New insurance accounting standard brings greater comparability for investors and analysts: KPMG

New insurance accounting standard brings greater...

The new insurance contracts accounting standard published today by the International Accounting Standards Board (IASB) brings greater comparability for investors and analysts, according to KPMG International.

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  • Increased transparency about profitability expected
  • Potential for greater volatility of insurers’ financial results and equity
  • Major implementation effort needed

KPMG International welcomes the publication today of the new, long-awaited accounting standard for insurance contracts, IFRS 17. This new, comprehensive accounting model is 20 years in the making and heralds an end to the lack of comparability in the insurance sector. 

Due to take effect on 1 January 2021, the new standard is the result of years of discussion, exposure drafts and debate. Although it has long been recognized that current accounting practice did not offer sufficient comparability between the financial positions and performance of insurers in different jurisdictions and with companies in other industries, the complexity of insurance accounting and variety of products meant that agreeing on a new standard was an extremely challenging task.

Feifei Zhang, Partner, Actuarial Services, KPMG China, says: “IFRS 17, without any doubt, will be a huge step towards the convergence of China GAAP to IFRS, following the previous insurance accounting change in 2009. It will raise fundamental challenges not only to the financial reporting, but also to the operating model, product offering and IT infrastructure of each individual insurance company. At the same time, this is an opportunity to create synergy, improve efficiency, and gain competitive advantage in China’s fast-growing and innovative insurance market.”

In terms of impact for insurers in Hong Kong, James Anderson, Partner, KPMG China, comments: “Today’s confirmation of the effective date and final requirements of IFRS 17 will provide certainty to Hong Kong insurers who have been holding off until now to begin analysing the impact of the standard and designing operational solutions.  Multi-national insurers who plan to leverage head office-led projects should expect the momentum of these projects to rapidly increase and will need to make plans locally to keep pace with head office expectations.  Given the regulator’s risk based capital programme looks likely to have a similar effective date, many in the market will want to develop capabilities that allow them to deal with both sets of changes in an integrated way.  Given the scale of change required over the next four to five years, it makes sense that some insurers are planning to use this as the driver for broader finance, actuarial and system enhancements. “

“We welcome the new standard and congratulate the IASB on this significant milestone after years of endeavor,” said Gary Reader, KPMG’s Global Head of Insurance and a partner with KPMG in the UK. “The greater comparability and greater transparency that IFRS 17 provides should be a clear benefit to analysts and users of financial information.

“For the first time, insurers will be on a level footing internationally. It will open up the ‘black box’ of current insurance accounting. However, these and other potential benefits will only come through the hard work of implementing the new standard, which we expect will raise several challenges for the sector. It will be a tough task for many.”

Key effects of the new standard

The new standard will give users of financial statements a whole new perspective. The ways in which analysts interpret and compare companies internationally will change. Increased transparency about the profitability of new and in-force business will give users more insight into an insurer’s financial health than ever before.

  • Separate presentation of underwriting and finance results will provide added transparency about the sources of profits and quality of earnings.
  • Premium volumes will no longer drive the ‘top line’ as investment components and cash received are no longer considered to be revenue.
  • Accounting for options and guarantees will be more consistent and transparent.

These have the potential to reduce the cost of capital for leading insurers. Greater comparability could facilitate merger and acquisition activity, encourage greater competition for investment capital and help gain the trust of investors.

At the same time, there are likely to be a number of other effects. For example, there could be greater volatility in financial results and equity due to the use of current market discount rates. Insurers may also need to revisit the design of their products and other strategic decisions, such as investment allocation.

Impact on insurers will vary widely

The impact of the new standard will vary significantly between insurance companies.

Joachim Kölschbach, KPMG’s Global IFRS Insurance Leader and a partner with KPMG in Germany, said: “The significance of the impact of the new standard will depend on an insurer’s previous accounting policies – which have differed across jurisdictions and, in some cases, even within jurisdictions. The size of the effect of using current assumptions about future cash flows under the new standard will vary. Economic mismatches between assets and liabilities will become more visible. That may increase the pressure to limit guarantees and adjust investment allocations.

“In short, there will be no ‘one-size-fits-all’ effect for insurers. But every insurer is certain to see impacts on its reported numbers in one way or another. Insurance accounting will never have been so revealing.

“Investors and analysts will be eagerly awaiting the new figures as they begin to emerge in 2021 – but first, they’ll need to understand how the accounting will change and what they can expect.”

Implementation challenges

The implementation date of 1 January 2021 may seem a long way off – but the timescale will be a challenge for many.

Implementing the new standard will require substantial effort, and new or upgraded systems, processes and controls. This task will be even more challenging given the long time horizons over which many insurance companies operate and the legacy systems that many still use.

Mary Trussell, KPMG’s Global Insurance Accounting Change Leader and a partner with KPMG in Canada, commented: “For most insurers, adopting the new standard will have a bigger impact and be a greater challenge than adopting IFRS in the first place. The journey isn’t over yet. The new standard will trigger a second wave of activity by local accounting and actuarial bodies, tax authorities and prudential regulators – everyone will want to know how the new accounting requirements will interact with capital requirements.

“A coordinated response will be essential. Finance, Actuarial and IT functions will need to work closely together like never before. The time to watch and wait is over – the need for planning starts now.

“Forward-looking insurance groups have already started analyzing what the changes mean for them – don’t underestimate the need to evaluate and test new systems and processes, and educate business users and investors. In general, the more jurisdictions an insurer operates in and the more products it offers, the more costly and time consuming implementation will be – but so too is the potential to benefit from the changes.

The more I work with insurers on implementation, the more I see them saying: ‘Why do we do things the way we do? Why don’t we set up centers of competence instead of duplicating activities 20 times over?’ Faced with a change of this magnitude, it becomes a much easier decision to invest to achieve efficiencies. Absent this change, you’d just live with a status quo. For the confident, change is opportunity.”

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About KPMG China

KPMG China operates in 16 cities across China, with around 10,000 partners and staff in Beijing, Beijing Zhongguancun, Chengdu, Chongqing, Foshan, Fuzhou, Guangzhou, Hangzhou, Nanjing, Qingdao, Shanghai, Shenyang, Shenzhen, Tianjin, Xiamen, Hong Kong SAR and Macau SAR. With a single management structure across all these offices, KPMG China can deploy experienced professionals efficiently, wherever our client is located. 

KPMG is a global network of professional services firms providing Audit, Tax and Advisory services. We operate in 152 countries and regions, and have 189,000 people working in member firms around the world. The independent member firms of the KPMG network are affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. Each KPMG firm is a legally distinct and separate entity and describes itself as such.

In 1992, KPMG became the first international accounting network to be granted a joint venture licence in mainland China. KPMG China was also the first among the Big Four in mainland China to convert from a joint venture to a special general partnership, as of 1 August 2012. Additionally, the Hong Kong office can trace its origins to 1945. This early commitment to the China market, together with an unwavering focus on quality, has been the foundation for accumulated industry experience, and is reflected in the Chinese member firm’s appointment by some of China’s most prestigious companies. 

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