Should UK GAAP Insurance companies start preparing for IFRS 17?

Insurance companies across the UK and the world reporting under IFRS have undertaken a mammoth exercise of implementing IFRS 17 with costs to the industry estimated to be US$21-27bn according to a 2023 survey completed by Willis Towers Watson (WTW). In this article we consider if and when UK GAAP might change to align with IFRS 17.

On 27 March 2024, the FRC issued amendments to FRS 102. The effective date for most amendments is periods beginning on or after 1 January 2026. The headline changes following these amendments are:

• Alignment of revenue recognition with IFRS 15, but with simplifications.
• Alignment of lease accounting with IFRS 16, but with certain practical exemptions.

To find out more about these changes, read our insights page Upcoming changes to FRS 102 - KPMG UK.

The amendments do not include changes to align FRS 102 with IFRS 9, nor changes to align FRS 103 (the UK GAAP accounting standard for insurance contracts) with IFRS 17.

Since the date FRS 103 was first issued back in 2014, the FRC made it clear that it expected the standard to have a limited life and that it would review the standard once the International Accounting Standards Board (IASB) issued its updated standard on insurance contracts (i.e. what became IFRS 17) [FRS 103, March 2014, Summary, Paragraph viii].

In the March 2024 amendments to FRS 103, the FRC has stated it is likely to wait for several years’ implementation experience before considering alignment with IFRS 17 [Amendments to FRS 102, March 2024, Basis of Conclusion FRS 103 Insurance Contracts, 57A].

No timeline has been provided by the FRC, and therefore the uncertainty around if and when UK GAAP will change to align with IFRS 17 remains. 

In the table below, we outline the time between the effective dates of IFRS 9, IFRS 15 and IFRS 16 in the UK and when UK GAAP changed to incorporate those standards:

The effective date of IFRS 17 was 1 January 2023 - although this does not necessarily mean we can expect to wait 5-6 years from this date before a new UK GAAP standard for insurance contracts is issued. Despite the effective date of IFRS 9 being the same as IFRS 15, FRS 102 has not yet been amended to incorporate the IASB’s changes to the accounting for financial assets under IFRS 9, including the business model and expected credit loss model changes, potentially because of its complexity. The FRC intends to reconsider this matter in due course [Amendments to FRS 102, March 2024, Amendments to Part B – Technical Issues by Section, 20]. IFRS 17 is arguably an even more complex accounting standard than IFRS 9.  

If and when FRS 103 is changed, there will be a period between the new standard’s issue date and the effective date, in order to provide preparers time to implement the new standard. The length of this period will depend on the complexity of the standard. IFRS 17 was issued in May 2017 with an effective date of 1 January 2023, thus giving IFRS reporters 6-7 years of implementation time.

If and when FRS 103 is revised, the key question will be what changes are featured and the extent to which it aligns with IFRS 17. The FRC have not outlined how FRS 103 might change. Below we consider some of the options the FRC  may consider in the process of developing a new standard for insurance contracts:

• Full alignment with IFRS 17 – The FRC may choose to fully align UK GAAP with IFRS 17.
• A simplified IFRS 17 model – The FRC may propose a simplified model similar to IFRS 17 but with simplifications. This would be a similar approach to the FRS 102 changes for revenue recognition and lease accounting mentioned above. 
• Alignment with insurance regulatory framework – The FRC may propose an accounting standard which aligns with the insurance companies’ regulatory framework (i.e. Solvency UK or Solvency II). Such an approach would need consideration for entities that are not in scope of the regulatory framework but issue insurance contracts. 
• Multiple frameworks – The FRC may propose several models, including the ones considered above, and give preparers the option to select. 

Response letters to the FRS 103 exposure draft were generally supportive of the FRC’s proposal to revisit FRS 103 once the IASB had issued its updated standard on insurance contracts (i.e. IFRS 17). However, some respondents cautioned against automatically assuming that IFRS 17 would be the most appropriate basis for insurance accounting under UK GAAP. During the exposure draft to what became IFRS 17, some respondents highlighted concerns that the new standard may not adequately address UK-specific issues such as with-profit funds and accounting for unallocated surplus. As such the FRC should consider the benefits and costs of all the options that could replace FRS 103. 

The main types of insurance companies which apply UK GAAP, and therefore most likely to be impacted by any changes in FRS 103 are as follows:

• Lloyd’s of London entities – Managing agents are required to prepare an annual report for each Lloyd’s syndicate using UK GAAP. 
• UK subsidiary entities with overseas parents – Many UK subsidiaries of overseas insurance groups use UK GAAP to mitigate GAAP differences when consolidating. 
• Mutual insurers – Some UK mutual insurance companies have chosen UK GAAP as opposed to IFRS.

The key takeaways from the implementation of IFRS 17 was that it was an incredibly complex standard which took a lot of resources and a long time to implement; UK GAAP insurers should be mindful of this. That being said, it would be ill-advised to begin any kind of formal implementation plan with so much uncertainty around the nature and timing of any changes.

We would encourage UK GAAP insurers to continue to monitor for announcements by the FRC in the coming years and share their views with the FRC and to the wider community.

KPMG will continue to provide updates in the coming periods as the FRC makes further announcements.

This article was written by Calvin Woodroffe and Allan Jones.