Insurance companies worldwide are preparing for the most significant change in global accounting standards in almost two decades. In January 2023 the International Financial Reporting Standards (IFRS) 17 will come into effect. Replacing the previous standard, IFRS 4, which was issued in 2004, IFRS 17 aims to standardise insurance accounting globally in order to improve comparability and increase transparency by applying an uniform approach. This is expected to help those in the industry better understand individual insurers’ financial position, performance and risk exposure.
The forthcoming standard will be the first time a single IFRS accounting model applies to all types of insurance contracts. It also seeks to align insurance accounting as much as possible with the general IFRS accounting of other industries. Given that a lack of transparency and consistency in financial reports was seen as a major factor discouraging global investors, implementation of the new standards is expected to facilitate an increase in capital and finance in the insurance industry. The standards for IFRS 17 were developed by the International Accounting Standards Board, an independent body of the IFRS Foundation, with 144 jurisdictions fully adopting the standards as of the time of writing.
Implementation Challenges
While seen as a positive step towards aligning international accounting practices and improving transparency, introduction of the standards poses potential challenges for insurers in emerging markets.
The transition to IFRS 17 will require many insurance firms to alter their reporting practices. In addition to changes to financial statement presentation, industry analysts expect the new standards to accompany considerable data and IT upgrades, as they require greater depth and quality of data to fulfil. These requirements present numerous challenges for emerging markets, as insurers seek to balance the financial and human resource demands with the myriad benefits of adoption.
Emerging Markets
As the implementation date for IFRS 17 nears, the level of readiness among insurers varies by region, country and company. In a May 2022 report assessing the readiness of MENA countries, US credit ratings agency AM Best stated that despite few companies in the region being fully prepared for implementation, the more mature financial markets demonstrated a greater level of preparedness, particularly with regard to larger market-leading insurers.
Saudi Arabia has been particularly proactive on this front, with sector authorities requiring insurers to comply with a series of preparation and implementation milestones. For example, in December 2018 the Saudi Central Bank launched a four-phase plan for the insurance sector to transition to IFRS 17. In countries with less regulatory oversight and engagement with IFRS 17, the level of preparedness has been less consistent, and the transition has been largely market-driven and led by large insurers, according to the AM Best report.
A similar market-driven approach is seen in Latin America, with many insurers across the continent already implementing IFRS 17 as of mid-2022, despite Brazil, Colombia, Mexico and Peru not being signatories. In some cases, the region’s insurance companies operate internationally in markets where compliance is required. In other instances, insurers either have or are subsidiaries of foreign insurance companies, in which case they have already been IFRS compliant for a number of years.
With the 2023 implementation date for the new international accounting standards looming, countries with mature financial industries are better equipped to handle the transition. Although considered a beneficial move towards transparency, application poses challenges for emerging markets.
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