Delaying IFRS 17 risks a loss of momentum and could squander preparations made to date
The International Accounting Standards Board (IASB) has offered significant leeway to the (re)insurance sector through proposed amendments to the incoming IFRS 17 accounting standard.
As Willis Towers Watson senior director Kamran Foroughi explained, last week’s overhaul vastly reduces the likelihood of an accounting mismatch between insurance liabilities and reinsurance.
The changes recognise reinsurance as a legitimate risk mitigation tool, and eliminate a perverse disincentive to buy reinsurance cover that was baked into the original framework.
The IASB has also acknowledged with an additional amendment that money spent now acquiring customers could reap dividends in years to come, given that many policies will renew after the initial one-year term. And the organisation has cut carriers some important slack on the investment service element of certain insurance contracts.
The accounting standards body has further changes in sight for its meeting next week, including to the arrangements it will make for the transition to the new system.
The IASB’s concessions – which Foroughi and peers welcomed – follow extensive industry lobbying that reached a crescendo last autumn.
Carriers had identified numerous deficiencies in the framework, which is expected to cost many billions of dollars to implement worldwide.
One of the IASB’s early concessions was to agree to a one-year delay, with the new rules now due to come in by January 2022.
Industry groups immediately volleyed back a request for a two-year extension.
However, last week’s concessions take a considerable amount of wind from that particular lobbying sail.
If any regulatory overhaul is painful, changes to accounting and capital standards are positively excruciating.
However, delaying the inevitable – as with a piece of particularly invasive surgery – would prolong the agony.
It would tempt (re)insurers to press the pause button on their preparations, squandering countless hours of planning and making it harder for companies when they resume. Mazars partner Michael Tripp highlights loss of momentum as a key risk, and the run-up to Solvency II is certainly a case in point.
A delay beyond January 2022 would also put IFRS 17 out of sync with IFRS 9, which governs the recognition of financial assets and aims to address deficiencies seen as contributing to the financial crisis.
Anecdotal evidence suggests carriers’ IFRS 17 preparations are ticking along reasonably nicely, and kicking the new framework further out into the long grass would do them a disservice.
None of this, of course, addresses the issue of whether the new rules will make management at (re)insurance companies run their businesses better, though that is a question for another day, albeit one which is unlikely to trouble the boffins in global financial regulation.