Why the world needs IFRS 17 Insurance Contracts

According to the South African Institute of Professional Accountants (SAIPA), changes to the International Financial Reporting Standards (IFRS) are aimed at avoiding another global financial crisis. This is in response to the backlash against IFRS 17 Insurance Contracts from critics in the insurance industry.
 
Says Faith Ngwenya, Technical and Standards Executive at SAIPA: “We need better reporting standards to protect the global economy and the world’s collective public interest. The IASB works with organisations to make implementation easier. However, these standards are not developed to help businesses become more profitable but to make their financial sustainability transparent to unsuspecting investors.”
 
Industry resistance
The IFRS comprises some 45 standards that dictate how various accounting elements must be presented on an organisation’s financial statements to make its financial health apparent to its stakeholders.
 
The IASB introduced IFRS 17 in May 2017 with the deadline for adoption set for 2021. However, insurance industry leaders have criticised the standard’s complexity and general compliance issues. As a result, the IASB recently made several changes to the requirements and delayed implementation to 1 January 2022.
 
Standards to avert the next financial crisis
According to one CNN report, countries took such drastic steps to restart their economies that, if the world faces another global financial crisis, they might not be able to recover at all.
 
Further, in its Financial Stability Report of 2017, the International Monetary Fund (IMF) warned that: “Risk assessment in the insurance sector suffers from opaque and heterogeneous financial disclosure and deficiencies in the accounting and regulatory regimes.” It also warned that, in seeking greater yield, insurers have taken on more liquidity risk and credit risk, with their holding of lower-grade bonds having increased significantly.
 
The aims of IFRS 17
During a speech last year, Hans Hoogervorst, Chair at the IASB, explained the reasons behind the development of IFRS 17:
 
First, the liability of an insurer will be properly declared and, being regularly updated, will provide a more accurate view of its status. So increasingly risky equity positions will become noticeable sooner.
 
Second, IFRS 17 prohibits insurers from taking profit until the service is actually provided. Hoogervorst says that in some parts of the world, profits on long-term contracts, like annuities, are taken upfront, skewing the firm’s actual profitability.
 
Third, insurers tend to average their profitability over different generations of contracts. This practice means that poor profitability in the present financial year is camouflaged by good profitability in previous years, hindering investors from discerning current earnings trends. IFRS 17 will ensure that declining profits become obvious to the public.
 
The urgency of adoption
Some insurers are proceeding with implementation while others continue to push for more concessions. SAIPA says the IASB needs backing from governments and global organisations, like the IMF, to ensure the standards are adopted as soon as possible.
 
“Noting the IASB’s valid reasons, we mustn’t forget why this and other new standards have been introduced,” says Ngwenya. “We’re trying to avert another global financial crisis. Push-back from the industry only increases the risk and delays stability.”
 
Ngwenya invites insurers to approach their Professional Accountants, as business advisors, to find the most efficient ways to implement IFRS 17 by the deadline.
 
ENDS
 
MEDIA CONTACT: Stephné du Toit, 084 587 9933, stephne@thatpoint.co.za, www.atthatpoint.co.za
 
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