The International Financial Reporting Standards 17 (IFRS 17) marks a significant shift in how international insurance companies report their financial statements. Since IFRS 17 became effective on January 1, 2023, it is imperative for all insurers—including U.S.-based companies with operations in countries using IFRS—to achieve both initial and ongoing compliance. Accurate reporting and measurement of financial performance under this standard are essential from the outset to help avoid regulatory scrutiny or a misleading comparison with industry peers.
The first financial reports applying IFRS 17 were released between January and May 2024, depending on the specific reporting requirements (regulatory, internal group reporting, etc.). To help you navigate this complex landscape, we’ve compiled a checklist focusing on the application of the IFRS 17 standard for Canadian insurance companies.
Before diving into the specifics, remember that every insurer’s journey is unique and will depend on your company’s structure:
- Pure Canadian insurer: Focus solely on Canadian regulatory requirements.
- International branch of a U.S. insurer: Navigate the interplay between U.S Statutory Accounting Principles (U.S. SAP) and/or U.S. Generally Accepted Accounting Principles (U.S GAAP) plus IFRS.
- International branch or subsidiary of a global insurer: Apply IFRS 17 alongside any specific accounting standard applicable to the parent company.
Achieving Compliance
Achieving compliance builds on mastering IFRS 17’s general principles for insurance contracts, while also adhering to the additional regulatory compliance requirements. It’s a two-pronged approach—embracing the international framework while making sure your practices comply with domestic regulations. Your checklist to help you achieve compliance on IFRS 17’s general principles: • Consider the principles differing from IFRS 4. A choice between IFRS 17 approaches,1 granularity, specific IFRS 17 components,2 transition approach for IFRS 17 opening balance sheet assessment, sensitivity analyses, etc. • Make your accounting policy choices. For a flawless IFRS 17 implementation, you must make optimal choices in your accounting policies to accurately reflect financial realities while remaining operationally feasible. • Prepare your methodological documentation. Explain your policy choices for significant areas of judgment and management of estimates. • Consider modifications to contracts/riders. This will help ensure a smooth integration of policies under the new accounting standard. | Your checklist to help you achieve compliance for reporting requirements in localities where IFRS 17 is taking effect: • Assess your compliance with the local regulators, e.g., OSFI for Canada or BMA for Bermuda, specific capital requirements under IFRS 17. This can include estimating the Minimum Capital Test (MCT)3 or Branch Adequacy of Assets Test (BAAT).4 It also includes completing the framework implementation and assessing its implications for your solvency calculations. • Internalize the yield curve requirements outlined by the local regulator. • Update the annual actuarial report (AAR). This takes on a new form under IFRS 17. Integrate the revised disclosure requirements. • Internalize the disclosure changes. Specifically address those related to the reserves roll-forward, the risk adjustment, and other information required to be shared. • Prepare the upcoming audits. Prioritize transparency, consistency, and clear communication of accounting judgments for your stakeholders and auditors. • Maintain transparent communication with the local regulator. This will help ease regulatory governance and compliance throughout the entire process. |
IFRS 17 Financial Statements Prerequisites
While complying with IFRS 17 involves presenting accurate information, verifying the proper implementation of its core principles is equally crucial to help ensure reliable and accurate disclosures.
Below is a list of questions to consider to help with a smooth transition:
- Have you finalized the portfolio definition and the level of aggregation based on a justified accounting approach and your available data?
- Have you finalized the development of tools for calculating the liabilities for incurred claims (LIC) and liability for remaining coverage (LRC)?
- Have you defined your risk adjustment (RA) methodology and tested it against the standard requirements?
- Have you confirmed that your IFRS 17 revenue recognition pattern is in line with the guidance and your business/underwriting plan?
- Have you documented your understanding of the impacts of IFRS 4 to IFRS 17 through a bridge analysis?
- Have you drafted your financial statement disclosures and made sure a proper audit trail between all information is reported there?
- Have you updated the narratives to reflect the modified key processes? Have you redesigned and effectively implemented internal controls for the new processes? Are they documented properly?
- Have you defined and implemented the new key performance indicators (KPIs)? Are they appropriately monitored? Are you planning to use those KPIs for business measurement (especially when expanding or launching a new line of business)?
Equipping Yourself for Success: Beyond Compliance
Having built the foundation of compliance, let’s now construct a more efficient and effective financial closing process.
What should you do next?
- Improve and test your models and processes to help ensure correct implementation before reporting deadlines.
- Conduct a structured analysis of your closing to improve internal controls. Increase the controls based on the initial closings performed under IFRS 17, refine the closing process, validate data flows, and make sure pro forma financial statements are generated accurately and efficiently.
What should you plan?
- Train your personnel. Invest in training sessions and equip your board members and key personnel (accounting and actuarial teams) with a deep understanding of IFRS 17.
- Educate your stakeholders. Provide bridges and comparison analyses that will help them understand your financial performance.
- Conduct sensitivity analyses to assess the impact of different assumptions and scenarios on the new IFRS 17 accounting metrics, deepening your understanding of their behavior.
- Review the KPIs you have previously implemented to refine your business decision processes.
- Assess the business impact and bridge the gap between understanding the standard and translating it into concrete adjustments for your business model.
- Schedule a post-implementation engagement to work on your areas for improvement after the first-time application phase. This will ease your next audits by helping you adjust the documentation or choices made.
If you have any questions or need assistance with IFRS, please reach out to a professional at Forvis Mazars.
- 1 BBA, PAA, and VFA.
- 2 Such as LRC and LIC, PVFCF, RA and CSM, non-distinct investment components.
- 3Minimum Capital Test – Guideline (2024), OSFI.
- 4Regulatory Capital and Internal Capital Targets, OSFI.