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Massive changes made to insurance accounting

Last Updated Tuesday, July 3, 2018 11:34:34 AM

Johannesburg, 03 July 2018 – Insurance accounting has undergone a major revamp. The new Insurance Contracts Standard (IFRS 17 – Insurance Contracts) will impact insurance companies in South Africa including those offering motor vehicle insurance, life insurance and medical schemes. The manner in which these companies recognise, measure, present and disclose insurance contracts and reinsurance contracts will change.

It has been over a year now since IFRS 17 was published. It replaces an interim standard (IFRS 4 – Insurance Contracts) which has been in place for over a decade.  IFRS 4 allowed companies to use a wide variety of accounting practices for insurance contracts, reflecting national accounting requirements and variations of those requirements. The differences in the accounting treatment across jurisdictions and products made it difficult for investors and analysts to understand and compare financial results of insurance companies. IFRS 17 addresses these inconsistencies and thus enhancing comparability in addition to making the financial statements of insurance companies more useful. Globally around 450 listed insurers using International Financial Reporting Standards (IFRSs) will be affected by this Standard.

Bongeka Nodada, SAICA Project Director: Financial Reporting, says: “Insurance companies should be considering the impact of the new requirements on its financial performance (including budgetary implications e.g. reviews of the IT systems), key leverage ratios, the contracting process, debt covenants, employee performance incentives (applicable where performance incentives are based on the IFRS numbers) and human resource capacity to implement the new requirements. The governing bodies of insurance companies and in particular the audit committees should be asking the tough questions now to understand the effect of IFRS 17 and assess the company’s readiness to adopt the new Standard. In its assessment, insurance companies should consider the extent to which the impact of IFRS could be passed onto the policyholder.

Nodada notes that IFRS 17 is applicable to insurance contracts that fall within the scope of IFRS 17. An insurance contract is a contract under which the insurance company accepts significant insurance risk from a policyholder by agreeing to compensate the policyholder if a specified uncertain event affects the policyholder. Examples of insurance contracts include those contracts that will compensate a policyholder against theft or damage (for example, damages made to the policyholder’s motor vehicle), professional liability insurance, insurance against civil liability or legal expenses, life insurance, disability and medical insurance and some product warranties.

Nodada adds that IFRS 17 also provides detailed guidance on the measurement of insurance contracts such that it is clear what considerations an insurance companies should take into account in determining the IFRS insurance liability or asset.  Insurance companies will be required to recognise and measure groups of insurance contracts at a risk-adjusted present value of the future cash flows (the fulfilment cash flows) that incorporates all of the available information about the fulfilment cash flows in a way that is consistent with observable market information; plus (if this value is a liability) or minus (if this value is an asset) an amount representing the unearned profit in the group of contracts (the contractual service margin).

An insurance company is required to recognise the profit from a group of insurance contracts over the period it provides insurance coverage, and as it is released from risk. If a group of contracts is or becomes loss-making, an entity recognises the loss immediately.

Furthermore, an insurance company may apply a simplified measurement approach (the premium allocation approach) to some insurance contracts. The simplified measurement approach allows an insurance company to measure the amount relating to the remaining service by allocating the premium over the coverage period.

IFRS 17 will require insurance companies to disclose information to enable users of financial statements (existing and potential investors, lenders, creditors) to assess the effect that contracts within the scope of IFRS 17 have on the financial position, financial performance and cash flows of a company.

IFRS 17 is effective for annual periods beginning on or after 1 January 2021 and early application is permitted. More information on IFRS 17 can be found on

The South African Institute of Chartered Accountants (SAICA), South Africa’s pre-eminent accountancy body, is widely recognised as one of the world’s leading accounting institutes. The Institute provides a wide range of support services to more than 46 000 members and associates who are chartered accountants [CAs(SA)], as well as AGAs(SA) and ATs(SA), who hold positions as CEOs, MDs, board directors, business owners, chief financial officers, auditors and leaders in every sphere of commerce and industry, and who play a significant role in the nation’s highly dynamic business sector and economic development.

SAICA Media Contact
Kulani Chauke
Communication Coordinator: Corporate
SAICA Brand Division
011 479 0698

Subject Matter Specialist:
Bongeka Nodada
Project Director: Financial Reporting
SAICA Standards Division
Tel: 011 621 6892