variety of business functions, so internal resource constraints must be considered when looking to assess and implement updated internal controls and processes,” Zeigler said, according to CPA Practice Advisor.

IASB accounting rules are applied throughout the European Union, in many Asian nations and in Canada as the US is working on its own reforms.

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