Insurance companies worldwide have been preparing for the most significant change in global accounting standards in almost two decades. On January 1, 2023 the International Financial Reporting Standard (IFRS) 17 came into effect. Replacing the previous standard, IFRS 4, which was issued in 2004, IFRS 17 aims to standardise insurance accounting globally through a uniform approach in order to improve comparability and increase transparency. This is expected to help those in the industry better understand individual insurers’ financial positions, performance and risk exposure.
The updated standard marks the first time a single IFRS accounting model applies to all types of insurance contracts. In addition, it seeks to align insurance accounting as much as possible with the general IFRS accounting of other industries. Given that a lack of transparency and consistency in financial reports is seen as a major deterrent by global investors, implementation of the new standard is expected to facilitate an increase in capital and finance in the insurance industry. IFRS 17 was developed by the International Accounting Standards Board, an independent body of the IFRS Foundation. As of July 2022, 146 jurisdictions required IFRS for all or most domestic, publicly accountable entities.
While seen as a positive step towards aligning international accounting practices and improving transparency, the introduction of the standard poses potential challenges for insurers in emerging markets.
The transition to IFRS 17 will require many insurance firms to alter their reporting practices. In addition to changes to financial statement presentation, industry analysts expect the new standard to accompany considerable data and IT upgrades, as it requires greater depth and quality of data. These requirements present numerous challenges for emerging markets, as insurers seek to balance financial and human resource demands with the myriad benefits of adoption.
As IFRS 2017 went into effect at the start of 2023, the level of readiness among insurers varied by region, country and company. In a May 2022 report assessing the readiness of MENA countries, US credit ratings agency AM Best stated that despite few companies in the region being fully prepared for implementation, the more mature financial markets demonstrated a greater level of preparedness, particularly with regards to large, market-leading insurers.
Saudi Arabia has been particularly proactive on this front, with sector authorities requiring insurers to comply with a series of preparation and implementation milestones. For example, in December 2018 the Saudi Central Bank launched a four-phase plan for the insurance sector to transition to IFRS 17. In countries with less regulatory oversight and engagement with IFRS 17, the level of preparedness has been less consistent, and the transition has been largely market-driven and led by large insurers, according to the AM Best report.
A similar market-driven approach is seen in Latin America, with many insurers across the continent already implementing IFRS 17 as of late 2022, despite Brazil, Colombia, Mexico and Peru not being full signatories. In some cases, the region’s insurance companies operate internationally in markets where compliance is required. In other instances, insurers either have or are subsidiaries of foreign insurance companies, in which case they have already been IFRS compliant for a number of years.
The IFRS Foundation Trustees created the Emerging Economies Group in 2011 to assist with the adoption and application of IFRS in emerging markets. The group meets quarterly to discuss how members might incrementally implement the standard considering possible resource and financial constraints.