The implementation of the International Accounting Standards Board (IASB)'s new IFRS 17 reporting standard could cost between £1bn – £2bn in the UK, according to Prudential CFO Nic Nicandrou.
In a piece written by Nicandrou in trade body Insurance Europe’s annual report, he questioned whether IFRS 17 would be worth its considerable cost. He said that the change that IFRS 17 will bring about will likely be as fundamental as the introduction of Solvency II. However, he said that the notion that IFRS 17 amounts to Solvency II with a few adjustments is incorrect.
“Some observers misdiagnose that — as the IFRS 17 requirements have certain similarities with aspects of the Solvency II approach — the hard work has already been done and therefore the effort and associated cost of the new standard will be modest,” he wrote.
"In practice, extensive re-engineering of data storage and actuarial and finance systems to generate all the necessary information will be required. We are talking about fundamental operational as well as technical accounting change," he continued.
Nicandro, who is chairman of the European Insurance CFO Forum, said that that the implementation of IFRS 17 will involve “eye-watering” costs, adding that it was "hard to see how anyone" can conclude that the benefits of the standard will justify the investment and effort. He listed a number of reasons including that financial results have yet to be prepared on the new basis; current investors in the insurance sector have not been “meaningfully consulted”; auditors will have to navigate a "huge learning curve"; and the impact on insurance products and insurers' investment behaviour is unknown.
Nicandrou said that insurers should raise concerns in the lead up to the January 2021 start date as they develop their own implementation plans, with an opportunity to do so as part of a testing programme being undertaken by the European Financial Reporting Advisory Group.
"A core aspect to this programme will be assessing the costs and benefits of the change and, ultimately, whether the standard is both appropriate and in the public good,” he noted.
Nicandrou's comments follow the publication of the new reporting standard by the IASB last month. Insurers across the globe will be required to use IFRS 17 for accounting periods from 1 January 2021.
The new rules require companies to recognise profit when insurance services are delivered, rather than when premium payments are received, as well as to provide information about insurance contract profits that are expected to be recognised in the future.
Insurance companies are also expected to continue incurring costs in applying IFRS 17 on an ongoing basis. These will mainly arise from gathering the necessary information to update assumptions for measuring insurance contracts on a current basis.