The implementation of IFRS 17, issued by the International Accounting Standards Board, will pose a significant challenge to insurers and investors, as it is set to fundamentally change accounting and reporting practices.
Business Insurance spoke to Darrel Scott, an IASB board member based in London, who said current accounting and reporting practices are confused, with many different accounting practices in place globally.
“No one does it consistently – so there’s some good accounting mixed with bad accounting,” Scott said.
However, hope is on the horizon, as IFRS requires a single approach to accounting that will result in “direct comparability with every insurance company globally.”
Scott emphasised the extent to which IFRS 17 constitutes an important change for New Zealand insurers.
“It applies to insurance contracts and will be a significant advantage for insurance companies which want to play in the international arena, as it places all insurance companies on an equal footing with other insurance companies,” he said. “This means it likely constitutes a key development for companies outside traditional investment zones. That’s an important factor for smaller jurisdictions or jurisdictions that haven’t been ‘flavour of the month’ in the past.”
In the past, investors did not want to take the time to understand how accounting worked in different jurisdictions. “Now they don’t have to because it’s the same,” he said.
Scott advised New Zealand insurance firms to start moving from old accounting to new accounting as soon as possible. “It will take a lot of work. A lot of judgements and big decisions have to be made, so the sooner you start the process, the better,” he said.
Insurance accounting has diverged notably from accounting in other industries, and the consequence has been that insurers often trade at a discount to other industries, Scott said.
“Insurers have been disadvantaged and people have struggled to understand what’s happening in their accounts,” he said. “The new standard puts them on an even playing field with other industries and arguably evens out the distribution of investment between different industries, making insurance a more popular destination for investment.”
The new standard also has the advantage of aligning external reporting more closely with how the insurance business is managed and, perhaps more importantly, with how many advanced jurisdictions regulate insurance entities.
“It brings closer together the three different perspectives people have on insurance- internal, regulatory and investment,” Scott said.
The other point Scott stressed is that because the nature of insurance is long term, the IASB has introduced a lot of relief for insurance companies to consider when they move from the old to new accounting.
“Perhaps more than anything, they need to think early on about their approach to the choices, systems and data at hand,” he said.
According to
Tim Grafton, Insurance Council of New Zealand CEO, IFRS 17 will have less impact on general insurers than life insurers.
“The changes are still some time away, so there is time to understand and plan for changes,” Grafton said. “One of the key issues is the treatment of leases and the implications for solvency calculations to meet regulatory requirements.”
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