STANDARDS are in place to ensure a level of quality across comparable things. But standards are not set in stone. They are bound to change—to adapt to the needs of the times.
And accounting standards are no different. They, too, change, albeit at a more tedious process and rate.
In 2004, the International Accounting Standards Board (IASB) embarked on a project to standardize insurance contracts with the goal of making them more transparent and comparable across geographies and economies.
The project was called “IFRS 4 Phase II.” IFRS stands for International Financial Reporting Standards (IFRS), which are global accounting rules set by the IFRS Foundation and the IASB.
It was dubbed “Phase II” as it was the second half of the so-called “Insurance Project” of IASB’s predecessor the International Accounting Standards. IFRS 4 was the outcome of the Phase I project.
“The IASB’s objective was to develop a common, high-quality standard that will address recognition, measurement, presentation and disclosure requirements for insurance contracts,” according to Deloitte’s IAS Plus.
It took at least 16 years before Phase II came into fruition, giving birth to IFRS 17, replacing IFRS 4.
IFRS 17 was officially published on May 18, 2017, with its initial effective date set on January 1, 2021.
However, in June 2020, the IASB published an amendment to IFRS 17 following the comments of stakeholders that mostly contained challenges and concerns in complying with the new standard.
The amendment also involved the deferral of the implementation of IFRS 17 by two more years, or by January 1, 2023.
So why change?
THE IFRS 17 applies to insurance and reinsurance contracts that a firm issues, reinsurance contracts that a firm holds, and investment contracts with discretionary participation features that a firm issues.
The IFRS is a set of accounting standards recognized by at least 166 countries, including the Philippines, and provides a guide on how particular types of transactions and other events should be reported in the financial statements.
Former Insurance Commission (IC) Commissioner Dennis B. Funa earlier pointed out that IFRS 4 failed to “harmonize” insurance contracts in the global insurance industry. Funa argued that the IFRS 4 did not push for “harmonization” but “allowed the continued use of national standards.”
“From an international viewpoint, it means a variety of accounting practices across the globe. Thus, under IFRS 4, there really is no global accounting standard to speak of,” Funa said in an August 2019 column in the BusinessMirror.
“Consequently, comparability of insurers across jurisdictions remained a difficulty—a matter that will later be addressed by IFRS 17,” he added.
German multinational Allianz SE pointed out that the IFRS seeks to ensure “true harmonization” across insurance contracts to provide “greater” transparency to an insurer’s performance.
Aside from providing greater transparency to the financial health of an insurer, Allianz explained that IFRS 17 is better than IFRS 4 because it provides “consistent” principles across all accounting aspects for contracts, and allows for easier comparison of contracts across countries.
“[IFRS 17] is the first harmonized accounting model for insurance contracts,” Allianz said in a YouTube video.
“[It] increases the transparency of our financials, making the value we create for our customers and shareholders more apparent. This will also make it easier for our investors to compare our performance with the performance of our competitors,” Allianz added.
The pie slices
THE huge change in IFRS 17 is that it now “takes into account” the long-term nature of an insurance business in consideration of the uncertainties that it faces, according to Allianz. IFRS 17 primarily measures the liabilities of insurers.
Under IFRS 17, insurers are now required to report their contractual service margin (CSM), which measures the profits that they would realize over a given period across all contracts that they hold.
Allianz likens the CSM to slices of a pie.
“IFRS 17 does not allow us to recognize any of these profits when we issue the contract but lets us recognize it slice by slice as we fulfill our promises to our policy-holders over time. The slice represents the profit for the period,” it said.
“Making estimates of all the cash inflows and outflows requires us to look a long way out in the future, particularly for our long duration of our life health business,” it added.
Local context
EVEN if the implementation of the IFRS 17 took effect globally this year, the IC gave a deadline of January 1, 2025, because of the impact of the Covid-19 pandemic on the insurance industry.
In May 2020, the IC deferred the local implementation of the IFRS 17 to two years after the effective date set by the IASB.
In a circular letter issued last year, the IC required the insurance and reinsurance companies as well as health maintenance organizations (HMOs) to submit reports that would contain their respective actions taken and actions to be taken in adopting IFRS 17.
The status reports must include the approved budget for the IFRS 17 programs and activities, training of key personnel and officers, determination of key accounting policies, identification of data requirements, conduct of financial impact analysis, among others.
The IC also required the concerned entities to provide additional disclosures in the notes to their financial statements starting this year if they are not yet adopting IFRS 17 this year.
The additional disclosures include information about the insurers’ IFRS 17 implementation project, operational impacts of the new standard, quantitative information on the size of their contractual service margin, and expected impact on net worth, among others.
InLife’s perspective
FOR the 113-year-old Insular Life Assurance Co. Ltd. (InLife), the country’s first Filipino life insurance, the adoption of IFRS 17 will “significantly” impact “the measurement and reporting of these contracts on our financial statements.”
“The new standard is giving rise to a profound change in the financial reporting landscape of the insurance industry,” InLife Chief Transformation Officer Efren C. Caringal Jr. told the BusinessMirror in an e-mail interview.
Aside from transparency and consistency in accounting, Caringal pointed out that IFRS 17 would “enhance” risk management by insurers as it mandates a “more explicit recognition” of the risks associated with insurance contracts on balance sheets.
“This increased clarity and uniformity in reporting, inherent in this global standard, can help deepen our members’ understanding of InLife’s financial performance. We see an opportunity to further enhance the quality of information available to our members,” he said.
InLife has been “rigorously” preparing for the adoption of IFRS 17, Caringal claimed. Caringal explained that the adoption of the IFRS 17 has “involved substantial investments in technology and training to ensure the smooth integration of the new standards into existing frameworks.”
“Our preparations include conducting thorough impact assessments to gauge the prospective implications of IFRS 17 on our financial statements and overall operations,” he said.
“Moreover, we have revamped our financial systems and processes to adhere to the new accounting prerequisites and provided extensive staff training on the updated requirements,” he added.
Caringal admitted that the adoption of the new accounting standard came with challenges. For one, the IFRS 17 requires a “deep understanding” and “careful implementation” as it involves a wide array of data to be analyzed, he noted.
“For instance, the extensive data requirements of IFRS 17 mandate us to collect and analyze a vast amount of data. To navigate these challenges, InLife has been collaborating intensively with our auditors, advisors and strategic partners with expertise,” he said.
“We have invested in relevant technologies and team training. We have created a governance structure for the project, communicating regularly across our teams. This comprehensive approach will help ensure InLife’s seamless transition and adaptation to the IFRS 17 reporting,” he added.
Furthermore, the IFRS 17 may “potentially” impact the “cost structures” of insurers because of the need for more “explicit” recognition of risks and the value of insurance contracts on balance sheets, InLife Senior Vice President and Chief Actuary Jesselyn Ocampo said.
However, Ocampo pointed out that they do not see an immediate impact on the retail costs of InLife’s products because of IFRS 17.
“We don’t expect any near-term impact on retail costs of our products as a direct result of IFRS17, especially since the underlying strong business fundamentals remain the same,” she told the BusinessMirror.
“However, the eventual impact will be contingent upon many factors, including the evolution of product design and market demand, competition, and other relevant regulatory frameworks,” she added.
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