By Danielle Atherton and Brian O'Loughlin
The impact of IFRS 17: an emerging picture
Over the past 12 months the impact of transitioning to IFRS 17 has become increasingly apparent. Gaining this information was initially difficult as insurers gave broad indications and qualitative information on key metrics such as shareholder equity and Contractual Services Margin (CSM).
However, at YE22, known or reasonably estimable impacts needed to be disclosed under IAS 8. This requirement, along with more time to understand and evaluate the impact of IFRS 17, has enabled insurers to better provide details on; the implications of IFRS 17, how existing KPIs have changed and new KPIs that have been introduced.
Further information emerged through investor presentations ahead of HY23 reporting where most insurers provided more detail on transition impacts and the implications for the 2022 comparative period.
Headlines from HY23 reporting
Our analysis last month revealed three key themes including; differing HY practices, differing KPI definitions and the potential challenges ahead of YE reporting.
At HY23, the types of disclosures and level of detail included within these disclosures differed between insurers. This was expected given limited disclosure requirements for interim reporting and the IFRS 17 basis being used for the first time. We also saw differences in KPI definitions from updated definitions of existing KPIs, such as adjusted operating profit and combined ratio, to differing definitions for new metrics such as New Business Value based on the CSM.
The Financial Reporting Council (FRC) in the UK also recently conducted a Thematic Review on IFRS 17 interim disclosures. This review outlined areas for improvement for insurers including making accounting policies company-specific, providing sufficiently detailed disclosure of significant judgements and estimates, providing methods and assumptions used to measure contracts at the transition date and determining appropriate levels of aggregation that provide the most useful disclosure to readers of the accounts. A helpful, albeit additional, ‘to do’ list for the year-end ahead.
In terms of potential challenges ahead, insurers who provided limited IFRS 17 disclosures at HY23 will have more to do for YE23 to complete the work necessary to populate both 2022 and 2023 mandatory disclosures for the year end accounts. In addition, subsidiaries that report on an IFRS, as opposed to a UK GAAP basis, will need to externally report under IFRS 17 for the first time at YE23.
Despite the level of effort required, there are things that insurers can and should be doing as they prepare for YE23 reporting.
Seven areas to focus on for YE23 reporting
- 1. Remaining comparative disclosures
- 2. Moving away from tactical solutions
- 3. Making the working day timeline secure
- 4. Strengthening controls
- 5. Engaging auditors
- 6. KPI definitions
- 7. Crafting communications for investors
1. Remaining comparative disclosures
While IFRS 17 disclosures at HY23 were, to some degree, voluntary, additional year-on-year IFRS 17 comparative disclosures are mandated at year-end for group and in-scope subsidiary accounts. As it’s mandatory that these are disclosed, insurers need to be clear on what they are and how they will be produced and will need to provide oversight of the likely narrative to the Audit Committee / Board.
2. Moving away from tactical solutions
Many firms still have plans to transfer processes built in tactical solutions to their strategic systems, for example certain elements of the CSM calculation. If this remains the objective then this must become a management priority as there is now limited contingency time remaining ahead of year-end reporting. If time and resource constraints mean that tactical solutions remain for the short-term then further work may be needed to fix existing defects and replan its replacement.
3. Making the working day timeline secure
Given the proximity of the year-end process, insurers must focus on securing the YE23 timetable as a priority. If significant risk still exists, contingency plans such as roll-forwards could be considered.
We would also recommend that implementation of new improvements close to the reporting date be avoided and considered after Q1 2024. Using new solutions for the first time during a year-end closing process is risky from an operational perspective and can pose a challenge for internal and external reviewers.
4. Strengthening controls
To support efficient and effective internal review and external audit, a robust control environment is important. This may be more challenging where tactical solutions, such as spreadsheets may still be in place, particularly around disclosure items being produced for the first time and not in an automated fashion, and therefore insurers should plan sufficient time for management review procedures.
5. Engaging auditors
Full audit opinions will be provided for the first time at YE23, so the full 2022 comparatives and the 2023 financial statements and disclosures will be subject to the scrutiny of external auditors. Insurers should engage early with auditors to gather views on proforma accounts and disclosures to ensure efficiency in the audit process.
6. KPI definitions
Given differing approaches to KPIs at HY23, some firms may wish to reflect on their definitions to see where alignment can be made with best practices adopted by other insurers or dedicate more time to better explain their own approach.
7. Crafting communications for investors
Some analysts and investors are finding it challenging to understand the drivers of change of financial performance following the introduction of IFRS 17, for example the impact of discounting for non-life insurers. Differing approaches and disclosures are also making it difficult for them to make effective comparisons.
Insurers should consider how they will explain their story to the market and how they can bridge any gaps in understanding. For example, including narrative around product level impacts and information to bridge old IFRS 4 metrics with new IFRS 17 metrics may be useful.
As you prepare for year-end, reach out to your local PwC contact to hear about these focus areas. We’re continuing to support Life, General Insurance and Reinsurance firms with their final sprints ahead of FY23 reporting, both as their auditor or implementation partner.
