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IFRS 17: a new accounting standard for insurers

IFRS stands for International Financial Reporting Standards. Since 2002, the IFRS body has been aiming to standardise the presentation of accounting data exchanged at the international level. One of the main changes to be introduced by the IFRS 17 standard in 2021 concerns the valuation of insurance liabilities. This will require insurers to make major changes and will be difficult to implement before the deadline.

IFRS 17: a new accounting standard for insurers

IFRS 17 on Insurance Contracts was published on 18 May 2017 by the IASB (International Accounting Standards Board), which is the body in charge of drafting international accounting standards. Subject to adoption by the European Union, it will enter into force in 2021, when it will replace the current IFRS 4.

Why has IFRS 17 been produced?Until now, insurers have applied the IFRS 4 standard that allows them to use national accounting standards, which has led to a proliferation of different approaches in different countries and has made it difficult for insurers to compare the financial performance of different operators in the sector. In order to harmonise international accounting practices and facilitate comparisons between insurers, IFRS 17 requires the consistent recognition of all short-term and long-term insurance and reinsurance contracts, and of investment contracts with discretionary investment characteristics.IFRS 17 will apply to open years from 1st January 2021.

However, its application in the European Union will depend on the outcome of the approval process. The major principles established by IFRS 17One of the main changes to be introduced by the new standard concerns the recognition of the valuation of insurance contracts: this will be based on a forward-looking assessment of insurers’ liabilities. In this way, bonds corresponding to insurance policies will be recognised at their present value (i.e. at market value) and no longer at the historical cost. To this end, the value of insurance policies will be assessed according to the cash flows they will generate in the future (benefits), while including a risk margin to take account of the uncertainty relating to these flows. 

IFRS 17 also introduces the contractual service margin (CSM) concept. This represents the profit not acquired by the insurer, which will be released over time according to the service rendered by the insurer to the policyholder.What this will change for insurers in practice By assessing the value of policies at their market value, IFRS 17 differs quite significantly from the accounting methods currently in use.

It is likely to lead to major changes among insurers, in terms of their accounting practices but also concerning their financial and actuarial functions, as well as their information systems.Insurers will also need to ensure that their procedures and financial statements, which will change significantly, conform to the requirements of the standard. They must also adapt their financial communication and internal management practices in order to incorporate new performance indicators and explain the impact of IFRS 17 on their earnings and capital.  Sources: IFRS press release of 18 May 2017 – FocusIFRS.com – Les Echos 

"For several years now, the European Union and France have been exerting regulatory pressure on financial institutions, and on insurers in particular"

Interview with Antoine Jolivel, Public Affairs Manager at Crédit Agricole Assurances

What position have CAA and the Group adopted in response to this regulatory pressure?

Antoine Jolivel: Regulation can be seen in a positive light as it creates fair competition among the different operators on the market and puts the customer’s interests at the heart of the commercial relationship. However, it must be adapted to the economic environment that it is designed to regulate and must attain the objectives in question in an efficient and proportionate manner. For several years now, the European Union and France have been exerting regulatory pressure on financial institutions, and on insurers in particular. This pressure has intensified, especially with the entry into force of Solvency 2 last year. A new wave of regulations governing distribution rules will soon enter into force and insurers are keeping a close eye on developments. There are three major regulations: the Insurance Distribution Directive (IDD), PRIIPs and MiFID 2 (which, as a bank insurer, affects us indirectly). In response to this pressure, CAA and the Group have striven to ensure that their interests are taken into consideration properly throughout the entire preparatory process for these regulations, and that they remain proportionate to their objectives.

PaHow can CAA make its voice heard by the different regulators?

Antoine Jolivel: The regulatory landscape changed dramatically in the years following the economic and financial crisis of 2008. In just a few years, Europe became a key regulatory centre, especially with the establishment of the European Insurance and Occupational Pensions Authority (EIOPA) in Frankfurt in 2011 and the implementation of Solvency 2. At the same time, the development of the international dimension, with the rise in power of the International Association of Insurance Supervisors (IAIS), has completed the development of this new landscape. In response to these changes, CAA can now make its voice heard both directly and indirectly. Directly, by making contact with the different regulatory bodies and participating in consultations at the French, European and international levels, and indirectly, through the efforts of financial market bodies such as the French Insurance Federation (FFA) and the French Banking Federation (FBF). Both approaches are complementary and cover all regulatory projects to make sure that the positions adopted by CAA are defended properly. CAA is represented in all of the FFA’s Commissions and Working Parties to ensure that the company’s specificities are fully taken into account in the development of the market’s positions. 

Today, the institutions participating in the different processes involved in the drafting of regulations are clearly identified and can be used as channels through which CAA and market bodies can make their voices heard. The main challenge for public affairs, in collaboration with business and legal experts and in association with the CASA Public Affairs Division, is to carry out a practical assessment of the operational consequences of regulatory projects and, in this way, to defend CAA’s specific position.

Which of these new regulations could have the biggest impact on the Group’s business?

Antoine Jolivel: As mentioned previously, the new wave of regulations concerning distribution rules and comprising IDD, PRIIPs and MiFID 2 has captured the Crédit Agricole Group’s attention. There will be a significant impact, particularly on the training of advisors. The key issue will be to implement the mandatory 15-hour training requirement within a limited time frame.  At the French level, the 2018 Government Finance Bill includes the highly publicised Flat Tax on income from capital. Potentially, this measure could have a substantial impact on the Group’s business even if the main tax benefits are maintained: exemption of policies under €150,000 and maintenance of tax breaks after 8 years. At the European level, the review of Solvency 2 is also a priority, with the key issue being to improve certain aspects of the regulation, such as the calibration of capital requirements for long-term assets and shares.

Accounting standards such as IFRS 17 and IFRS 9 also need to be monitored very closely given the extent of their possible impact on our accounts. Lastly, at the international level, we are keeping a close watch on the development of a new standard on capital requirements (ICS). Therefore, Public Affairs are monitoring this issue closely, as it could potentially affect the management of our risks and the associated capital requirements.

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