The actuary and IFRS 17

The business of insurance is unique in that the primary cost of the product is unknown at the time of sale, and it may take many years before that cost is certain. In most businesses, accountants and business professionals can apply accounting rules to determine business results and compare to similar entities. In contrast, the insurance industry requires the application of actuarial science to determine results, and then to merge those results with accounting rules in order to produce a meaningful financial statement. Thus, the determination of financial results for any insurance business can be very complicated and contain additional uncertainty due to changing estimates of financial results, potential adjustments or policies written in the past. Past results can be uncertain whether the business is long duration, such as selling life insurance contracts that last for the policyholders’ lifetimes, or short duration with a long tail, such as selling workers compensation insurance to employers obligated to pay lifetime medical costs for employees suffering permanent injury. 

For a business as complex as insurance, accounting rules should never be expected to provide a perfect picture of results. This is not to say accounting rules do not allow users of financial statements to compare results of similar entities – they indeed do. However, with stagnant accounting rules, accountants and actuaries can become complacent and forget that the true picture of results is more complex than any set of rules could portray. 

One important consideration any potential change in insurance accounting standards is that there should be a general improvement of the actuarial soundness of the results. While this consideration is certainly subject to judgment and debate, the actuarial soundness discussion should be important to all actuarial practitioners as it is relevant even when the accounting standard in question is not directly applicable to their work. In the United States, the International Financial Reporting Standard (IFRS) is the third most important insurance accounting standard after Statutory Accounting (stat) and Generally Accepted Accounting Principles (GAAP). This article may be relevant to actuaries providing estimates under stat and GAAP due to the following: