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What Makes IFRS 17 so Complicated? An Introduction to its Credit Implications for the Canadian Insurance Sector

The implementation of the new accounting standard for insurance contracts, better known as the International Financial Reporting Standard 17 (IFRS 17 or the Standard) is the most significant change to insurance accounting in the last 20 years. IFRS 17 introduces accounting practices that are, in many cases, different from the existing practices, requiring dedicated financial and human resources in order to establish new accounting policies and to implement operational and financial reporting changes.

Key highlights include:

-- The new insurance accounting standard, IFRS 17, is not expected to affect the financial strength ratings assigned to Canadian insurance companies when it comes into force on January 1, 2023.

-- Extensive changes to IT systems, processes, and tools are integral components of IFRS 17 implementation and have the potential to increase operational risk in the short to medium term, unless properly managed and mitigated.

-- In Canada, the introduction of IFRS 17 also affects solvency capital requirements and income taxation rules, which adds an additional layer of complexity.

“For those who are not involved in its implementation, attaining a level of understanding of the Standard's principles and their interdependencies quickly becomes an overwhelming and very technical exercise,” said Nadja Dreff, Senior Vice President, Insurance. In addition to changes to IT systems, processes, and tools, IFRS 17 introduces potential variations in how insurance companies interpret the Standard as well as changes to key profit and volume metrics.