2023 is a very important year for the insurance industry: The complex IFRS 17 framework was set in force on 1st January 2023 and replaces the interim standard IFRS 4 Phase I, which has been in force since 2005. The new standard regulates the principles for identification, recognition, measurement, presentation and disclosures for insurance contracts.
Alma is going to accompany the implementation of IFRS 17 by the insurance industry. Therefore, Alma will publish from time to time brief and well understandable articles on IFRS 17.
Part 2: Why IFRS 17?
The short answer is: it’s for analysts.
Each country has its own local accounting regulations. These regulations are based on different principles. These principles differ, for example, in prudence principles, a strong focus on creditor protection or the investor need for a “true and fair view/fair presentation”.
This obviously leads to different presentations of results and also to different results themselves from insurance companies. And thus also to a situation in which transparency and comparability are highly challenging.
The aim was to create transparency and comparability. In a first step – it was only envisaged as an interim solution from the beginning – this was to be done with IFRS 4. In this phase, the local financial statements were used as a basis and certain adjustments were made. However, the basic problem of lack of transparency and comparability essentially remained. Since it was fundamentally based on local financial statements, which follow fundamentally different accounting principles.
IFRS 17 breaks away from local financial statements and their individual and different principles. They no longer serve as a basis. Separate financial statements must be prepared. Uniform principles are applied to these, the main purpose of which is to increase transparency and comparability:
- Comparability within a company operating in different countries: These companies will use consistent principles to value their insurance contracts. Comparability of insurance products or country regions becomes easier.
- comparability between the companies: Revenue, for example, reflects the insurance cover offered, excluding the deposit components.