Many countries are failing to prepare for new accounting standards that could dramatically change the way insurer solvency is assessed, potentially causing nations to lose out on benefits from the shift, a financial oversight body said.
In a report published Friday, the Basel, Switzerland-based Financial Stability Institute said few countries are considering the impacts of the major shift to determining insurer solvency, expected to come into effect in 2023.
The Financial Stability Institute found in a survey of 20 countries that most insurance supervisory bodies have not assessed the financial impact of upcoming changes to accounting practices, which it described as “the most significant development in the insurance industry in recent years.”
The IFRS 17 — short for International Financial Reporting Standard 17 Insurance Contracts — would prescribe standardized reporting practices with the intention of improving the accuracy of insurance companies’ reports of their solvency, performance and exposures to risk.
The requirements “are likely to change profit emergence patterns, encourage earlier recognition of losses on contracts that are expected to be onerous, and enrich valuation processes,” the Financial Stability Institute said. “Greater granularity in contract groupings will provide more relevant information about insurers’ financial position and financial performance, but will create more complexity in the valuation models, data, systems and process requirements.”
The institute said insurers and supervisors should begin analyzing the impact of IFRS 17 by January at the latest to be ready for the “looming” 2023 implementation date. It recognized their current priority of weathering the COVID-19 pandemic but warned of many implementation challenges lying ahead.
Despite the slow start, many insurance supervisors expect the IFRS 17 to bring benefits to their industries like greater financial stability, the institute said, though some said the standard may be costly to implement and cause some insurance product types to be disadvantaged due to technicalities and forced off the market.
The IFRS 17 was published in 2017 by the International Accounting Standards Board, an independent standard-setting body for international financial markets. Originally intended to be implemented next January, the accounting standard had its start date delayed in March until the first day of 2023 so insurers can adopt it simultaneously.