Hans Hoogervorst, Chairman of IASB, spoke at the IFRS Foundation's conference in Amsterdam about the role of accounting standards in fostering financial stability. He particularly focused on the new international insurance contracts standard IFRS 17 and the ongoing work toward making financial reports a better communication tool between companies and investors.
The IASB Chair said that IFRS Standards are intended to bring transparency, accountability, and efficiency to the financial markets worldwide, also highlighting the contribution of IFRS 17 toward financial stability. In this context, he explained the key features of IFRS 17, which will require current valuation of all insurance liabilities based on uniform principles. IFRS 17 will bring clear principles for revenue and profit recognition, making the insurance industry better comparable to other financial companies such as banks and asset managers. While discussing the contribution of IFRS 17 to financial stability, he elaborated on the following benefits of this standard and added that this standard will provide much more insight on the risks to which an insurance company is exposed:
The insurance liability will be properly measured and regularly updated, giving much better information. The build-up of unsustainable equity positions will become visible much more quickly.
The cost of options and guarantees will be regularly updated and fully reflected in the financial statements.
Companies will also provide updated information on the risk margin they hold for their insurance products.
The losses embedded in onerous groups of contracts will have to be recognized immediately. Contracts can be grouped, but in a way that ensures that the losses embedded in onerous groups of contracts will not be averaged with groups of profitable contracts.
IFRS 17 ends up-front profit taking and revenue will only be recognized as the service is provided.
IFRS 17 will also make it easier for investors to judge the performance of an insurance company. Currently, many investors base their analysis on Solvency II, which is almost entirely focused on the balance sheet and makes no distinction between profits earned in the past and profits to be earned in the future. IFRS 17, however, is expected to result in better information about profitability trends.
Keywords: IASB, International, IFRS 17, Insurance, Financial Stability, Insurance Contract
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