IFRS 17 – what does the boardroom need to know?

That technical knowledge will be understood by the actuarial specialists and the IFRS 17 project team, but it needs to be streamlined throughout the organisational structure: from IFRS 17 dedicated experts to the business as usual teams, business unit leaders, and up to the boardroom.  We spoke to Vitalina Kobernik, a Director in our Financial Services team, to explore this.

What level of knowledge is required before 2023?

There are plenty of resources available to get a very basic knowledge of the standard, but what else do the board members need to know to understand the real impact of this new insurance standard?

Specifically, it is the IFRS 17 financial impact assessment which is detailed below:

1. Firstly, it’s making decisions around significant management judgements, estimates, and accounting policy choices. All those decisions will have a significant impact on the companies. Consider, for example, a decision about IFRS 17 level of aggregation. IFRS 17 approach to the level of aggregation is principally different to the allocation commonly used in other frameworks, for example in Solvency II where grouping by risks is normally applied. In IFRS 17 the contract needs to be the lowest level at which the grouping is performed, the contract cannot be split by risks even when it contains several risks (unless there is a separation criterion met). That IFRS 17 requirement along with grouping by profitability requirement will impact not only the accounting results, but also the way the management accounts and forecasting is prepared starting from 2023.
2. Secondly, it’s understanding how the transition balance sheet will look like. Transition balance sheet determines the incoming CSM which represents the amount of unearned profit to be released going forward. Transition approach, while being just a one-off exercise, is the key basis for the future profit of the contracts in-force at the transition date. The most relevant approach needs to be chosen by management considering the trade-off between complexity of modified retrospective approach method and opening transition CSM resulting from fair value approach (in case the full retrospective approach is impracticable). 
3. Thirdly, it’s understanding what the pattern of the future profit recognition is and how that future profit interacts with requirements for income and expenses arising from other standards, for example IFRS 9 financial instruments or the new primary financial statements standard which is yet to be finalised by the IASB. Current market expedient reveals a very different pattern of profit recognition for some contracts, for example for contracts with direct participation features where profit recognition is sometimes backloaded. 
4. Fourthly, it’s the KPIs used. It’s not a secret that some insurers plan to stick to the existing KPIs even when IFRS 17 is in place. Management still need to assess the adequacy and relevance of KPIs. For example, consider a scenario of a life insurance company that uses volume of cash raised as a major KPI. Under the current IFRS 4, that KPI is very much linked to the way the premium is recognised in PL and to a certain extent reflects the way the business operates. But will that KPI be just as relevant when new IFRS 17 revenue recognition pattern is applied? That’s the question that management will need to think about. 
5. Last but not least, it’s the understanding of local endorsement issues, especially in the scenario of multinational companies. At the moment, we are all monitoring local endorsement aspects of IFRS 17. We know that EFRAG are currently working on the annual cohort question which was largely discussed by the European community but at the same time was not highlighted as an issue by the UK insurers. For insurance groups with multiple locations the potential differences in the endorsed standards should be analysed to assure compliance both at the local and group levels. 

On the areas mentioned above, it is worth noting that quantitative assessment (simulations) is a good way to highlight the areas of attention and strategic topics to the board (and to test new tools and processes when these are available).

Our team is happy to support you with any of those aspects – please see below for contact details.