The latest on IFRS 17 implementation

From transition to business as usual

7 min read

Where are we now?

As of 1 January 2023, IFRS 17 replaced the interim IFRS 4 standard, in force since 2004. In the Irish (re)insurance market work on opening balance sheet restatements is generally well progressed.

Most (re)insurers were in a position to provide the required IAS 8 pre transition disclosures in their 2022 financial statements. There is however much to do over 2023, and beyond, to operationalise, embed and optimise reporting under IFRS 17 in the post-implementation phase.

What are the focus areas in 2023?

Measuring the opening IFRS 17 balance sheet and transition adjustments were complex, however the focus now is shifting to the next immediate challenges. (Re)insurers now are required to move to a position, for FY2023, to be able to present comparative information applying IFRS 17 and provide the full and extensive new set of disclosures that IFRS 17 requires. We expect during 2023 there will be an acceleration in the development of controls / processes, training, and updating the finance target operating model to reflect the changes that IFRS 17 brings and ensure reporting readiness for FY 2023.

In the Irish market this work is largely being carried by IFRS 17 project teams. There is still some way to go to wind these down and transfer to a business-as-usual model (BAU). All this means is, for most, there is still some way to go to embed a smooth end to end IFRS 17 reporting process, with efficient data flows, reporting systems, and controls.

From an external audit perspective, the focus to date has been on the opening balance sheet and accounting policy decisions which would have formed the basis of the IAS 8 pre-transition disclosures. (Re)insurers will need to have an even greater level of engagement with their auditors during the audit of their 2023 financial statements which will incorporate the opening balance sheet, 2022 comparatives, 2023 results and associated disclosures all prepared under IFRS 17. This may stretch internal teams and have secondary impacts on other planned core activities.

What are the potential challenge areas?

Explaining the results

It is well understood that at a practical level the IFRS 17 statement of financial position and profit or loss are presented differently to the previous standard. The timing of profit recognition has changed, premium revenue is no longer on the face of the income statement, replaced by insurance revenue, and there will be additional elements such as the Contractual Service Margin (CSM), loss components, discounting etc.

This is going to create a change in how financial statements need to be interpreted. The challenge being the ability to understand the various liability components and explain the drivers for changes between the opening and closing positions to relevant stakeholders. In the early periods of reporting under IFRS 17 the results may be less intuitive than under the existing standard. Explanations and analysis previously provided need to be updated to align to the new presentation and financial drivers. Reconciling back to previous accounting basis should be limited to encourage an embedding of the new result.

However, while not ideal, for less advanced (re)insurers dual IFRS 17 / IFRS 4 reporting is likely to continue in to 2023 and beyond. This allows for the “safety net” of being able to compare this year on year results between IFRS 4 and IFRS 17 to provide confidence and context over the results and minimise the risk of misinterpretation. This will, of course, create a burden on financial reporting teams, and the project teams involved in implementing IFRS 17

Market comparatives will also be challenging due to differences between companies’ accounting policies. o The aim of IFRS 17 was to improve comparability, however a KPMG analysis of recent market disclosures (insights included below) show a range of policy choices and subsequent impact on results. Taking discount rates as the example, some companies are incorporating the illiquidity premium based on their own mix of assets and others are leveraging their Solvency II illiquidity premium. Two companies with similar portfolios could report very different results and direct comparison of metrics would therefore not be meaningful.

All of the above increases the reliance on a robust control environment to ensure there is confidence in the figures being reported under IFRS 17. This needs to be combined with an intense period of training so that internal users of the financial statements fully understand what is changing, how it is changing and what the business implications are.

Market developments

2022 brought an unprecedented level of market volatility, bringing higher interest rates than previously observed. This may result in (re)insurers reassessing policy decisions e.g. redesigning systems to make use of the OCI option available under IFRS 17 and reduce profit or loss volatility, or reassessing decisions made based on materiality that need to be reviewed in the context of a changed environment.

For example, when performing Premium Allocation Approach (“PAA”) eligibility testing one of the main drivers of differences between the PAA and General Measurement Model (“GMM”) is higher interest rates. The current environment may result in contracts no longer being PAA eligible.

From the perspective of life insurance contracts, the potentially long-tailed nature of the contracts means that they are more exposed to movements in interest rates and that this can impact the CSM upon inception. The rate increases observed in recent months may therefore lead to a material change in the expected profitability and grouping of contracts.

More generally, interest rates may also be a consideration for the risk adjustment, where approaches have leveraged, for example, cost of capital type approaches.

The consideration of stress and scenario testing on the valuation of IFRS 17 insurance contract liabilities is still a work in progress for many (re)insurers. The focus to date being on base case results. As a result, interest rate sensitivity to the measurement insurance contracts may be as yet somewhat unknown and lead to new challenges in reporting, understanding and communicating results.

Systems Refinements

Many insurers started out with ambitious plans to use IFRS 17 as an opportunity to revamp their finance operations as they implemented IFRS 17. The implementation of the standard has however been hugely complex, taken longer and cost more than the industry originally anticipated. Many firms scaled back ambitions for go-live date and now have large scale projects continuing into 2023 to make sure working day timetables can be met in a sustainable way going forwards, to put operating model plans into place and to eliminate manual workarounds.

This ongoing IFRS 17 project based work will continue to put strain on the already under pressure BAU teams. Even addressing the issues above and moving IFRS 17 to BAU, there will be some time before companies will have a smooth, stable process. Companies need to factor this into their planning over 2023 and in to 2024 and should consider:

Whether there are resources available to ensure Solvency II quarterly reporting is not impacted?
Whether the business planning and ORSA process factored in the full complexity of planning on an IFRS 17 basis?
Whether teams are available and ready to engage with external audit? In particular, entities should consider:
- Whether the governance of implementation and transition activities is appropriately evidenced.
- Whether new processes and controls to address new risks been sufficiently documented ahead of the audit process commencing.
- Whether accounting manuals and accounting policy documentation have been sufficiently updated for the impacts of IFRS 17.

How KPMG can help

While the first audited set of IFRS 17 results is the culmination of years-long development, as above we expect activities to continue throughout 2023 and beyond. We expect insurers to remain agile over 2023 and react to internal and external factors as they arise.

KPMG have local and global experts with strong technical and market experience at the forefront of IFRS 17, IFRS 9 and Solvency II implementation that can assist you on your IFRS 17 journey. KPMG has a successful track record of providing a broad range of services to clients, including:

Peer review/challenge of IFRS 17 assumptions and calculations
Reviewing the processes, controls and governance arrangements in place for financial reporting purposes

Providing IFRS 17 training to Boards, Audit Committees and Finance teams
Reviewing and assisting with the production of IFRS 17 accounting policy papers and accounting manuals
Reviewing and assisting with the production of pro-forma financial statements and disclosures
Review model governance including model risk framework, policies and procedures, accountability of key stakeholders, senior management oversight
Assessing appropriateness of systems, data and internal controls
Reviewing and supporting in the production of procedural documentation
Assessing Management Information / KPI’s under IFRS 17
Review and support in developing proforma financial statements and disclosures
Reviewing and designing the Finance Target Operating model for any required updates to support IFRS 17
Assessing the efficiency and effectiveness of end-to-end finance processes, including the impact on the overall working day timetable
Design and support for digital reporting tools and report production automation
Reviewing and designing the Finance Target Operating model for any required updates to support IFRS 17
Assessing the efficiency and effectiveness of end-to-end finance processes, including the impact on the overall working day timetable
Design and support for digital reporting tools and report production automation