The new Insurance Contracts Standard will result in major changes for the insurance industry. Insurers should prepare for the implementation work that is likely to be long and complex.
IFRS 9 for insurance undertakings
IFRS 9 Financial Instruments and the upcoming insurance contracts Standard IFRS 17 (that will replace IFRS 4 Insurance Contracts) are both expected to result in major accounting changes for most insurers and entities issuing financial instruments with discretionary participating features. The parallel application of these standards was always seen by the IASB as a desirable outcome to avoid the application of IFRS 9 classification and measurement criteria to financial assets without at the same time applying the new insurance standard to associated liabilities.
IFRS 9 is effective for annual periods beginning on or after 1 January 2018. And as such, IFRS 17 Insurance Contacts will have a later implementation date than that of IFRS 9.
Concerns were raised in relation to the ‘gap’ in effective dates, such as:
To address preparers’ concerns, while ensuring that IFRS 9 is implemented on a timely basis, the IASB amended IFRS 4 to provide two voluntary approaches to mitigate the issues arising for insurers as a result of the effective date of IFRS 9 falling before that of the upcoming insurance contracts Standard.
The amendments introduce two approaches: an overlay approach and a deferral approach. The amended Standard:
The amendments to IFRS 4 supplement existing options in the Standard that can already be used to address the temporary volatility.