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Insurers press on with new accounting rules despite calls for delay

Insurers are pressing ahead with implementing new global accounting rules for insurance contracts despite recent criticism and calls for a delay from industry CEOs.

IFRS 17, which is due to come into force Jan. 1, 2021, is designed to make insurance company accounts more easily comparable across countries. The standard it is replacing, IFRS 4, allows companies to account for insurance contracts using their local accounting standards, leading to a lack of consistency.

The new standard has come under fire from senior insurance executives in recent weeks. Aviva Plc group CEO Mark Wilson described it as "nonsense" and predicted the implementation would be delayed, while Munich Re CFO Jörg Schneider told the Financial Times that "a delay to IFRS 17 would be good."

But KPMG U.K. partner Ferdia Byrne said: "I think it is too early to say whether or not more time is needed — I don't think there are enough facts out there to justify it." Byrne added: "Our view would be that companies need to get on with preparing this."

S&P Global Ratings insurance ratings Director Mark Nicholson said a delay was unlikely, even if some companies may lobby for it. "I don't think [a delay] is impossible, but our expectation is that we will see the standard in 2021," he said.

A KMPG survey of 82 executives from insurers globally, which was published Dec. 12, found that only 5% of them were expecting to implement IFRS 17 after the Jan. 1, 2021, deadline.

According to PwC partner and global IFRS 17 lead Alex Bertolotti, most companies are rolling up their sleeves and getting on with IFRS 17. "All of our big clients around the world are either doing an impact assessment or have moved into implementation," he said. "While a number of insurers are not happy, they are looking to deal with the standard."

Brexit questions

Brexit could introduce complications, though, because if the U.K. leaves the EU in 2019, the country may have to endorse the new rules separately from the bloc rather than accepting its endorsement.

After the International Accounting Standards Board, or IASB, unveiled IFRS 17 on May 18, the CEOs of three of the biggest U.K. life insurers — Aviva, Legal & General Group Plc and Prudential Plc — wrote to the British Chancellor of the Exchequer on July 14 asking for the U.K. to defer the implementation of the new accounting standard for five years and suggesting that Brexit presented an opportunity to retain the existing rules that are "appropriate for the U.K.'s insurance industry."

But Brexit is unlikely to prevent IFRS 17 coming into force on its intended date, according to Byrne.

"It is hard to see how the U.K., as an international market, open for business post-Brexit, would not adopt international accounting standards if the rest of the world is moving ahead," he said.

That is not to say that adoption of IFRS 17 will be easy. The main sticking point is cost, particularly as preparation for IFRS 17 has begun shortly after the implementation of new European insurance capital regime Solvency II, which was a big drain on insurers' finances. Solvency II implementation costs in Britain alone were more than £3 billion, according to the Association of British Insurers.

Writing in trade body Insurance Europe's 2016-2017 annual report published May 31, Prudential CFO Nic Nicandrou said that while it was not yet possible to estimate IFRS 17 implementation costs accurately, "a figure in the range of £1 billion to £2 billion in the U.K. would not seem unrealistic."

He added: "Our general position is that we are in favor of the standard as a whole, but I can see where the insurers are coming from. The implementation costs of this would be very significant."

According to PwC's Bertolotti, that is because "[IFRS 17] goes to a level of granularity that people may not have done before. That means lots of changes to systems and data."

Key changes

One of the standard's effects is that it requires insurers to spread their recognition of profit over the duration of a contract, which means reported figures will look different if companies currently recognize profit at the point of sale, although the ultimate profitability of the contracts over time will not change.

KPMG's Byrne said U.K. annuities providers would be among the companies affected by the profit recognition shift, with KPMG's research suggesting that annuities profits could fall by anything between 0% and 20%, depending on the company's previous practices.

Bertolotti said explaining the reporting change to investors was a key consideration for life insurance companies.

"In transition [to the new rules], you have got some choices of how to do things, and that will impact on reported profit," he said. "That may tell a very different story to what you have reported in the past. The ability to explain the reconciliation will be really important."

While some insurers may disagree, the accounting firms argue that the benefits of greater transparency and comparability outweigh other concerns.

"We have some sympathies for our clients who are feeling some pain from this, but it has been going on since 1997 and needs to get resolved now," Byrne said. "[Insurance] is the only industry that doesn't have a proper accounting standard under the IASB, and we need to move forward with the implementation now and see what some of the issues are as they arise."

S&P Global Ratings and S&P Global Market Intelligence are owned by S&P Global Inc.