There are exciting changes for the insurance sector. Insurers embracing the transition from the interim International Financial Reporting Standard 4 (IFRS 4) to IFRS 17 are benefiting in several ways. The benefits include better transparency of their financials and better collaboration amongst their internal departments for a smoother flow in the day-to-day functions as an organisation. Although many may consider IFRS 17 to be a disruptor, it brings with it many advantages for the insurance sector. IFRS 17 increases comparability in the insurers’ overall financial reporting as well as in the measurement of insurance contracts. It removes the existing inconsistencies and allows for investors and analysts to make more meaningful comparisons of the performance of companies, contracts, and industries. IFRS 17 also reflects a truer reflection of a company’s profits. The transition from International Financial Reporting Standard 4 (IFRS 4) to IFRS 17marks a significant shift for insurers, and the benefits are indeed noteworthy. Let us delve into how IFRS 17 outperforms its predecessor. 

Benefits of IFRS 17 in Comparison to IFRS 4 

Considering the amount of time, effort and cost involved in the transition process from IFRS 4 to IFRS 17, insurers would definitely want to maximise on the benefits their companies can derive from this journey in enhancing the way they do business going forward. According to Deloitte’s article on IFRS17 Benefits to grow over time , the following is mentioned: 

One key change under the new system, which applies to reporting periods after Jan. 1, 2023, is that liabilities will be discounted according to current interest rates. This will remove mismatches in how reported assets and liabilities respond to changes in interest rates. However, one effect of the new rules is that it will also temporarily flatter some combined ratios, which measure nonlife underwriting performance.” 

Further motivation for why insurers should embrace IFRS 17 is shared in 7 Great Reasons to welcome IFRS 17 Insurance Standards. The article shares the following reasons: 

  1. Liabilities valued at market value. 
  2. Truer reflection of profits  
  3. Nearly Global consistency  
  4. Collaboration between actuaries and accountants
  5. Better governance of actuarial systems
  6. Greater protection for policy holders
  7. Investor Confidence 

IFRS 17 initiates better product design and provides greater transparency by aligning the valuation of insurance contracts to assets that back the insurance industries and valuations made by other industries. Also, IFRS 17 requires proper accounting to be applied which allows for risks to be noticed by insurers and investors. Over time IFRS 17 is expected to encourage better pricing and to strengthen the balance sheets of insurers. 

IFRS 17, measures profit in line with the services performed over the lifetime of the contract in a series of small cash flows which gives a clearer indication of profits gained by the company. By aligning revenue recognition with the timing of insurance services, it ensures a clearer representation of financial performance. 

A consistent high-quality accounting standard for all insurance contracts across most jurisdictions, reduces the long-term costs of compliance and makes it easier to compare business units and aggregate results and financial statements, particularly for multinational insurers. Insurers can now compare their performance across different periods, contracts, and even industries. Investors and analysts benefit from more meaningful insights. 

IFRS 17 encourages greater collaboration between actuaries and accountants who are responsible for managing the insurer’s risks, finances as well as looking after the interests of the stakeholders. The new accounting standard also requires accountants and actuaries to have a greater understanding, and alignment of financial data across both departments to ensure accuracy of their company’s financial disclosures. IFRS 17 encourages accountants and actuaries to establish a sound relationship of mutual respect and cooperation under IFRS 17 and can no longer work in silos.  

Enhancing governance standards in alignment to the requirements of IFRS 17 will help insurers achieve compliance, reduce costs, minimize manual errors, and make it easier to access risk insight, resulting in better management of their businesses. 

IFRS 17 will help strengthen insurance company balance sheets and offer more protection to policyholders. 

With IFRS 17, investors and analysts are afforded a proper insight into insurance companies, allowing them to compare one firm with another more consistently. This will improve investors’ confidence in and understanding of insurers.  

IFRS 17 Outperforms IFRS 4 

IFRS 17 aims to remove the diversity in accounting for insurance contracts and to ensure a more meaningful comparison among insurers and other entities. IFRS 17 became mandatory from the 1st of January 2023. According to the IFRS Standards Fact Sheet, the benefits of IFRS 17 clearly outweighs the benefits of IFRS 4 as depicted in Table 1 below.  

Table 1Comparisons between IFRS 4 & IFRS 17 

(Table 1 information was taken from the IFRS® Standards Fact Sheet)

In conclusion, changeis often a catalyst for progress. Transitioning to IFRS 17 can be one ofthose catalysts, if implemented effectively. From the insights shared in this article by experts in the field, it is evident thatIFRS 17 is a disruptor with many benefits that far outweighIFRS 4. It would be prudent for insurance executives transitioning to IFRS 17 to use the opportunity to streamline their companies’ processes and incorporate any much-needed modernization to their current financial and IT systems. This will allow them to offer their organisations better efficiency and management of their company’s finances, as other insurance companies preceding them have benefited from. 

 

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