Riding the wave of
The global insurance industry is facing a wave of transformative accounting
changes which will affect many aspects of business reporting. Life reinsurers
must act now to survive the storm, says Cordelia Davis at EY Bermuda.
Across the globe, one can hardly sit through an accounting
update session without robust discussion about the
unprecedented changes in insurance accounting. As a
long-duration/life reinsurer, one will most likely have to
contend with IFRS 17: Insurance Contracts, or Accounting Standard
Update 2018-12: Targeted Improvements to the Accounting for Long
Duration Contracts (LDTI), or for some, both.
IFRS 17 is scheduled to be applied for annual periods beginning on
or after January 1, 2022; LDTI is effective for public business entities on
January 1, 2021 (on July 17, 2019 the FASB tentatively decided to delay
the effective dates of ASU 2018-12 by one additional year for public
business entities and stagger the effective date for all other entities).
These standards have been referred to as “transformative”, “significant”,
“a comprehensive overhaul”, etc, due to the impact the implementation
of these accounting standards can have on all aspects of the business.
These range from operations to systems, administration, governance,
and certainly, the financial results of a company. This is because both
standards seek to significantly shift the measurement and financial
reporting of insurance contracts.
In the discussion that follows, we will explore some of the biggest
challenges reinsurers will have to contend with as they navigate
implementing insurance accounting changes.
The challenge: it’s all about the data
Data requirements stemming from the new accounting rules will
significantly impact how reinsurance companies manage their data
today. Various aspects of the new accounting rules will put pressure
on reinsurers who might not have historically collected, retained
or managed the data needed to comply with the new insurance
Under today’s practice, most reinsurers rely on ceding companies
to provide the administrative policy data (eg, claims, billing, etc) to
prepare their financial statements. Due to new requirements, reinsurers
can expect to face challenges around data quality and availability.
The challenges around data availability will come to bear
depending on certain accounting decisions (eg, transition approach in
the year of adoption). For example, one of the key changes introduced
under LDTI is market risk benefit (MRB), which represents a
new classification for certain benefit features that are required to
be measured at fair value at the transition date under a full retrospective
approach. In order to determine the fair value, reinsurers need to
maximise the use of relevant observable data and information for
applicable assumptions as of the contract inception date. As a result,
reinsurers might face situations whereby the necessary data may not
be available, or historical data from contract inception will need to
be re-collected/requested from the ceding companies.
It’s expected that additional data will need to be stored locally or
made easily accessible to generate disclosure reports on a consistent
and timely basis as part of implementing the new accounting rules.
Reinsurers can expect to spend significant time and effort
communicating and coordinating with ceding companies to fulfil the
data needs stemming from the new insurance accounting standards.
Judgement around the unit of account
The two standards require similar decisions around how companies
apply each respective standard. From an IFRS 17 perspective, one such
decision is how the portfolio of contracts is defined and grouped. From
an LDTI perspective, this is understood as what level of aggregation
shall be considered for measurement. Either way, both represent the
universal concept around the unit of account.
While IFRS 17 is more prescriptive in how one determines
the portfolio and groups of contracts, the LDTI guidance is not
as prescriptive, other than prohibiting companies from grouping