New global standard IFRS 17 triggers radical change to insurance accounting

ARLINGTON, Va., May 18, 2017 -- Willis Towers Watson (NASDAQ:WLTW), a leading global advisory, broking and solutions company, has responded to today’s publication of IFRS 17 by the International Accounting Standards Board (IASB), warning that implementation will be a major challenge for insurers and investors. According to the consultancy, the long-awaited IFRS 17 will usher in a wave of unprecedented change to current insurance accounting practices, fundamentally changing how and what insurance companies have to report.

“IFRS 17 is more than ‘just’ an accounting change and will have a wide and significant impact on insurers’ operations,” said Dominique Lebel, managing director, Life practice, Willis Towers Watson. “The current standard, IFRS 4, has allowed local GAAP approaches to be used in each country, which has meant very little consistency across countries and multinationals. There are big changes under IFRS 17; it will take some time for investors to understand the new information.”

Twenty years after the IASB’s predecessor initiated the insurance contract project, the new standard will replace IFRS 4 for accounting periods from January 1, 2021, and represents a major milestone for the insurance industry as the first-ever global accounting standard for insurance contracts. However, inconsistencies will remain due to the U.S. Financial Accounting Standards Board’s decision to abandon its convergence efforts with the IASB and instead make targeted improvements to existing U.S. GAAP.

“Four years may seem like a long time, but adequately preparing for the new complexity of IFRS 17 will be a challenge,” said Kathy Bachman, consultant, Life practice, Willis Towers Watson. “The new standard will impact profit, equity and volatility, as well as reserving and financial reporting processes, actuarial models, IT systems and potentially even executive remuneration, so insurance companies should not underestimate the work required. The additional complexity will also affect communication with investors.”

Analysis by Willis Towers Watson notes that some of the biggest challenges for insurers include:

• Interpretation and judgment. IFRS 17 is truly principle-based, which in most cases will mean it is the insurer’s responsibility to ensure policies and disclosures comply with the standard’s requirements, rather than it being able to rely on prescriptive and detailed rules.
  
  
• Dealing with volatility in profits. The hybrid model proposed may increase volatility compared to existing models, particularly those based on locked-in assumptions.
  
  
• Managing stakeholder expectations. Explaining IFRS 17’s impact on profits and equity, and the variances to current GAAP and reporting under applicable regulatory regimes will require robust processes, a keen grasp of the individual differences and a transparent communication strategy. This may affect dividend-paying capacity, management bonuses and market-wide performance metrics.

About Willis Towers Watson

Willis Towers Watson (NASDAQ:WLTW) is a leading global advisory, broking and solutions company that helps clients around the world turn risk into a path for growth. With roots dating to 1828, Willis Towers Watson has 40,000 employees serving in more than 140 countries. We design and deliver solutions that manage risk, optimize benefits, cultivate talent, and expand the power of capital to protect and strengthen institutions and individuals. Our unique perspective allows us to see the critical intersections between talent, assets and ideas — the dynamic formula that drives business performance. Together, we unlock potential. Learn more at willistowerswatson.com.

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