New insurance accounting standard brings greater comparability for investors and analysts: KPMG

Mahesh Balasubramanian, Partner in KPMG in Bahrain
Mahesh Balasubramanian, Partner in KPMG in Bahrain

Bahrain: KPMG International welcomes the recent publication of the new, long-awaited accounting standard for insurance contracts, IFRS 17. This new, comprehensive accounting model is 20 years in the making and heralds an end to the lack of comparability in the insurance sector.

Due to take effect on 1 January 2021, the new standard is the result of years of discussion, exposure drafts and debate. Although it has long been recognized that current accounting practice did not offer sufficient comparability between the financial positions and performance of insurers in different jurisdictions and with companies in other industries, the complexity of insurance accounting and variety of products meant that agreeing on a new standard was an extremely challenging task.

Mahesh Balasubramanian, Partner at KPMG in Bahrain commented, “The launch of the new standard is a significant milestone for IASB and the insurance accounting in Bahrain and worldwide. IFRS 17 will give users of financial statements a completely new perspective, bringing greater transparency and comparability for investors and analysts. However, benefits will only be realized when the new standard has been implemented. The roll out date might seem a long way off, but insurance companies needs to invest today in reviewing and upgrading their systems, process and control to be ready when the new standard come into effect in 2021.”

Key effects of the new standard

The ways in which analysts interpret and compare companies internationally will change. Increased transparency about the profitability of new and in-force business will give users more insight into an insurer’s financial health than ever before.

  • Separate presentation of underwriting and finance results will provide added transparency about the sources of profits and quality of earnings.
  • Premium volumes will no longer drive the ‘top line’ as investment components and cash received are no longer considered to be revenue.
  • Accounting for options and guarantees will be more consistent and transparent.

These have the potential to reduce the cost of capital for leading insurers. Greater comparability could facilitate merger and acquisition activity, encourage greater competition for investment capital and help gain the trust of investors.

At the same time, there are likely to be a number of other effects. For example, there could be greater volatility in financial results and equity due to the use of current market discount rates. Insurers may also need to revisit the design of their products and other strategic decisions, such as investment allocation.

Implementation challenges

Mary Trussell, KPMG’s Global Insurance Accounting Change Leader and a partner with KPMG in Canada, elaborated on the challenges and said, “For most insurers, adopting the new standard will have a bigger impact and be a greater challenge than adopting IFRS in the first place. The journey isn’t over yet. The new standard will trigger a second wave of activity by local accounting and actuarial bodies, tax authorities and prudential regulators – everyone will want to know how the new accounting requirements will interact with capital requirements.

“A coordinated response will be essential. Finance, Actuarial and IT functions will need to work closely together like never before. The time to watch and wait is over – the need for planning starts now.

“Forward-looking insurance groups have already started analyzing what the changes mean for them – don’t underestimate the need to evaluate and test new systems and processes, and educate business users and investors. In general, the more jurisdictions an insurer operates in and the more products it offers, the more costly and time consuming implementation will be – but so too is the potential to benefit from the changes.

The more I work with insurers on implementation, the more I see them saying: ‘Why do we do things the way we do? Why don’t we set up centers of competence instead of duplicating activities 20 times over?’ Faced with a change of this magnitude, it becomes a much easier decision to invest to achieve efficiencies. Absent this change, you’d just live with a status quo. For the confident, change is opportunity.”