IFRS 17 Actuarial Science - Part 2

 Here we will discuss 3 major questions:

1. What are the benefits of IFRS17?

2. What are the limitations of IFRS 17?

3. Difference between IFRS 17 and IFRS 4?


Ques: How IFRS17 adds value to users' financial statements?

Ans:

  • Transparency - improves the quality of insurers' financial information
  • Consistency - consistent and high-quality accounting standard for all insurance contracts across most jurisdictions 
  • reduces much of the existing diversity in reporting.
  • increases comparability in financial statements.
  • Better reflection of reality – profit is spread over the contract's life in a series of smaller cash flows – giving more insight into how profit emerges.
  • Beneficial for investors - More informative and granular disclosures provide investors proper insight into the entity's business model, exposures and performance.
  • Transformation - Opportunity for insurers to transform existing business 



Ques: Difference between IFRS 4 and IFRS 17?

Ans:

IFRS 4

IFRS17

Companies use national standards when accounting for insurance contracts, resulting in lack of comparability

Companies across all jurisdictions apply consistent accounting for all insurance contracts, regardless of product

There is a line item in profit and loss account for change in liability

Distinction between “Release in Best Estimate Assumptions” and “Release of Margins”

Entities are free to derive their own interpretations for revenue recognition and calculation of reserves

Requires companies to measure insurance contract on updated estimates and assumptions which reflects the discount rate and risk adjustment

Profit recognition at the start of contract

Insurers need to indicate the expected profit with the CSM and only recognize the profit when it delivers the insurance service

Outlines what should be disclosed regarding methods and processes but provides limited guidance on how these disclosure requirements should be met.

More detailed and granular disclosure


๐’๐ฎ๐›๐ฌ๐œ๐ซ๐ข๐›๐ž ๐ญ๐จ ๐ฆ๐ฒ ๐˜๐จ๐ฎ๐“๐ฎ๐›๐ž ๐‚๐ก๐š๐ง๐ง๐ž๐ฅ ๐ญ๐จ ๐ฅ๐ž๐š๐ซ๐ง ๐๐ฒ๐ญ๐ก๐จ๐ง ๐š๐ง๐ ๐’๐๐‹ ๐Ÿ๐จ๐ซ ๐€๐œ๐ญ๐ฎ๐š๐ซ๐ข๐ž๐ฌ

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Ques: Limitations or Challenges in IFRS17 ?

Ans:
  • Increased balance-sheet volatility - The effect of using current market discount rates will vary, resulting in greater volatility in financial results and equity
  • Increase in complexity - Change is happening to different aspects of finance reporting as we are transition to IFRS17
  • Cost overruns – Mismanagement of IFRS17 implementation can result in extensive cost overruns to insurers
  • Technology - Larger volumes of data at greater granularity will drive complexity of the data architecture which can be challenging during implementation.
  • Communication - New disclosure requirements will change the way performance is communicated.
  • Principle-based approach - offers a lot of flexibility, but also requires intensive analysis.
  • Different jurisdictions have different disclosure
  • Overload of information – Existing measures remain important, and now on top of that we have IFRS. Understanding all of them in insurance business is complex.
  • Cost of this disclosures - IFRS usually require companies to publish more extensive disclosure information than under local GAAP
  • Fundamental mismatch between assets and liabilities - The management of assets and liabilities will be affected by the approach adopted to determine discount rates.

๐’๐ฎ๐›๐ฌ๐œ๐ซ๐ข๐›๐ž ๐ญ๐จ ๐ฆ๐ฒ ๐˜๐จ๐ฎ๐“๐ฎ๐›๐ž ๐‚๐ก๐š๐ง๐ง๐ž๐ฅ ๐ญ๐จ ๐ฅ๐ž๐š๐ซ๐ง ๐๐ฒ๐ญ๐ก๐จ๐ง ๐š๐ง๐ ๐’๐๐‹ ๐Ÿ๐จ๐ซ ๐€๐œ๐ญ๐ฎ๐š๐ซ๐ข๐ž๐ฌ

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Follow me on Linkedin: Kamal Sardana

Comments

  1. Great summary. The definition and assessment of "Fair Market Value" for assets remains a complex and controversial complication worthy of a separate blog.

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