The IFRS 17 standard: overview, basic principles and objectives

IFRS 17 is a new international accounting standard designed for the insurance industry. Published in May 2017 by the IASB (International Accounting Standards Board), a private-sector body based in London, it enables insurance companies to harmonize the presentation of their financial statements (quarterly, half-yearly and annual) on an international scale.

The standard came into force on 1 January 2023, two years after the initially announced date. This delay was due to the complexity of implementing such an accounting benchmark and the challenges faced by the insurance industry as a whole.

Overview of IFRS standards

International Financial Reporting Standards (IFRS) arose from the desire of international financial regulators to standardize the presentation of accounting data worldwide. These rules were extensively revised in the wake of the 2008 crisis, which shook the global financial system.

Deployed in more than 160 countries, IFRS standards apply to entities (listed companies and financial institutions) required to report to the authorities.

Examples of IFRS standards

Standards normally evolve over time, with some having turned obsolete and then replaced by others to meet the needs of a specific economic, legal or social context. This is the case, for example, with:

• IFRS 9: Entitled "Financial Instruments", this accounting standard applies to financial instruments. It replaces IAS 39 - Financial Instruments: Recognition and Measurement.
• IFRS 15: This standard was implemented in January 2018 to improve turnover information.
• IFRS 16: Designed for leases, IFRS 16 has been applied since 1 January 2019.
• IFRS 17: Replaces IFRS 4, which allowed companies to use national accounting rules. IFRS 17 modifies the accounting treatment of insurance contracts and investment contracts for insurers by providing for more consistent accounting. The IASB has set 1 January 2023 as the date of entry into effect.

IFRS 17: a brief overview of the chronological development

IFRS 17 is in fact the fruit of a project dating back to 1997. The initial work culminated in 2004 in the introduction of an intermediate standard, IFRS 4 Phase 1, the minimum objective of which was to take account of the specific features of the insurance sector (contract complexity, presence of provisions due to the inversion of the production cycle, heterogeneity of accounting systems in different jurisdictions).

IFRS 4 is mainly based on local regulations. As a result, accounting principles may vary from one country to another, and may be insufficiently aligned with the principles of other IFRS standards, thereby contradicting the IASB's objective of a coherent body of accounting standards.

Among its main measures, Phase 1 clarified the method to be used for valuing balance sheet assets. These financial instruments, which are not intended to be held to maturity, now had to be based on their fair value, which implies valuation at market value. While this method was adopted for assets, the IASB did not plan to extend the fair value concept to liabilities until Phase 2.

This asymmetric valuation between liabilities recognized according to local standards (historical cost) in Phase 1 balance sheets and assets at fair value creates imbalances, known as "mismatches", requiring the passage of equalization provisions, which in turn hampers the understanding of financial statements and the comparison of insurance companies.

IFRS 4 Phase 2, otherwise known as IFRS 17, addresses these limitations. Introduced in 2017 and effective from 1 January 2023, the standard is the culmination of a lengthy process marked by the publication of exposure drafts, revisions and amendments.

IFRS 17 is now a well-established part of the IASB's body of standards, and can be applied in conjunction with IFRS 9 on financial instruments and IFRS 15 on the service component.

Basic principles of IFRS 17

IFRS 17 applies to all entities that issue insurance/reinsurance contracts, whether they are insurance/reinsurance companies, groups or any other entity. It establishes principles for the recognition, measurement and presentation of insurance contracts. Technically, IFRS 17 also applies to certain investment contracts.

The changes introduced constitute a minor revolution, overturning the industry's reflexes.

1. The transition from historical accounting to forward-looking accounting based on future profitability
   Insurance liabilities will have to be measured at market value, by estimating the present value of expected future cash flows. Some insurers continue to use data collected at the time of contract signature to value liabilities several years after signing. Moreover, these insurers must also reflect the time value of money when estimating the various cash flows (premiums, claims, expenses, commissions, …).
2. Profit recognition at the outset of the contract
   IFRS 17 introduces the concept of a contractual service margin (CSM) corresponding to the expected profit on the contract. This provision is released "as and when required" throughout the life of the contract, to smooth revenues.
   Currently, depending on the jurisdiction, profits can be booked at the time of collection. For example, in the case of a long-term contract with a single premium paid upon signing, all profits may be recognized at the time of issue. The new system requires profits to be spread over the entire term of the contract, to ensure consistency with the services provided over time.
3. Presentation of earnings in the financial statements: greater transparency and consistency with the financial statements of other industries
   IFRS 17 increases companies' obligations in terms of disclosures on sources of profit (separation of technical and financial income, recognized profit vs. future profit, ...). These disclosures will also have to be harmonized with those required by the other standards in the corpus, to make them more intelligible.
4. Grouping of contracts
   The standard requires that insurers group contracts together for accounting purposes.
   This granularity constraint is significant, with contract groups being required to contain homogeneous contracts, underwritten in annual periods, with the same cost status.
   Once a contract group has been created, its composition cannot be modified, thus ultimately multiplying the number of contract groups for which accounting statements need to be produced.

