New Insurance Standard - AASB 17


While the introduction of the new standard has been delayed, Boards and management need to understand both the accounting and the operational impacts and the time for action is now..

Scott Hadfield Partner, Capital Markets and Accounting Advisory Services
loading-player

Playback of this video is not currently available

Since filming this video, the IASB has delayed the implementation of Standard IFRS17 by one year, (i.e. effective as from 1st January 2022). While this gives companies additional time to prepare for the implementation, in our experience, many companies still have a lot to do so it would be unwise to pause your implementation plans. In Australia, the AASB are yet to release any official comments on how this applies locally.   

New Insurance Standard - AASB 17

November Edition, Many Hats: Audit & Risk Insights

Which standards does it replace?

AASB 17 is the first truly international accounting standard for insurance. It will replace the three standards that we have today, which cover definitions of insurance (AASB 4), general insurance (AASB 1023) and life insurance (AASB 1038).

The Australian Accounting Standards Board (AASB) is currently looking at how the new standard will apply in the not-for-profit and public sectors.  For example, some entities that are currently applying the Provisions standard to their business, but who are actually issuing insurance contracts, will need to change to this new standard. What is still under debate is whether the standard applies to funds that are more like a social benefit than insurance, such as the National Disability Insurance Scheme.

 

When does it apply?

The standard applies for annual reporting periods beginning on or after 1 January 2022, which means 30 June 2023 for June reporters. This may sound like a long way off, but due to the potential magnitude of the impact on companies that write insurance, it's important to start planning for it now.

 

What are the key elements?

There are basically three methods of accounting under the new standard, with the applicable method determined by the nature of the insurance contracts issued. These new methods are:

  1. a main method of accounting, which applies to longer term coverage contracts such as life insurance

  2. a simplified premium allocation approach, which applies to eligible contracts such as those that are 1 year or less (eg. motor and health policies), and

  3. a method which applies to profit participation schemes, such as the traditional with-profits business issued by life insurers.

 

What are the key impacts?

While companies are still modelling the detailed impacts of the new standard, we are seeing more granularity in the accounting and some economic mismatches, both of which will lead to more volatility in reported results. The standard will also bring more operational complexity, resulting in a need for systems with more detailed functionality.

In terms of the impact on capital requirements and tax, these are currently unknown as APRA and the ATO have yet to issue any guidance on the topic.

 

What are the complexities?

The new standard contains many concepts insurers in Australia will be familiar with, including estimating future cash flows, discounting to present value and risk adjustments to reflect the uncertainty in the cash flows for non-financial risks. However, there are a number of issues emerging, with the four key ones listed below:

  • Determining the appropriate level of aggregation is challenging - the new standard requires more granular portfolios so that potentially onerous contracts can be recognised more quickly, which in turn will bring additional volatility.
  • Reinsurance accounting is different to the current standards and there are concerns about the inherent mismatches that it creates.
  • Overall there is an increase in operational complexity; for example, some premiums will be recognised on a cash basis whereas today most systems in Australia are set up on an accruals basis.
  • Determining who in the Australian public sector the new standard actually applies to is challenging, particularly for those lifetime care or unfunded schemes that are seen as more akin to a social benefit.

For companies that require system changes, time is already running out.

How prepared are Australian companies?

In Europe and the UK companies have already undertaken much work to comply with the new insurance standard. In Australia, however, we have been relatively slow to start. The key to implementation is deciding the level of system development needed to comply with this standard: will it be an overlay system above the legacy systems, or is this an opportunity for a wholesale redesign, as we have seen in some cases in Europe?

Implementing the new insurance standard will be a complex project, one that boards and management should not underestimate. Understanding the accounting impact on your business is a good first step, but getting a clear picture of the operational impact is paramount. For companies that require system changes, time is already running out.


November Edition, Many Hats: Audit & Risk Insights

Contact us

Scott Hadfield

Partner, PwC Australia

Tel: +61 2 8266 1977

Follow PwC Australia