IFRS 17 Compliance: Your 2023 Action Plan!

Updated September 14th, 2023
IFRS 17 compliance

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One of the most impactful challenges that underscore the importance of IFRS 17 compliance is the risk of ”Erosion of investor confidence and market valuation.

Non-compliance or poor implementation of IFRS 17 can lead to less transparent, inconsistent, and incomparable financial reporting, severely undermining investor confidence in an insurance company.

For this reason, the implementation of the new IFRS 17 accounting standard for insurance contracts represents one of the most significant tasks in financial reporting for insurance companies.

Rather than viewing IFRS 17 simply as a compliance exercise, insurers should leverage it as a catalyst for strengthening data governance, financial discipline, and competitive positioning.

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In this article, we discuss the pressing priorities that insurers must consider on their IFRS 17 compliance journey.

Let us dive in!

Table of contents

  1. Understanding IFRS 17 compliance: Why does it matter in 2023?
  2. 10 Key considerations for achieving IFRS 17 compliance
  3. 8 Essential requirements for achieving IFRS 17 compliance
  4. Beware! 5 Repercussions of IFRS 17 non-compliance
  5. Summing up
  6. IFRS 17 compliance: Related reads

Understanding IFRS 17 compliance: Why does it matter in 2023?

IFRS 17 is a critical accounting standard that regulates the financial reporting of insurance contracts. Its adoption is mandatory for companies that issue such contracts and follow International Financial Reporting Standards.

The primary goal is to establish transparency, comparability, and relevancy in the financial statements of insurance companies, ultimately benefiting stakeholders such as investors, regulators, and policyholders.

What is IFRS 17 compliance?

IFRS 17 compliance refers to the state where an insurance company adheres to the requirements and guidelines set forth in the IFRS 17 accounting standard. Compliance is a multi-layered endevour involving changes in accounting systems, business processes, and reporting mechanisms.

Significance of IFRS 17 compliance:

The significance of IFRS 17 compliance extends beyond merely adhering to a new set of accounting standards. Its impact is profound and has far-reaching implications for insurance companies, investors, regulators, and even the broader financial markets.

Here are some key areas where the significance of IFRS 17 compliance is especially evident:

  1. Enhances transparency and accountability

IFRS 17 aims to provide a consistent and transparent framework for the financial reporting of insurance contracts.

The standards lay out detailed requirements for how insurance contracts should be measured, recognized, and presented in financial statements.

By adhering to these guidelines, insurance companies can improve the quality and comparability of their financial statements, fostering greater transparency and accountability.

  1. Facilitates better decision-making

Investors, regulators, and other stakeholders often rely on financial statements to make informed decisions. Compliance with IFRS 17 allows for more consistent and comparable data, which in turn enables better decision-making.

It provides a clearer picture of an insurance company’s financial health, risk exposure, and profitability, thereby facilitating more accurate assessments and forecasts.

  1. Increases investor confidence and market stability

IFRS 17 helps to level the playing field and improve market integrity. This boosts investor confidence and can lead to a more stable and resilient financial market.

It may also make it easier for insurance companies to attract investment, as improved financial reporting can reduce the information asymmetry between the company and potential investors.

  1. Reduces risk of regulatory scrutiny and penalties

Non-compliance with IFRS 17 could result in substantial fines, penalties, and reputational damage.

Regulatory bodies may also impose restrictions on business activities for companies that fail to comply, which could have long-term implications on their operational effectiveness and profitability.

  1. Improves operational efficiency

The process of becoming IFRS 17 compliant often involves overhauling existing systems, adopting new technologies, and optimizing business processes.

While this transition can be challenging, it often results in greater operational efficiency. Companies can take this opportunity to eliminate redundant systems and streamline workflows, leading to cost savings in the long term.

  1. Enables global comparability

For insurance companies that operate in multiple jurisdictions, IFRS 17 compliance means that they can produce financial statements that are globally comparable.

This is particularly important for multinational corporations and for investors who operate across borders.

  1. Promotes long-term sustainability

By encouraging transparency, facilitating informed decision-making, and reducing risks, IFRS 17 compliance contributes to the long-term sustainability of insurance companies.

It equips them to manage their obligations more effectively and to plan for the future with greater confidence.

In summary, IFRS 17 compliance is not just a regulatory requirement but a strategic imperative that holds significant implications for transparency, efficiency, and the long-term sustainability of insurance companies. Failure to comply can have severe consequences, while effective implementation offers a range of benefits that extend well beyond the realm of accounting.

10 Key considerations for achieving IFRS 17 compliance

IFRS 17 compliance is a complex undertaking requiring thorough planning, cross-functional coordination, and significant resources.

