IFRS 17: Have you considered the impact on customers?

21 January 2020

Most of us have some form of insurance. Life, cars, gadgets, body parts, you name it, it can be covered. But, do you understand how insurance works? And do you know that it’s changing?

I am not talking about what globalisation or technologies such as blockchain or AI are doing to it - which can be overwhelming. I am talking about how insurance accounting is changing and it's arguably the biggest change ever.

Here is a drumroll announcement - a new accounting standard is coming which will be applicable from 1 January 2022: IFRS 17. According to the International Accounting Standards Board (IASB), around 450 listed insurance companies worldwide, with a combined $13 trillion in assets, will be impacted. The European Financial Reporting Advisory Group (EFRAG) has assessed the cost implications for insurers and the total one-off costs reported by the 11 respondents to an extensive study is €1.5 billion - an average of €136 million per insurer.

So yes, it's a pretty big deal. But while a lot of work has been done to understand the impact of this accounting standard on insurers, no one seems to be talking about its impact on customers.

For example:

- The standard introduces the requirement to identify and disclose onerous contracts, i.e. those that are loss-making at inception. This may result in price hikes, or in such products being discontinued.

- The requirements of the standard define various cost allocation decisions that may impact the pricing of products by allocating additional costs to products.

- The requirements to comply with a simplified accounting approach known as the premium allocation approach (PAA) may result in duration and terms and conditions of contracts being modified for strategic reasons.

Furthermore, the majority of insurers will be spending a significant amount of money on new infrastructure required to comply with IFRS 17. This includes new systems, storage capabilities and ongoing maintenance costs, as well as upskilling and the additional costs of meeting comprehensive requirements every year. EFRAG has conducted a study and notes that any additional implementation costs arising from IFRS 17 will ultimately be borne by customers or shareholders.

Insurance companies will also need to work with intermediaries to ensure the requirements are met for business sold through them and, as a consequence, brokers may need to change processes and upgrade systems. This could impact the speed and nature of the interactions that policyholders have with their intermediaries and insurers.

Another likely impact of all the above changes will be the introduction of new products or product features that may not currently exist. There may also be more transparency in the way tariffs are calculated that can benefit the policyholder.

In summary, the insurance industry is going through its biggest change in decades and this has the potential to impact customers directly or indirectly.

Have you considered the customer impact?

Maneet  Kathpal

Maneet Kathpal | Manager, PwC United Kingdom
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