As insurers prepare for IFRS 17, some are starting to recognize that the new accounting standards will have a significant impact across many areas of their business.
By now, most insurers should already be thinking about the practical implementation of IFRS 17. Accounting and actuarial teams have read the new rules, begun estimating the financial impacts and started creating their roadmap to achieve compliance.
Insurers know that the shift to IFRS 17 will mean developing new accounting and actuarial policies and procedures and redesigned year end reporting process, documentation and controls. They recognize that the new standards will require designing systems changes to perform new calculations, the collection and storage of new data and rigorous testing to ensure smooth adoption. For those that have completed an initial impact assessment, activity has started to pick up pace at an operational level. Many of these front-runners are deep in the tactical steps needed in order to be able to dry run results on the new basis ahead of achieving compliance by 2021— analyzing which of the available options is preferable in their particular circumstances, exploring how to mitigate volatility, working out how best to operationalize the requirements, probing matters of interpretation, and strategizing how best to use this opportunity to automate, streamline and standardize. Their executive teams have likely started to ask detailed questions about performance metrics and key performance indicators (KPIs) under the new standard.
Seeing the bigger picture
Yet, as management starts to dig deeper into the financial and operational impacts of IFRS 17, many are starting to uncover some unexpectedly wide business impacts and this is creating some concern in the executive suite.
For undertakings within the European Union, IFRS 17 will have no direct impact on prudential capital. But for other companies one of the most acute concerns we are finding relates to the potential impact of IFRS 17 on future available capital. Depending on the linkage between local financial reporting and prudential regulation in particular jurisdictions the new standards could, in some cases, alter the available capital which, in turn, impacts the amount of free capital that is available to support new growth opportunities, payment of dividends and to conduct M&A. Those with an eye towards their long-term growth strategy are understandably concerned and are looking to factor IFRS 17 metrics into their business planning.
It's not just those with ambitious growth plans and those that report their group results using IFRS that are taking a second and third look. Those with a global or multijurisdictional footprint are also concerned about how the shift to IFRS 17 will impact the dividend paying ability of their subsidiary operations. Planning future dividend flows and factoring this into the group's dividend policy and communicating this to investors will all be important — and require robust numbers ahead of time.
KPMG professionals have found that for some, the prohibition on recognizing 'day one' gains and the need to recognize losses on groups of onerous contracts will likely trigger important changes in product design and marketing. While the total level of profit will not change, the timing of its recognition will. This will be most significant for life insurers writing long-term business, where front end loading of profit is commonplace. Already, some insurers are exploring how they might pivot their focus away from day one profits — and that has the potential to benefit consumers as well as quality of earnings.
In matters of valuation there is no absolute truth, only perception. We believe the shift to IFRS 17 will impact the perceptions of shareholders, analysts and regulators — hence has the potential to impact valuation multiples and the value of any new acquisitions. Those embarking on inorganic growth or those considering the potential sale of books of business will certainly want to understand how the new standards may influence longer-term valuations.
CEOs and executives should also have a personal interest in the impacts of IFRS 17. Most are tied into performance-based bonus arrangements that are informed by finance KPIs. Many are justifiably worried as the new standards will change a variety of performance measures, specifically those using existing accounting bases, such as their remuneration packages. Those who have started exploring the presentation of their financials on the new basis will understand the major task required to educate the business in how to explain, interpret and, indeed, steer results on the new basis.
Download the PDF
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.