At its meeting of February 22, the International Accounting Standards Board (IASB) considered that its project on insurance contracts was sufficiently completed for it to be published before the summer. From May, IFRS 17, better known as “IFRS 4 phase 2”, will complete the regulatory landscape of the insurance sector.
From 1997, the IASC (future IASB) initiated the project of a specific standard for the insurance sector which led to the publication in 2004 of standard IFRS 4. This new standard was not intended to “Revolutionize” the sector, but rather provide the first frame of reference.
Among its main measures, IFRS 4 introduced in particular details on the method to be used to value the elements comprising the assets of the balance sheet (assets only within the framework of IFRS 4). These financial instruments, not intended to be held to maturity, were now to be based on “ fair value ” (or fair value). The fair value implies a valuation according to a basis for estimating the market value or the value in use. While this method was used for the asset, IFRS 4 provided for recognition under local standards for the liability (historical cost).
This asymmetry of valuations in the balance sheet creates imbalances, called " mismatch ", which require making equalization provisions, thus making it difficult to understand financial statements and compare insurance companies.
The IASB continued its work by publishing drafts of the standard in 2010 and 2013 in the form of Exposé-Surveys allowing insurers to stay informed of the orientations taken by the organization.
Faced with diversified accounting practices and the growing complexity of insurance products, it became essential to harmonize international accounting practices, hence the IFRS 4 phase 2, or IFRS 17 project.
Many questions arise regarding the text that will be published in summer 2017. Indeed, the IASB has only released little information on the content of IFRS 17. According to experts, one of the main changes introduced by the text should concern the valuation of insurance commitments.
Indeed, IFRS 17 should impose on insurers the obligation to value their commitments at market value, more appropriate than the historical value. To do this, the liability would be valued based on the present value of future cash flows (benefits discounted at the interest rate) including a risk margin to take into account the uncertainty relating to these flows.
Furthermore, IFRS 17 could introduce the concept of contractual services margin - ( Contractual Service Margin or CSM). The CSM corresponds to the expected profit from the contract portfolio. Recorded as a liability on the balance sheet, this margin will be amortized during the period covered by the contract so that the profits generated are recognized in the income statement over time and according to the service provided by the insurer to the insured.
Insurers are well aware that the implementation of this new regulation will require the launch of major projects. Indeed, the changes introduced by the standard should impact accounting as well as processes and the information system, among others.
By moving towards a market value valuation, insurers fear the “volatility” resulting from imperfect consideration of the economic link between investments and insurance products. Life insurance contracts are a case in point. The principle of discounting is based on the use of an interest rate. The significantly low level of interest rates for several years could potentially imply an increase in the share of liabilities. This would imply significant changes in the financial statements and consequently, an overhaul of the communication of insurance companies with their shareholders.
Pierre THERON, president of the Accounting Commission of the Institute of Actuaries, specifies that "the breakdown of the IASB does not correspond either to the business model or to how life insurance contracts are managed in France" and The risk is that this classification only partially represents the intergenerational pooling of life insurance contracts.
With IFRS 17 coming into force on January 1, 2021, the IASB will place the actuarial model at the heart of insurers' accounting.
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