A survey of 160 global insurance executives by KPMG International has revealed that Australian insurers are behind their international counterparts in readiness for new major accounting standards, IFRS 17 (Insurance Contracts) and IFRS 9 (Financial Instruments).
The KPMG report, In it to win it, found that a mere 7% of insurers are prepared for new IFRS standards, while 56% anticipate just one year of parallel running before going live. The two standards will take effect on Jan. 1, 2021 but two years of parallel running are recommended.
“IFRS 17 is the most significant accounting change for over 20 years in the life and general sector,” said Scott Guse, KPMG Australia insurance partner. “Ten per cent of the insurers surveyed were Australian, and they do seem to be slightly behind their global counterparts when it comes to commencing and implementing their transition to the requirements of the new standard. IFRS 17 brings in different ways of valuing insurance contracts and assets and so will make profit and loss (P+L) accounts more volatile – this will primarily arise through the ‘choices’ allowed in the new standard when re-measuring claim liabilities. IFRS 9 will add to the volatility in insurers P+L accounts as it allows more choices to be made in recording valuation gains or losses on their investment portfolios.”
The KPMG survey also revealed the major hurdles in making the new standards operational, with 90% of insurers foreseeing difficulties in securing skilled people to do the complex work and half are concerned about securing the necessary budget. Increased training is also a critical need for insurers implementing the transition.
“Ironically, the survey found that organisations which are furthest along with their projects were feeling the greatest time pressure,” Guse said. “The more they do, the more they realise how challenging implementing the new standards will be. For many, this has meant significant investment in systems, processes, data, controls, education, communication with stakeholders, and changes to asset-liability management. Profit profiles and product offerings may also have been impacted.”
Despite the challenges ahead, 97% of the largest insurers polled viewed the new requirement as an opportunity to transform their business, with a focus on process optimisation (identified by 77%), actuarial process enhancement (65%), and system modernization (58%).
“The costs of implementing IFRS 17 and IFRS 9 may be very significant, but the transition can be a catalyst for innovation and to develop your talent and emerging business leaders,” Guse said. “Ultimately, it is critical for insurers to be alert to evolving matters of interpretation so that the impacts on financial statements can be fully understood and there can be a dialogue with investors about what changes they can expect. But two years of parallel running is definitely preferable, and not many insurers look like achieving that.”