IFRS 17: Redefining insurance accounting

Overview

IFRS 17 will impact businesses well beyond the finance, actuarial and systems development areas (for example, product design and distribution, development of revised incentive and wider remuneration policies and reconfigured budgeting and forecasting methodologies feeding into business planning). There could also be an impact on the cash tax position and dividends, both on transition and going forward.

IFRS 17 might require several years to implement. Gap analysis and impact assessments to develop an implementation roadmap will enable entities to begin the detailed implementation project. A fundamental shift might be required in the way in which data is collected, stored and analyzed, changing the emphasis from a prospective to a retrospective basis of analysis and introducing a more granular level of measurement and additional disclosures. Before the effective date, insurers will need to carefully consider their ‘IFRS 17 story’ for investors and analysts, as well as the key metrics that they will apply in the new world.

General model

Why is it needed?

To be used as a default model for all insurance contacts

Key features

  • Discounted cash flow model with an allowance or risk
  • Market-consistent valuation of options and guarantees
  • Discount rates reflect characteristics of the insurance contracts
  • No day one profits – recognized as a contractual service margin (CSM) and amortized in profit and loss (P&L) over the contact term
  • New income statement presentation and definition of revenue
  • Other comprehensive income (OCI) option1 for changes in discount rates to reduce P&L volatility
  • Transition approach allows come simplifications and judgement

Applicable contacts

  • Long-term and whole life insurance, protection business
  • Life contingent annuities
  • Universal life
  • Reinsurance contracts
  • Certain general insurance contacts

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Premium allocation approach

Why is it needed?

To simplify for short-term contracts

Key features

  • Optional simplified model is allowed for short duration contracts (e.g., coverage period up to one year)
  • Applied to measure the pre-claims liability – akin to unearned premium accounting
  • The General model is applied for measuring incurred claims

Applicable contacts

  • Short-term general insurance
  • Short-term group contacts
  • Short-term reinsurance

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Variable fee approach

Why is it needed?

To deal with participating business where the liability is tied to underlying items

Key features

  • Reflects the link to underlying returns for contacts that participate in a clearly identified pool of item, where policyholders are paid a substantial share of the returns and a substantial proportion of the cash flows vary with the underlying items
  • As per General model with additional features, notably:
    - Changes in insurers’ share of assets recognized in CSM
    - Accretion of interest on CSM at current rates
    - Profit or loss movement in liabilities mirrors treatment on underlying assets

Applicable contacts

  • Segregated funds
  • Certain participating contracts
  • Certain unit linked contracts
  • Separate accounts

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How PwC can help

PwC’s insurance modernization specialists can help can insurers prepare for future operational, business, regulatory and market demands by focusing on how to improve finance, operational, actuarial and risk functions. We have:

  • a record of success helping insurers modernize their operations;
  • a practical and successful approach to helping companies plan for and respond to regulatory, operational and strategic change;
  • an interdisciplinary team of subject matter specialists who have experience helping clients prepare for and address strategic, operational, financial, actuarial, risk and regulatory imperatives;
  • extensive expertise in finance, actuarial and risk management process improvement, data and technology transformation, regulatory and financial reporting consulting, and business strategy formulation and design.

Contact us

Mary Helen Taylor
Partner, Assurance
Tel: +1 (646) 471 8394
Email

Richard de Haan
US Life Actuarial Leader
Tel: +1 (646) 471 6491
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Mary Saslow
Managing Director, National Professional Service Group
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Chris Myers
Director, Capital Markets and Accounting Advisory Services
Tel: +1 (678) 419 2072
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