Here are key considerations for achieving IFRS 17 compliance in detail:

  1. Planning and project management
  2. Data management
  3. Financial and actuarial modeling
  4. Systems and technology
  5. Accounting policies and procedures
  6. Reporting and disclosure
  7. Testing and validation
  8. Governance and control
  9. Transition planning
  10. Regulatory and stakeholder communication

Let us understand each of them in detail:

1. Planning and project management

  • Steering committee: Form a committee of key stakeholders, including finance, IT, actuarial, and risk management teams, to steer the IFRS 17 implementation.
  • Project plan: Establish a comprehensive project plan that outlines the steps, timelines, and resources required for compliance.
  • Gap analysis: Identify discrepancies between current systems and processes and the IFRS 17 requirements.

2. Data management

  • Data quality: Assess the quality, accuracy, and completeness of existing data.
  • Data infrastructure: Ensure that data infrastructure can handle the additional data requirements, including new data elements and increased granularity.
  • Data mapping: Map the required IFRS 17 data fields to the source systems where these fields can be extracted.

3. Financial and actuarial modeling

  • Model selection: Choose appropriate models for calculating Contractual Service Margins (CSMs), risk adjustments, and other key financial metrics.
  • Scenario analysis: Run different scenarios to gauge the financial impact of the new standard.
  • Validation: Validate the models to ensure that they are accurate and meet the standard’s requirements.

4. Systems and technology

  • System requirements: Determine whether existing systems can be adapted to meet the new requirements, or if new systems are needed.
  • Integration: Ensure seamless integration between actuarial, financial, and reporting systems.
  • Automation: Consider automating repetitive and data-intensive tasks to improve efficiency.

5. Accounting policies and procedures

  • Policy update: Update accounting policies to align with the new IFRS 17 regulations.
  • Training: Educate staff on the new accounting policies and the implications of IFRS 17.
  • Documentation: Keep detailed records of changes made to accounting policies, procedures, and systems for audit purposes.

6. Reporting and disclosure

  • Reporting templates: Develop templates for the new reports required under IFRS 17.
  • Dry runs: Conduct dry runs to test the end-to-end reporting process.
  • Disclosures: Prepare for the additional disclosures required by IFRS 17, ensuring that systems can produce the needed information.

7. Testing and validation

  • Parallel runs: Conduct parallel runs of the IFRS 17 calculations alongside existing processes to compare and validate the results.
  • Third-party reviews: Consider getting a third-party audit for additional validation.

8. Governance and control

  • Control framework: Establish a governance and control framework to ensure ongoing compliance with IFRS 17.
  • Review mechanism: Implement periodic reviews to identify areas for improvement and address issues proactively.

9. Transition planning

  • Transition approach: Decide on an appropriate transition approach, such as full retrospective application, modified retrospective application, or fair value approach, as allowed by IFRS 17.
  • Impact analysis: Assess the impact of the chosen transition method on financial statements.

10. Regulatory and stakeholder communication

  • Regulatory reporting: Ensure that all regulatory reporting requirements are met.
  • Stakeholder communication: Communicate clearly and regularly with stakeholders to manage expectations and report progress.

Given its far-reaching implications, IFRS 17 compliance is not just a finance or actuarial project but an enterprise-wide initiative. Early planning, rigorous testing, and continuous monitoring are critical for successful compliance.

8 Essential requirements for achieving IFRS 17 compliance

The requirements for IFRS 17 compliance are multi-faceted and involve a comprehensive overhaul of financial reporting practices specifically related to insurance contracts.

Here are the key requirements that insurance companies must adhere to:

  1. Scope and classification of insurance contracts
  2. Measurement of insurance contracts
  3. Financial and actuarial models
  4. Recognition and presentation
  5. Disclosure requirements
  6. Data management and technology
  7. Governance and internal control
  8. Transition rules

Let us understand each of them in detail:

1. Scope and classification of insurance contracts

  • Definition: Companies must correctly identify what qualifies as an insurance contract under IFRS 17.
  • Classification: IFRS 17 requires insurance contracts to be classified into different categories based on the risk they bear: either as insurance contracts with direct participation features or those without.

2. Measurement of insurance contracts

  • Initial recognition: Contracts must be measured at the total of the fulfillment cash flows (comprising estimates of future cash flows, a discount to reflect the time value of money, and a risk adjustment for non-financial risk) and the Contractual Service Margin (CSM).
  • Subsequent measurement: The carrying amount of the group of insurance contracts at the end of each reporting period should be the sum of the liability for remaining coverage and the liability for incurred claims.

3. Financial and actuarial models

  • Risk adjustment: Companies must make appropriate adjustments for the risk associated with the insurance contracts.
  • Discounting: Cash flows must be discounted to their present value using a discount rate that reflects the characteristics of the cash flows.
  • CSM: The Contractual Service Margin must be recognized in profit or loss over the coverage period.

