On 18 May 2017, IFRS 17 was issued by IASB to replace IFRS 4 “Insurance Contracts.” Insurers must commence application of IFRS 17 with effect from 1 January 2021. However, IASB proposed to defer the application to 1 January 2022 due to the numerous challenges facing those insurers in complying with the new standard.
It is worth mentioning that this standard not only affects the profit, equity, insurance liabilities and financial reports of the insurers, but also their IT models and structures. This is attributed to the changes proposed in the standard regarding the uniform accounting treatment, measurement and disclosure requirements of the insurance contracts.
Objective of IFRS 17
IFRS 17 aims at standardizing the insurance accounting at a global level in order to improve comparability and increase transparency, in addition to providing users of financial statements with the information they require to assess the impact of insurance contracts on the insurer’s financial position, financial performance, cash flows and exposure to risk.
Scope of IFRS 17 Application
The standard shall apply to companies who have:
- Insurance contracts, including re-insurance contracts issued thereby;
- Re-insurance contracts maintained by the company.
- Investment contracts with voluntary participation feature, provided that the insurer shall also issue insurance contracts.
Contracts may be divided into groups for accounting purposes. Insurance contract issuers must record the same in the statement of financial position.
Measurement is divided into two main phases:
- Measurement upon initial recognition
Insurers must measure the group of insurance contracts, with the total of:
- amount of fulfillment cash flows, where the present value of the discounted future cash flows are measured at discount rates to show the effect of time value of money and the risks associated with those cash flows
- contractual service margin, representing the unearned profit, which shall be recognized by the insurer when they provide the services in the future.
- Subsequent Measurement
The carrying amount of any group of insurance contracts at the end of each reporting period is the total of:
- The liability for remaining coverage from fulfillment cash flows relating to future service
- Liability for incurred claims.
IFRS 17 requires the insurers to disclose the insurance contracts in their financial statements as a total of the cash flows allowing commitment to settlement (using the current projections of the size, timing, uncertainty of cash flows, and discount rate). The standard also requires insurers to segregate the groups of contracts expected to gain profit and those by which it is difficult to achieve profit. The profit expected against providing the insurance coverage is recognized in the statement of income over time. Once the insurer determines that it is expected to realize losses from the contract from which it is difficult to gain profit, the accounting treatment is made for the losses in the statement of income.
Approach of Insurance Contracts Presentation in the Statement of Financial Position
IFRS 17 requires insurers to disclose the additional information, enabling the users to understand the risks facing the company due to issuance of insurance contracts. The disclosure requirement aims to induce the company to disclose the information in the notes, which provide, in addition to the information presented in the statement of financial position, statement of income and statement of cash flows, the basis for financial statement users to assess the impact of contracts falling within the scope of IFRS 17 on the company’s financial position, financial performance and cash flows. In order to realize this objective, the company must disclose the qualitative and quantitative information relating to:
- Amounts recognized in their financial statements regarding the contracts falling within the scope of IFRS 17;
- Significant judgments and changes in those judgments made upon the application of IFRS 17;
- Nature and extent of risks arising from contracts falling within the scope of IFRS 17.
Methodology to be followed by insurers to meet the requirements of IFRS 17
- Use the software that fulfils the standard application requirements;
- Initiate an organizational unit covering specialized actuarial functions, with actuaries possessing experience in life and general insurance, so as to project the potential future risks of insurance contracts;
- Provide specialists in actuarial aspects in insurance;
- Train the finance staff to understand the standard application requirements;
- Develop accounting and IT policies and procedures to ensure effective application of the standard.
Baker Tilly assists insurers in applying the standard
Baker Tilly in Kuwait possess in-depth expertise and knowledge at local, regional and global levels, to assist insurers in applying the standard, through an integrated technical and timely framework to fulfil the standard requirements.
IFRS 17 is generally intended to manage the lifecycle of insurance policies from the issue date up to the expiry date thereof.
With respect to revenue recognition, revenue is only recognized when it involves no future burdens or risks. With respect to technical provisions, these should be reviewed periodically by an actuary to ensure their adequacy to meet any potential future risks involved in the remaining part of insurance contracts, and therefore, insurance companies will be able to manage potential risks and avoid insolvency.
Through full coverage of the standard’s features and applications, while linking the same with the actions that insurers in Kuwait must adopt, the insurers should invest, immediately, in the infrastructure, including systems and software, and attract academically and practically qualified personnel in the area of insurance, specifically, actuarial, to be prepared for the application of the standard.