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The IASB published its much-anticipated overhaul for insurance accounting, ushering in a major change to how insurers report the risks they take and the promises they make to their customers. The standard aims to offer more transparency into an industry where balance sheets are often compared to a “black box”.

International insurance companies will be subject to sweeping financial reporting requirements for the complex estimates they make, the risks they take, and the payouts they promise to policyholders under a long-awaited accounting standard the IASB published on May 18, 2017.

Two decades in the making, IFRS 17, Insurance Contracts, calls for a fundamental accounting overhaul to an industry whose balance sheets are considered impenetrable to all but the most specialized analysts. The standard goes into effect in 2021, but insurers — an estimated 450 companies with $13 trillion in assets — can adopt the provisions ahead of time.

The standard requires insurance companies to measure their obligations using updated estimates and assumptions, versus locking in information such as risk and morbidity when they write their customer policies. The change is expected to result in more period-to-period earnings swings compared to current accounting.

The new standard allows companies to record profits as they deliver insurance, as opposed to booking them right away. In addition, it aims to force more clarity about profitability from the two key pieces of insurers’ business — the money they make from writing policies and the returns they gets investing customers’ premiums — and will require new information in insurer balance sheets to make the breakdown clearer.

“This is a game changer in a lot of senses”, IASB member Darrel Scott said. “It means you’re going to have consistent accounting for an industry historically seen as difficult to understand, difficult to compare, and difficult to set up against other investment opportunities.”

The new standard applies to all insurance products, including short-term policies such as automobile and theft coverage, but it is expected to have the biggest effect on accounting for long-term policies such as life insurance.

Some describe the change as “massive”.

“This isn’t a fine-tuning sort of a standard, this is a pretty fundamental re-think of how they want insurer liabilities to be calculated”.

The new standard replaces the limited guidance in IFRS 4, Insurance Contracts, which the IASB issued in 2004 as a temporary set of guidelines until the standard-setter wrote a comprehensive new standard. IFRS 4 laid out some disclosure requirements but largely grandfathered existing local GAAP. As a result, insurers based in South Africa, for example, can follow very different accounting practices from insurance companies in Belgium. The lack of comparability has long frustrated investors and analysts.

Standard & Poor’s Financial Services LLC said it welcomed the accounting changes because they will make it easier to rate insurers.

“It’s going to be very helpful for people who try to divine the workings of long-term insurers”, said primary credit analyst Mark Nicholson.

The accounting standard may also trigger changes to insurance company business models, Nicholson said. More transparency about risks and profits could make it less desirable to issue some policies. Regulators and consumer groups also could use the information to challenge business models if profits are considered excessive.

Insurers expect a long, costly process to update their data collection systems to capture the new information required by the standard. Insurance Europe, a group representing the continent’s insurance companies, described the changes as “substantial”. It also expressed concerns about employing the standard in practice, and said there was only “limited” testing and evaluation of the standard by the IASB.

“Indeed, key aspects of the new requirements have only recently been developed, and major parts of the final text have only been seen by very few insurers. Therefore, it has not been possible for the industry to make a proper assessment until now”, Olav Jones, deputy director general of Insurance Europe, said in a statement.

The day-to-day impact on insurers will be different, however, depending on where they are based. Because there is no single, unifying IFRS standard for insurance accounting, different countries have different financial reporting requirements. Companies based in Australia and Canada, for example, may not see such dramatic changes because they already use current value measurement techniques to value their liabilities, Scott said.

The IASB’s journey to releasing the insurance accounting standard was a long one. The board’s predecessor, the International Accounting Standards Committee, started an examination of insurance accounting in 1997. In the years between the 2004 issuance of IFRS 4 and the ultimate publication of the new accounting standard, several obstacles stymied the IASB, including the 2008 financial crisis and a failed attempt to write a converged standard for U.S. GAAP with the FASB.

The complexity of the insurance industry itself also bogged down the IASB’s work. Insurers write policies that are subject to uncertain outcomes and with profits that may not be realized for many years into the future. In addition, some products are often deliberately complex for tax, regulatory, or competitive purposes.

In 2015, the IASB said it was close to the finish line. In 2016, the board repeated the promise. On May 18, the standard-setter’s website led with the headline, “IFRS 17 is here!”

For more information on insurance industry reporting, contact Karsten Hatch at khatch@larsco.com.