10 top advantages of new financial reporting standards (IFRS 17)

By , K24 Digital
On Tue, 21 Feb, 2023 07:30 | 3 mins read
10 top advantages of new financial reporting standards (IFRS 17)
International Financial Reporting Standards (IFRS 17). Photo used for representational purposes.

Companies have started implementing the new International Financial Reporting Standards (IFRS 17), amid concerns over huge costs and challenges of the firms transitioning from the older IFRS 4, which might attract huge financial penalties.

Here are the advantages of the changes in the insurance sector.

1. Transparency

IFRS 17 requires that financial statements contain a lot more detail, which improves the quality and relevance of the information for users of financial statements. This will be of benefit to the company, investors and analysts. With more transparency in information, there will be increased investor confidence and hence ensure the long-term sustainability of the insurance industry in the event that insurance companies need to raise capital from the stock market.

2. Consistency

IFRS 4 made it difficult to compare financial information between insurance companies. However, under IFRS 17, much of the diversity in reporting is eliminated since companies will have consistency in the accounting framework even if operating in different jurisdictions. This will ensure that the financial information presented by different insurance companies is easily comparable. This will be of significant benefit to investors as well as management and will increase competition in bottom-line generation to achieve shareholder value.

3. Comparability across different financial service industries

Under financial service industries such as banks, deposits are not treated as revenue for the bank. This is because deposits ultimately belong to the client and the only income that banks earn from these deposits will come from the fees and/or interest levied on such funds. Under IFRS 4, when an insurance company issues a savings product, the full premium deposited is recognized as revenue to the insurance companies. IFRS 17 amends this element of revenue recognition to exclude monies that ultimately belong to policyholders from the revenue booked by insurance companies. This amendment aligns the mode of revenue recognition for insurance companies with other financial service industries.

4. True reflection of profits

IFRS 4 allowed revenue to be recognized immediately when a contract was written, even though, for example, the contract was 20 years long. This is treated differently under the new standard, which aims to align profit recognition with the term of the policy. Instead of recognizing profit on day 1, insurance companies will now have to recognize a little bit of profit every month for the next 20 years. Profits for insurance companies will therefore be realized and spread over the term of the insurance contract giving investors insight into how the profit emerges.

5. Change of strategic focus

Many insurance organizations have previously been competing for market share at the expense of providing the shareholder’s value. With consistency and transparency of financial information, insurance companies will start competing on providing shareholder value by focusing on profitability. This will need a change of strategy from management as well as the Board and hence we should expect a more balanced approach between scale and profitability.

6. Increased cross-functional interactions

Previously departments used to work in isolation within an organization. IFRS 17 requires that departments such as actuarial and finance interact more and share information within their respective domains. This requires a lot of collaboration and teamwork amongst the team members involved in implementing IFRS 17. From an HR perspective, this could lead to increased staff motivation to achieve a common goal and hence greater job satisfaction.

7. Improved underwriting discipline

The insurance industry is faced with a lot of undercutting of premium rates which has led to many companies generating losses to shareholders. IFRS 17 requires that if an insurer underwrites a loss-making contract, the insurer should immediately recognize losses from that contract. The impact of this will be that insurers will need to exercise better underwriting discipline when pricing insurance contracts.

8. Up-skilled staff

Implementation of the IFRS 17 standard requires staff members who are highly skilled and digitally savvy. This means that organizations without the relevant skills will need to hire skilled staff for implementation. It also presents an opportunity to train staff who when trained can be able to meet the requirements of the standard. Training helps increase staff motivation and could possibly achieve higher staff retention.

9. Protection of Policyholders

Previously, including an adjustment for risks in the liability calculation within firms was at the discretion of the company. Under IFRS 17, this is a mandatory requirement. Most general insurers are likely to feel the brunt of this new requirement very heavily since it would be a completely new figure in the balance sheet for them and require the companies to hold significantly larger reserve values. Holding larger reserve values will ensure policyholders’ protection.

10. Better governance of actuarial systems

IFRS 17 requires a lot of control and automation of actuarial systems. This presents an opportunity of improving the governance standards, which will reduce manual errors and improve operational efficiencies of actuarial systems. This will ensure better service delivery of actuarial outputs making management better informed on areas that need intervention.

Noel Wandera spoke to CIC Group actuary Salome Ndegwa

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