Captives urged to prepare for “drastic change” to reporting

Captives reporting under the International Financial Reporting Standard (IFRS) face a “drastic change” in requirements to comply with the advent of IFRS 17, according to Marsh. The broker’s  update notes that captives must put in place material changes to the way they value and report on insurance contracts.

Even those that do not report under IFRS may still be required to perform IFRS 17 valuations for consolidation purposes where their parent company does, it warns Marsh.

The new standard, issued by the International Accounting Standards Board (IASB), aims to harmonise insurers’ approaches and create greater transparency in the sector. It sets out three measurement models to value insurance contracts: The default general measurement model; a premium allocation approach (PAA), which provides a simplified method to measure a group of insurance contracts; and the variable fee approach.

Marsh does not expect captives to use the last of these. Of the two remaining, the PAA is preferable, according to the risk manager, since it “vastly simplifies both the calculations and reporting requirements”.

A captive will qualify for the PAA if it can show the insurance contract has a coverage period of one year or less and that the captive reasonably expects the PAA output would not differ materially from that of the GMM. The broker’s update also summarises the key IFRS 17 principles it says captive managers should look out for.

The new requirements will come into effect from January 2023. As Marsh puts it, “After 20 years in development, the clock is now ticking for insurers to prepare for implementation.”