4. Recognition and presentation

  • Revenue and expense recognition: Revenue from insurance contracts needs to be recognized over the period that the company provides insurance coverage, and the expenses should be recognized when incurred.
  • Statement presentation: IFRS 17 mandates how the insurance contracts should be presented in the financial statements, including line items that must appear in the statement of financial position and the statement of profit or loss.

5. Disclosure requirements

  • Quantitative and qualitative information: Companies must disclose enough information for users of financial statements to assess the effect of insurance contracts on the financial position, financial performance, and cash flows.
  • Sensitivity analysis: Companies must provide sensitivity analysis to show how changes in variables could affect the measurements.
  • Risk management: Companies are required to disclose information about their practices in managing risks associated with the insurance contracts.

6. Data management and technology

  • Data quality: The data used in financial statements must be reliable, accurate, and complete.
  • System requirements: Companies must have robust systems in place capable of handling the complex calculations and large volumes of data required for IFRS 17 compliance.

7. Governance and internal control

  • Compliance checks: Procedures should be in place to ensure ongoing compliance with IFRS 17.
  • Audit trails: Adequate records and documentation must be maintained to substantiate the figures presented in the financial statements.

8. Transition rules

  • Transition approach: Companies have options for the approach they use to transition to IFRS 17, such as the full retrospective approach, the modified retrospective approach, or the fair value approach.
  • Date of initial application: Companies must be prepared to apply IFRS 17 for annual periods beginning on or after January 1, 2023, although earlier application is permitted if both IFRS 15 and IFRS 9 have also been applied.

Achieving compliance with IFRS 17 is a complex task that will likely require changes to systems, processes, and perhaps even the business model itself. Due to its complexity, companies should consider consulting experts in the field and should begin the compliance process as early as possible.

Beware! 5 Repercussions of IFRS 17 Non-Compliance

Failure to comply with IFRS 17 standards poses severe risks and consequences for insurance companies. Non-compliance not only affects the company’s reputation but can also result in legal repercussions and financial penalties.

  1. Financial penalties
  2. Loss of investor confidence
  3. Regulatory scrutiny
  4. Reputational damage
  5. Legal consequences

Let us understand them in detail:

1. Financial penalties

Failure to comply with IFRS 17 can result in financial penalties imposed by regulatory bodies. These fines can be substantial, negatively affecting a company’s bottom line.

The scale of the penalty often depends on the severity of the violation, and repeat offenses can lead to escalating fines. These monetary repercussions can divert funds from other essential business activities, thereby impacting overall performance and profitability.

2. Loss of investor confidence

Non-compliance with IFRS 17 can shake investor confidence in a company’s governance and financial stability. Investors rely on standardized financial reports to assess a company’s health, and non-compliance signals unreliability.

The consequent decline in investor trust can lead to a drop in share prices, making it more challenging for the company to secure future investments.

3. Regulatory scrutiny

Non-adherence to IFRS 17 standards attracts increased attention from regulatory agencies. This usually results in more frequent and stringent audits, which can be resource-intensive.

Increased scrutiny from regulators can also slow down business operations as the company must allocate additional time and resources to address compliance issues.

4. Reputational damage

A company’s reputation is one of its most valuable assets, and non-compliance can tarnish it significantly. In today’s age of information, news of non-compliance can spread quickly, affecting customer perception and partner relations.

A damaged reputation can lead to lost business opportunities and diminished brand value, both of which are hard to recover.

Apart from financial penalties, IFRS 17 non-compliance can also bring about legal ramifications. In severe cases, company executives could be personally liable for non-compliance, facing potential legal action.

Furthermore, the company itself could be at risk of losing its license to operate, especially in jurisdictions that have adopted IFRS 17 as part of their local regulations.

The repercussions of IFRS 17 non-compliance can be severe and far-reaching, affecting nearly every aspect of an insurance company’s operations. Understanding the gravity of these repercussions is vital for companies aiming to maintain their market position, financial stability, and long-term viability. Compliance should, therefore, be treated as an imperative rather than an option.

Summing up

As the sweeping new era of IFRS 17 nears, insurance firms have a pressing need to address compliance imperatives head-on if they are to meet mandated timelines. This requires decisive action across accounting, finance, actuarial, data and IT domains to dissect implications and prepare thoroughly.

However, embracing compliance as a strategic opportunity promises significant advantages, from overhauling outdated accounting systems to harnessing data more effectively. Insurers that leverage IFRS 17 to transform their financial reporting and data governance stand to gain a competitive edge.

With clear vision, robust planning and cross-functional synergy, insurers can navigate the transition smoothly while future-proofing their business.

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