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IFRS 17 and Reinsurance –
What’s the Impact?
The new accounting standard for insurance contracts – IFRS 17 – remains a major concern for insurers throughout Europe, as the pro- posed implementation date of 1 January 2022 grows closer.
Despite the one-year postponement recom- mended by the IASB (International Accounting Stan- dards Board), there is still uncertainty on how the nal IFRS 17 accounting standard will be put into place. During 2019, changes were published, despite the previous text being called nal. Now we are waiting for a revised nal text of IFRS 17 in summer of 2020, which will hopefully address the outstanding prob- lems raised by many market participants.
Recent Changes
During 2019, amendments were published to allow for a better treatment of:
• Acquisition expenses – expenses for policies
expected to be written in the future may now be
capitalised, and the expense spread over time.
• Reinsurance of policies with participation fea-
tures – the market risks are now effectively
hedged through the reinsurance contract.
• Reinsurance of onerous policies – the accounting
standard now allows for a gain on the valuation of reinsurance when IFRS 17 is implemented, to offset the loss on onerous contracts, where future losses on these policies are taken up front.
• Aggregation of policies to simplify presentation – disclosure is now based on “portfolios” of insur- ance contracts.
Market participants have provided feedback on these amendments so the nal wording may be clari ed further.
Impact on Reinsurance
The good news is that the accounting standard has been clari ed in respect of the role of reinsurance. There is now a clear accounting set-off when onerous contracts have been reinsured, and the clari cation
when reinsurance hedges contracts with market risks is also helpful. However, reinsurance is still subject to further debates. The revised standard discusses the role of “proportionate” reinsurance – how does this differ from proportional reinsurance (the usual indus- try term)? And should insurers be allowed to cede some contractual service margin or risk margin through non-proportional reinsurance, such as excess of loss covers? Contract boundaries is another issue raised by a number of our clients – how should the contract boundary for reinsurance treaties be calcu- lated, in light of different rights and obligations by each party?
Further delays?
Several insurance associations are lobbying to delay the implementation of IFRS 17 by another year – to 2023 – due to the changes and time taken to change systems and processes. However, insurers also bene- t from the option to defer IFRS 9 until IFRS 17 is in place, and it is unlikely the standard setters will want to keep delaying both new accounting standards for insurers.
Conclusion
We welcome the extra clarity to the treatment of rein- surance under IFRS 17 but believe there is further to go in improving the text, and more importantly pro- viding guidance around its implementation.
THE SCOR SWEDEN RE MAGAZINE 2019 35