IFRS17/Ind AS117 will bring transparency in insurance

Life Insurance.

IRFS17/Ind AS117 is a new accounting standard applicable to the insurance industry and will be implemented across the world. This is part of the global accounting standard IFRS applicable to all industries.

 

What does the new standard mean?

The objective of the new standard is to ensure that an entity provides relevant information that faithfully represents the insurance contracts.

In the current reporting, the premium/contribution received by an insurer is shown as top-line / revenue, even though the underlying profitability of the contracts is completely different. Hence it
is difficult to make out the financial soundness of the business written by the insurer.

Till now, the cash received by an insurer is shown as revenue, irrespective of how much of that money is available for insurer towards claims and expenses.

For example, a major portion of a term assurance is available for claims and expenses. Whereas, only an insignificant proportion is available in a group fund.  

However, both are treated on par in current reporting to recognise revenue. This will no longer be the case. Instead, the money available for the insurer towards meeting the expenditure and claims will only be shown as revenue as per the new standard.

In a unit-linked product, only the expected death claim outgo and expenses will be part of the revenue. The premium component invested towards maturity benefit will no longer be part of the revenue of the insurer. This will result in a huge shift in the way the numbers are reported today.

In the current financial reporting, the emergence of the profit margins is not very transparent. The new standard addresses this issue by making this part of revenue. The profit margins are identified and measured which are called Contractual Service Margin (CSM) in IFRS language.

A part of this CSM pertaining to that year will get released every year as revenue. So, those who write contracts with higher CSM will report better profits.

The new standard will bring a lot of transparency in the financials. The comparability between different companies will now be more meaningful.

 

When is it implemented?

Across the world, this will be implemented effective from January 1, 2021. In India, it will be implemented from April 1, 2020. Since you need comparable figures for the previous year, the numbers need to be worked out one year before i.e. starting from January 1, 2020, across the world and April 1, 2019, in India.

 

How does this impact the business of an insurer?

If the industry moves to compare insurance revenue as per the new standard, this can change the rankings significantly.

If any insurer is monitoring its own performance based on these rankings, the ranking list will change completely and hence the strategy of the insurer has to change accordingly.

Similarly, any sales channel performance based on industry ranking will change.

If an insurer is doing a certain line of business keeping top-line in mind, it will have to change. The insurers need to brainstorm now on where to focus. Should they chase top-line or profit margins? Only top-line without profit margin may not mean much as per new standard.

The very definition of market share will have to change now. And hence any strategy designed around capturing market share, will have to undergo a complete change.

In the end, this will turn out to be a great opportunity for the insurers to review their strategy. They can review their priorities and re-orient their efforts in the right direction. This will ultimately result in better performance by the insurers.

(The writer is an appointed actuary at Bajaj Allianz Life Insurance. Ind AS117 is still in a draft stage and is subject to change.)

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