Insurers around the world have less than 500 days to ensure they are ready to adopt IFRS 17, the new accounting standard for insurance contracts.
While the 2023 effective date is fast approaching, insurers have another date to worry about – the transition date of 1 January 2022.
On transition to IFRS 17, insurers are required to apply the standard retrospectively using a default method called full retrospective approach.
Where this is impractical, other methods are available: the modified retrospective and the fair value approaches.
Transition is often viewed as a key challenge as insurers have to decide which approaches to take, with each involving certain trade-offs between complexity and the level of future profit.
The full retrospective approach is said to be very challenging as it requires lots of data that may not be possible or practical to apply. While the modified approach offers a certain degree of simplification, many argue it is not as modified as expected. The fair value approach, while described as the easiest transition method, has also been criticised for not providing an appropriate level of future profit.
So how are insurers planning for transition?
According to a poll of 200 insurance specialists who attended a webinar by Legerity last month, 69% of the audience were in the early stages of transition; a quarter claimed to be “advanced” in their transition; while 6% said they had not started thinking about transition.
The 6% thinking about IFRS 17 transition represents a relatively small number. Nevertheless, with just over four months away from transition, it’s shocking to hear these insurers have yet to start planning for this period.
Another concern with the transition to IFRS 17 relates to potential accounting mismatches when insurers start to provide comparative information next year. Many insurers will apply IFRS 17 and 9 at the same time, but those who choose to provide comparatives for both standards will not be allowed to apply IFRS 9 to financial assets that have been derecognised.
To fix this issue, the International Accounting Standards Board has proposed a classification overlay approach and is consulting on the proposal until 27 September.
Experts have been discussing issues over transition in the past four years. If firms have not made any decisions by this time, this is the area they should prioritise in the next four months.
Cintia Cheong
