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Standard Practice

ARTICLE BY

  • Ronald Richman
  • Chief Actuary
  • Old Mutual Insure

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IFRS17 is here. In this article, we take a look at what the new new international accounting standard means for the industry.

The insurance industry is undergoing a significant transformation with the introduction of IFRS 17, a new international accounting standard that has replaced IFRS 4, which was the industry standard and staple for a long time. This change affects insurers in South Africa, where IFRS standards are adopted automatically due to the absence of local accounting standards. Most South African insurers with year-ends from December 2023 to December 2024 have begun implementing IFRS 17, marking a new era in insurance accounting.

IFRS 17 explained

IFRS 17 is a comprehensive accounting standard specifically designed for insurers. It introduces two approaches relevant to non-life insurers: the simplified Premium Allocation Approach (PAA) and the more complex General Measurement Model (GMM). The standard aims to provide more consistent and transparent financial reporting across the insurance sector. The PAA is a simplified method suitable for short-duration contracts, similar to the previous unearned premium reserve model, while the GMM is a more complex approach required for longer-term contracts, involving detailed calculations of future cash flows and risk adjustments.

For many non-life insurers using the PAA, the changes may not be as dramatic as initially feared. The primary difference lies in the need for more detailed reporting. However, IFRS 17 introduces some changes, such as collapsing several figures on the balance sheet into a single line item and demanding more rigorous reserving practices.

What it means for the industry

It’s important to understand how IFRS 17 fits into the broader financial reporting landscape. Insurers must now compile their financial statements under IFRS 17, but they also need to prepare statutory accounts under the Solvency Assessment and Management (SAM) regime in South Africa. Listed insurers will report their IFRS 17 results publicly.

The implications of IFRS 17 are far-reaching. The new standard may make reinsurance less attractive, as some reinsurance contracts might not be reported as revenue, and complex, long-dated reinsurance contracts will require treatment under the GMM approach. Loss-making business will become more evident, as insurers must reserve for all anticipated losses on day one, encouraging a shift away from unprofitable lines.

IFRS 17 also requires increased reporting detail, with insurers potentially needing to report on cohorts of contracts or onerous contracts separately. This provides more granular insights but increases complexity and costs. Insurers are likely to incur additional expenses for staff, actuarial services, and auditing to meet these new requirements.

For insurance intermediaries, the most significant impact will be the increased demand for detailed data. Insurers will require much more granular information, particularly regarding cash flows received from and paid to policyholders. This is especially challenging in the cell captive market, where third parties rent a ring-fenced insurance license under an overall insurance license.

Impact on intermediaries

The increased costs and complexity associated with IFRS 17 might lead to market consolidation, potentially changing the landscape of insurers intermediaries work with. While many South African insurers have opted for the simplified PAA approach, the overall accounting process has become more complex. This may affect the speed and nature of interactions with insurers.

Despite these challenges, most insurers have not seen massive differences between the old IFRS 4 and the new IFRS 17 standards. However, the increased focus on profitability and detailed reporting may lead to changes in product offerings and pricing strategies.

As an intermediary, staying informed about these changes will help you navigate the evolving insurance landscape more effectively. The new standard’s emphasis on detailed data and profitability may lead to more in-depth discussions with insurer partners.

While IFRS 17 primarily affects insurers, its ripple effects will be felt throughout the industry. The standard aims to bring greater transparency and comparability to insurance financial reporting. As the industry adapts, it presents an opportunity for all stakeholders to gain deeper insights into the financial health and performance of insurers. By understanding these changes, intermediaries can better prepare for the evolving demands of their insurer partners and continue to provide valuable services in this new regulatory environment.

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