Unpacking IFRS 4 Phase 2: New Insurance Contract Standard

in Audit, Financial Services, 05.01.2016

While the publication date of the forthcoming insurance contracts standard, IFRS4 Phase 2, is not yet known, the majority of its requirements related to the building block approach have been tentatively agreed on by the International Accounting Standard Board (IASB), including the detailed and complex presentation and disclosure requirements. The new accounting standard for insurers will represent a significant change for Swiss insurance companies, both in terms of financial results and finance operating models.

Re-shaping primary statements and disclosures

The new requirements will re-shape the primary statements (the statement of profit or loss and other comprehensive income) and change the disclosures in insurers’ financial statements such as:

  • movements in insurance contract assets and liabilities analyzed by building block components, including analysis of new business
  • movements in insurance contract assets and liabilities analyzed between liabilities for remaining coverage and incurred claims
  • inputs used in determining insurance contract revenue
  • an analysis of insurance investment expense

The changes to measurement introduced by IFRS 4 Phase 2 will almost inevitably lead to changes in performance measurement. For life insurers, even so the IASB has not yet discussed how insurance contract revenue for contracts with direct participation features will be determined, insurance contract revenue will be nowhere close to the currently known written premiums. For short duration contracts measured using the premium allocation approach, insurance contract revenue will be similar to earned premiums. However, sources of potential new information are:

  • Information about the drivers of changes in insurance contract assets and liabilities derived from the movement tables
  • Information on the development of the risk margin and contractual service margin including a) a measure for the value added by new business by the contractual service margin recognized at initial recognition and b) the amount and timing for the recognition of future profits (derived from the contractual service margin) arising from existing business

Most of the data required to perform the prospective cash flow calculations and movement analysis is likely to be held in the existing systems. However, they are not typically included in the published IFRS financial statements. Actuaries and accountants will have to work closely together to produce the required information in a reliable and controlled way.

Complex exercise for insurance companies

Significant changes to the data gathered and maintained may be needed by the numerous new presentations and disclosures. As a result, this will be a complex exercise for insurance companies. Given the complexity of the new requirements, it is important for insurers to get an understanding of the level of detail and potential impacts on financial statement reporting, so that the implementation can be planned as efficiently as possible. Additionally, new IT systems can be planned for with greater confidence building in the new requirement.

I hope that KPMG’s illustrative presentation and disclosures in the new report “Opening the black box: Demystifying IFRS 4 Phase 2” will help you develop your understanding of the complexity and consequences of the forthcoming insurance contract standards.



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