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Insurers discover the real business impacts of IFRS 17

Insurers discover the real business impacts of IFRS 17

As insurers prepare for IFRS 17, some recognise that the new accounting standards will have a significant impact across their business.

David Kells

National Sector Leader, Insurance

KPMG Australia


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Insurers know that the shift to IFRS 17 will mean developing new accounting and actuarial policies and procedures and a redesigned year-end reporting process, documentation and controls, as well as system design changes to perform new calculations, the collection and storage of new data and rigorous testing to ensure smooth adoption.

Yet, as management starts to dig deeper into the financial and operational impacts of IFRS 17, many are starting to uncover some unexpectedly wide business impacts. And this is creating concern in the executive suite.

Bigger picture impacts of IFRS 17

One of the biggest concerns relates to the potential impact of IFRS 17 on future available capital. Depending on the linkage between local financial reporting and prudential regulation, in particular jurisdictions, the new standards could, in some cases, alter the available capital, which, in turn, impacts the amount of free capital that is available to support new growth opportunities, the payment of dividends and to conduct M&A.

In addition, those with a global or multi-jurisdictional footprint are concerned how the shift to IFRS 17 will impact the dividend paying ability of their subsidiary operations. Planning future dividend flows and factoring this into the Group’s dividend policy and communicating this to investors will be all be important.

KPMG professionals have found that for some, the prohibition on recognising ‘day one’ gains and the need to recognise losses on groups of onerous contracts will likely trigger important changes in product design and marketing. While the total level of profit will not change, the timing of its recognition will. This will be most significant for life insurers writing long-term business, where front-end loading of profit is commonplace.

In matters of valuation, we believe the shift to IFRS 17 will impact the perceptions of shareholders, analysts and regulators as well as exert an impact on the value of any new acquisitions. Those embarking on inorganic growth or those considering the potential sale of books of business will want to understand how the new standards may influence longer-term valuations.

For CEOs and executives who are tied into performance-based bonus arrangements that are informed by finance key performance indicators (KPIs), the new standards could change a variety of performance measures, specifically those using existing accounting bases, such as their remuneration packages.

Five steps to review IFRS 17 business impacts

For those organisations yet to start thinking strategically about the business impacts of IFRS 17, here are five steps to consider:

  1. Create a cross-functional view. Bring the directly impacted functions of accounting, actuarial and IT together with functions such as operations, marketing, distribution, product development and strategy, to create a holistic view of the potential impacts and strategies.
  2. Understand the implications. Assess how the business impacts will influence current and future operating and business models. Consider what you might want to change in order to respond to these impacts and how these can be used to create competitive advantage.
  3. Assess the impact for local reporting and the impact for capital and dividend paying capacity. Explore your various potential scenarios under IFRS 17 and consider how these scenarios may impact your capital ratios.
  4. Cross-check against your future strategy. As the implications come into view, reassess your current and long-term business strategies and models to ensure these are being presented in their best light in the new world of IFRS 17.
  5. Talk to your stakeholders. Talk to your key stakeholders – first internally in the business and then investors, regulators, brokers, reinsurers, agent networks and employees – to help manage expectations and ensure the right story is being communicated.

Still time to avoid consequences, find opportunity

One of the biggest risks related to IFRS 17 is that executives view it as a purely technical initiative owned by accounting and actuarial. Indeed, with major business impacts looming, those that are not planning ahead and thinking about the impacts of IFRS 17 may find themselves veering off plan, or unable to meet commitments to shareholders, regulators or customers.

Those thinking strategically about the business implications of IFRS 17 today should be best placed to navigate the business impacts of the transition to the new standard in 2021.

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