New standard poses unique challenges 

Feb. 14, 2022 — CANADIAN insurers are expected to face some unique challenges with implementing the new IFRS-17 global accounting standard next year. 

Under the new standard, insurance contract liabilities will be calculated as the present value of future insurance cash flows with a provision for risk. There will also be a new income statement presentation for insurance contracts, including a revised definition of revenue and additional disclosure requirements. 

Patrick Douville, VP of insurance credit ratings at ratings agency DBRS Morningstar, told Thompson’s that Canada’s system has a more direct link between financial reporting and capital requirements than in other countries. “That adds a bit of a transition challenge for insurers here,” he said. 

“In most other countries, typically, the capital or solvency requirements are disconnected from accounting financial reporting.” 

Many European countries have two sets of books, allowing them to keep those numbers separate. But Canadian companies have always kept that information together and will continue to do so, said Nadja Dreff, the analyst’s senior VP of insurance, global financial institutions group. 

Insurers in Canada will also see implications for their income tax systems that insurers in other countries may not face, she added. 

Income tax is paid based on financial reporting in Canada and so when that system changes there will likely be changes to the amount of taxes payable. 

“Certain adjustments will need to be made on the tax side by the Department of Finance and we’re still waiting to see exactly how that will be implemented,” Ms. Dreff said. 

Canadian insurers with operations in the U.S. will also be faced with added complexities because that country is not adopting the new standard — which could make it difficult to compare results in Canada and the U.S. “Canadian insurers with big operations in the U.S. have been concerned over the development of IFRS-17 and how it will impact their competitiveness in the U.S.,” Mr. Douville said. 

“It’s a big item and we won’t know the exact impact until we see how it all goes,” he said. 

For those watching the financial perform-ance of insurers from the outside, the new standard will require some education as the data will not match historical financial statements, Ms. Dreff noted. 

Some familiar terms will no longer be included in financial statements under IFRS-17. For example, premiums written and earned will be replaced by ‘insurance revenue.’ 

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