IRFS 17 objectives

The new IFRS 17 standard has been designed to:

• establish a uniform accounting system worldwide,
• promote greater transparency, consistency and understanding of the rules,
• facilitate the comparability of corporate financial statements on an international scale,
• enable international investors, lenders and other creditors to benefit from a clearer view of the financial position and valuation of insurance companies,
• facilitate the movement of capital between countries,
• guarantee a common accounting language, accessible to a large number of specialists in different countries,
• enhance the value of insurance contract options and covers,
• promote consistency with other IFRS standards,
• ensure better long-term profitability,
• better understand the impact of external macroeconomic factors.

Gradual implementation of the standard IFRS 17

Adopted by the end of July 2022 in over 144 countries, IFRS 17 has been applied in some countries since January 2023. Some US-based groups continue to publish their financial statements under US GAAP (American accounting principles).

Europe

In Europe, life and non-life companies, as well as bank insurers have already aligned with the new IFRS 17 when presenting their financial statements for the first quarter and first half of 2023.

Asia

In Asia, an enormous market characterized by specific regulatory features, several countries are beginning to adapt their accounting practices to the new standards. Turkey and Malaysia are among the countries where full convergence with IFRS 17 has been announced ahead of its official implementation.

Other countries such as Australia, China, New Zealand and Singapore plan to implement IFRS 17 before the end of the current year, while other countries are likely to experience delays. Thailand, for example, has postponed the entry into force to January 2024, while Indonesia and the Philippines have pushed it back to 2025.

Middle East

The major insurance groups in the Middle East have exhibited a high degree of preparation, with companies such as GIG (Kuwait) and QIC (Qatar) having already published quarterly results in line with the new IFRS 17 standard. The Central Bank of Saudi Arabia (SAMA) and the Emirati Financial Market Authority have also announced the official adoption of the new standard.

Africa

Regulators on the African continent have diverging agendas.

In Morocco, full adoption of IFRS is scheduled for 2025. The company Marocaine Vie has announced that it will introduce the standard in May 2023.

In Tunisia, the regulator has already launched a consultation on IFRS 17 in 2019 and plans to adopt it in 2023.

In Côte d'Ivoire, the financial authorities have expressed their intention to adopt the standard without specifying a date.

In Nigeria, the National Insurance Commission (NAICOM) has set the end of June 2023 as the date for transition to the new IFRS 17.

In South Africa, the local version of the standard, SAURS 17, has already been in force for insurance companies since 1 January 2023.

IFRS 17: challenges and issues

The use of IFRS 17 is not without its misgivings, with some markets or companies, perceiving the new standard as a potential constraint due to:

• profound changes in the way insurance companies are run. Changes in the principles governing the valuation of provisions, and constraints on the production of accounting statements, require greater collaboration between departments (accounting, actuarial, finance, IT, etc.) and the implementation of stricter workflows in the IT system,
• volatility of balance sheets and profit-and-loss accounts. In retirement-savings, market impacts will be cushioned by the CSM and will have less impact on results. In property-casualty, provident insurance and equity capital, however, experts warn that market effects will have a important impact on results,
• the time lag in the progress of upgrading work between markets and within the same market. Some companies have a head start on their competitors. According to Deloitte, most of the players affected by IFRS 17 have not yet completed the work required to revise their operating models and scale up their IT systems, which is essential for implementing the standard. Industry professionals are once again being put to the test after the enormous task of implementing Solvency 2, which has already had a major impact on teams and budgets,
• the difficulty of comparing insurers' results under IFRS 17. The standard defines the main principles and proposes different approaches to improve comparability, but does not define a single pattern.