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October 19, 2018

EIOPA published a report analyzing benefits of the IFRS 17 standard on insurance contracts. IFRS 17 was issued by IASB in May 2017, becomes effective from January 01, 2021, and is subject to an explicit endorsement before it becomes applicable in the European Economic Area EEA). Overall, EIOPA found that the expected increases in transparency and comparability of insurers' financial statements through IFRS 17, by providing better insights into insurers' business models, have the potential to strengthen financial stability in EEA. Therefore, EIOPA regards the implementation of IFRS 17 as beneficial for the European public good.

This report presents several aspects of the assessment of IFRS 17, including potential effects on financial stability and the European public good; on product design, supply, and demand of insurance contracts; and on the practical implementation of IFRS 17 in light of the applicable inputs and processes for Solvency II. EIOPA performed the analysis in light of the upcoming implementation of IFRS 17 to foster a better understanding of the implications and potential impact of the standard on European insurance and reinsurance undertakings as well as to provide insights into the future interplay between insurers' financial and prudential reporting. The introduction of IFRS 17 is a long overdue and positive shift of paradigm compared to IFRS 17's predecessor IFRS 4 Insurance Contracts. 

The current, market-consistent, and risk-sensitive measurement of insurance obligations in IFRS 17 better reflects economic reality. This supports efficient risk management and allows stakeholders to gain important insights into the entity's business model, exposures, and performance. With regard to the practical implementation of IFRS 17, the analysis concluded that arguably crucial inputs and processes developed for Solvency II can be used, but may need adaptation to varying degrees. Besides the potential need for adaptation, significant efficiency gains are expected. These efficiency gains are most prevalent in the key building blocks of IFRS 17—that is, cash flows, discount rate, and risk adjustment. Despite the significant improvements to the financial reporting applying IFRS 17, EIOPA has reservations on a few concepts that may affect comparability and relevance of IFRS 17 financial statements and should be duly addressed:

  • Principles of IFRS 17 on determining the applicable discount rate and risk adjustment may have exceeded the appropriate level of allowing for entity-specific inputs and consequently may give rise to significantly different and potentially incomparable results
  • Issues such as level of contracts' aggregation or gains from reinsurance contracts held may lead to further complexity of the financial statements

 

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Keywords: Europe, EU, Insurance, IFRS 17, Insurance Contracts, Solvency II, Reporting, Accounting, EIOPA

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