Changes to Accounting Standards Offer Transformational Opportunities for Insurers, with Extended Time to Implement
Big changes are coming to how the insurance industry recognizes and reports out financial performance. But the effects won’t be felt just in the accounting department.
IFRS 17, Insurance Contracts, and its U.S. companion, accounting standard ASU 2018-12, Targeted Improvements to the Accounting for Long-Duration Contracts, are intended to add clarity for investors in the wake of events and financial improprieties such as those that occurred during the global financial crisis of 2008. The new rules promulgated by the accounting standard-setters — the Financial Accounting Standards Board (FASB) in the United States and its international counterpart, the International Accounting Standards Board (IASB) — are aimed specifically at revenue accounting, as well as insurance liabilities and assets. Complying with these standards, however, will not be solely an accounting and finance project; rather, it will be a companywide effort requiring a significant level of transformation and investment in new technology, processes, skill sets and data governance.
These new standards will serve the dual purpose of:
- Aligning principles-based insurance financial reporting around the world by eliminating disparities among financial reporting standards in the United States and other countries (ASU 2018-12)
- Making the insurance accounting standards consistent and ensuring a uniform measurement and presentation approach for all insurance contracts (IFRS 17)
For insurance industry leaders, the realignment provides an opportunity to rethink their operating models and improve the way they develop, position and price life and annuity products, as well as the way they support those products in the marketplace.
More broadly, these changes are significant because, while most companies in other industries have already made their revenue recognition consistent with new risk-based global thinking, the insurance industry, due to its complexity and high level of regulation, has not yet been through that crucible nor reaped the related transformational improvements.
IFRS 17 and ASU 2018-12 are introducing major changes to insurers that are not limited to their accounting and finance departments. These new standards present an excellent opportunity to transform multiple areas of the business, including but not limited to introducing new technologies and tools to enhance processes and enable the organization to better leverage data. And now that insurers have been granted extra time to achieve compliance, they should consider where they can transform foundational aspects of their business and position their organizations to face their future confidently.