Are you ready for the new insurance standard – IFRS 17 Insurance Contracts?

By Vincent Onjala

In May 2017, the International Accounting Standards Board (IASB) completed its project on insurance contracts with the issuance of IFRS 17 Insurance Contracts. IFRS 17 replaces IFRS 4 and sets out principles for recognition, measurement, presentation and disclosures of insurance contracts within the scope of IFRS 17. In June 2020, IASB issued amendments to IFRS 17. This new standard is effective for annual reporting periods beginning on or after 1 January 2023 with earlier application permitted if IFRS 9 is also applied. IFRS 17 is applicable to any entity that issues an insurance contract including life insurers, general insurers, reinsurers, captive insurance entities and some banks and corporates.

Various entities are at different stages of implementation while some are yet to commence the process. Investments are also required to achieve the implementation deadline. Insurance is a sector that interacts with players outside the country due to reinsurance aspects hence the risk of number of local players finding themselves in a difficult position if they will not have properly implemented this new standard by the effective date. The financial statements for insurance companies for the year ending 31 December 2023 will have to be aligned with the requirements of IFRS 17 Insurance Contracts.

IFRS 17 brings an accounting model that is applied for all insurance contracts which in turn, will help overcome inconsistencies with the current accounting practices that make it difficult for investors and analysts to understand and compare insurers’ results. Insurance contracts have always posed an accounting challenge because they are not widely traded, generate cash flows with substantial variability over longer periods, combine features of financial instruments and service contracts and also applying other relevant accounting standards would involve splitting each contract into multiple investment and service components. The new standard ensures that for the first time, insurers will be on a level footing internationally due to consistent framework, global comparability, insurance and investment services, income split and more transparent and useful information.

The general expectation is that every entity affected has commenced the implementation journey because of substantial changes brought about by the new standard. By now, it is expected that various entities have built or are finalising on the IFRS 17 models, have started drafting IFRS 17 accounting policies and plans to prepare comparatives among others implementation activities.

These imminent changes will affect several areas in the business including systems and processes, key performance indicators management, volatility in financial results and equity, capital management and dividend policy, business decisions, people, presentation and disclosures in the financial statements. Management and boards of various insurance players including the regulator needs to be engaged in this process because of the significance of its impact. Involvement of the auditors and actuaries remain critical in the entire process. Systems and processes require a complete overhaul to align with the new standard. We expect that this overhaul will touch on the data sources, calculation engines, accounting logic, accounting systems and controls and financial reporting systems.

Some of the lessons learned to date from implementation projects include: don’t underestimate the extent of change; success requires comprehensive and structured governance and stakeholder education/engagement; chuck the project into manageable phases to counter project fatigue; you need actuaries, focus on date and systems architecture; proprietary solutions are not plug and play; have a roadmap which you need to revisit and cross check progress against it; don’t underestimate the time needed – build in time for complex areas and re-working; involve your auditors early and finally for finance operations; practice, practice, practice – allow for testing, dry runs, parallel runs and leverage on what you have.

This being an accounting change, a common methodology for change separates any change program into four manageable stages: assess the change, design the response, implement the design, and sustain new practices embedding them in business as usual.

For entities yet to commence on this journey, consider starting with a gap analysis and impact assessment, whilst factoring group and regulatory requirements. This should help in developing a road map for full implementation. You need to reach out to your board for budgetary allocation because the implementation has a cost to it. It is important that you set up the project team and related governance structures according to your organisation’s policies. You need to work with specialists including actuaries, finance, your auditors among others in this journey. Stakeholder engagement is key as you go through implementation and it will help to negotiate for post implementation support with your service provider.

Vincent Onjala is a Partner with KPMG in Tanzania ([email protected] ). The views and opinions are those of the author and do not necessarily represent the views and opinions of KPMG.