IFRS 18, formerly IFRS 17, represents a major revolution in the world of insurance accounting. Coming into force on January 1, 2023, this new international standard completely redefines the way insurance companies must account for and present their insurance contracts in their financial statements.
What is IFRS 18 ?
IFRS18 is an international accounting standard that establishes principles for the recognition, measurement, presentation and disclosure of insurance contracts. It replaces the former IFRS 4, which allowed insurers to continue using their national accounting practices, creating a significant disparity in the presentation of financial statements worldwide.
The fundamental principles
The standard introduces a consistent and uniform approach for all insurance contracts. It requires insurers to value their insurance contracts at present value, using up-to-date estimates of future cash flows. This approach provides a better representation of the economic reality of insurance contracts.
The general valuation model comprises three key elements :
- Estimates of future cash flows
- An adjustment to reflect the time value of money
- An explicit margin for non-financial risk
New valuation approaches
IFRS 18 introduces three different approaches to contract valuation:
The General Business Approach (BBA)
This model applies to the majority of contracts
insurance contracts. It requires a detailed assessment of future cash flows and the recognition of a contractual service margin representing unearned profit.
The Variable Fee Approach (VFA)
This method is specifically designed for contracts with direct participation, such as participating life insurance.
Premium Allocation Method (PAA)
A simplified approach for short-duration contracts, generally used for non-life insurance.
Impact on the insurance industry
This new standard is bringing profound changes to the way insurance companies are organized. Insurers will have to modify their information systems, adapt their data collection processes and train their staff to meet the new accounting requirements.
Compliance with IFRS 18 requires significant investment in terms of human and technological resources. Insurers need to put in place new systems capable of handling more complex calculations and producing more detailed information.
Benefits for the industry
Despite the challenges of implementation, IFRS 18 brings significant benefits:
Financial transparency is considerably improved. Investors and analysts can better understand insurers’ financial performance and more easily compare different companies on an international scale.
The standard enables better risk management thanks to a more accurate assessment of insurance commitments. It also facilitates communication with stakeholders by providing more relevant and consistent information.
Conclusion
IFRS 18 represents a fundamental change in insurance contract accounting. Although complex and costly to implement, it will bring greater transparency and comparability to the insurance industry. Insurers who successfully adapt to this new standard will reap significant benefits in terms of the quality of their financial information and investor confidence.
As a specialist consultancy, BHI will support you in your transition to IFRS 18. Our expertise extends from the initial impact analysis to the full compliance of your processes. We adapt your information systems and provide in-depth training for your teams. Our support also includes setting up new accounting processes and optimizing your financial reporting to meet the requirements of the standard.
Our team of experts is ready to guide you through every step of this crucial transition. Contact us today for an initial discussion of your specific needs.
