Canadian insurers appear to be in a ‘pretty good place’ when it comes to implementation of the upcoming IFRS 17 insurance accounting standard but Canada’s federal solvency regulator recognizes the change is complex and will be challenging.
“Accounting systems are getting more complex,” said Darrell Leadbetter, senior director of insurance and pension with the Office of the Superintendent of Financial Institutions (OSFI). “The main reason we’re looking for assurance, and a level of insurance, is… that OSFI is a relatively unique regulator in that we rely on financial statements as part of our basis for our supervisory work and our capital standards.
“So, we need to have confidence that those numbers and those things are right. Accounting has only gotten more complex over time and IFRS 17… implementation [is] not going to make that less complex.”
IFRS 17 takes effect on Jan. 1, 2023. Earlier this year, OSFI released the final minimum capital test 2023 guideline, reporting forms and instructions.
Progress reports show the vast majority of Canadian insurers (P&C and life) are ready to transition, Leadbetter said during KPMG’s 2022 Insurance Conference on Nov. 17 in Toronto. According to the latest progress reports on IFRS transition readiness provided to conference attendees:
86% of insurers are reporting progress online
94% of insurers have calculated their capital positions
92% have completed pro forma (financial projections)
89% have filed transition readiness tests (TRTs)
“Many of the ones that haven’t filed are in runoff and/or subsidiaries or integrated into larger institutions,” Leadbetter said during a regulatory fireside chat at the conference. “The industry seems to be in a pretty good place, at least from a self-reporting perspective.
“We are noticing that a number of institutions — and we encourage this — have used the TRT multiple times as a way…to test their systems,” Leadbetter reported. “We’re going to keep the TRT open so that people can continue to use that going forward.”
Moderator Amit Chalam, a partner and national service line leader for governance, risk and compliance services with KPMG in Canada, told Canadian Underwriter Wednesday that OSFI requested all insurance companies to submit TRTs by Sept. 29, 2022.
This included completing select schedules (of the quarterly return and core financial statements, plus the whole quarterly capital return) as of and for the quarter ending March 31, 2022 as well as the Dec. 31, 2021 comparative balance sheet only. To do this, insurance companies used IFRS 17 and IFRS 9 as the basis using the processes and systems that the insurers intend to use when they go live.
“The regulator’s comments indicates that most insurance companies have advanced to a stage where they were able to accomplish the filing requirements, and I would see this as a great positive for the entire industry.”
Leadbetter said OSFI has heard about individual challenges, but knows “there’s a lot of people working hard on this and trying to get over the finish line.”
In general, accounting systems are becoming more complex and IFRS 17 will add to that complexity, Leadbetter said.
“And then you layer in things like acquisitions, the use of legacy systems and things like that…” he said. “When you’re dealing with technology and complexity, simple mistakes cascade.”
OSFI also expects insurers to practice ‘capital conservation’ due to market volatility in the current macroeconomic environment. “We’re encouraging all insurers to be conservative and prudent and think through the risks of the environment; take a look at the capital position and where they need to be in the next number of quarters,” Leadbetter said.
“We don’t really know how [IFRS 17] is going to play out, we don’t know how the metrics will be read,” he added. “So, when you’re looking at internal targets and things like that, be very conservative in that until you get some history of IFRS 17, and get a better sense of where the positioning of the macroeconomic environment [is].”