The role of actuaries in IFRS 17

The complex IFRS 17 framework for accounting for insurance contracts was published in May 2017 and is expected to come into force on 1 January 2023. It replaces the interim standard IFRS 4, which has been in force since 2005. IFRS 17 is mandatory for all listed insurance companies. It sets out the principles for the recognition, measurement, presentation and disclosure of insurance contracts within the scope of the standard. However, as a principles-based standard, it leaves considerable scope for interpretation and inconsistency in companies’ assumptions and methodologies regarding elements such as the illiquidity premium, amortisation of the contractual service margin (CSM), transition treatment, risk adjustments, applicability of the premium allocation approach (PAA) and the other comprehensive income (OCI) approach. Actuaries will play a central role in preparing for IFRS 17 and should be required to have a defined statutory role in (a) the preparation and (b) the audit of financial statements under IFRS 17.

The measurement of liabilities under IFRS 17 involves methods and assumptions similar to those required for calculating technical provisions under the Solvency II rules. Despite technical differences, many companies will seek to harmonise principles, definitions and calculation techniques. The existing Solvency II regulatory framework could provide a good starting point for a statutory role for actuaries working on IFRS 17. Solvency II currently requires the actuarial function to coordinate and oversee the calculation of technical provisions for the calculation of capital requirements and the determination of the SCR, as well as to perform additional tasks in risk management, underwriting and reinsurance. The results of the IFRS 17 accounting process are expected to be based on assumptions similar to those used in Solvency II calculations.

In practice, auditors commonly engage actuarial experts when auditing insurers to examine insurance companies’ liabilities. ISA 540 and ISA 620 set appropriate standards for auditing valuations based on professional judgement. The audit of insurance liabilities is an essential part of the audit of insurance companies. Collaboration between auditors and actuaries should therefore also play a crucial role in the audit of insurance companies under IFRS 17.