IFRS 17: Insurers should plan for strategic challenges now

Beyond the balance sheet, you will really benefit if you can track your revenue by line of business (personal lines, commercial lines, life and benefits). Depending on the company, different parties may be responsible for preparing the balance sheet. For small privately-held businesses, the balance sheet might be prepared by the owner or by a company bookkeeper. For mid-size private firms, they might be prepared internally and then looked over by an external accountant.

• Their cost will be depreciated on the financial statements over their useful lives.
• If we take Progressive’s float ($6.5 billion), debt ($1.3 billion), and shareholder’s equity ($6.1 billion) we get $13.9 billion — notice this is about equal to Progressive’s $14.3 billion in investments.
• Apple’s total liabilities increased, total equity decreased, and the combination of the two reconcile to the company’s total assets.
• Upgrading to a paid membership gives you access to our extensive collection of plug-and-play Templates designed to power your performance—as well as CFI’s full course catalog and accredited Certification Programs.

Each project’s costs are accumulated separately and will be transferred to the appropriate property, plant, or equipment account when the asset is placed into service. I feel sorry, I truly do, for all the small agencies that do not know these facts. I have not found many, if any, larger agencies that do not know these facts. Smaller agencies depend more heavily on their associations, their software and free advice boards as to what they should be doing. Many purchase agency management software and assume it does everything they need.

Definition of Payment for Insurance

In addition, we articulate the rationale for investing in insurance balance sheets as permanent sources of capital. Consolidation will continue across sectors, but accessible targets that are both mature and profitable are becoming increasingly sparse. Many available nonpublic entities are either very small or very large, especially in the technology space, and PE investors face increasing competition from other forms of capital. SPAC deal momentum also increased the competition, with several multibillion-dollar announcements since the third quarter of 2020. With recent moves to take insurers private, sophisticated PE investors are buying blocks of policies and assuming those risks—and billions in assets often come with that risk.

• Generally, sales growth, whether rapid or slow, dictates a larger asset base—higher levels of inventory, receivables, and fixed assets (plant, property, and equipment).
• If they advise that they know accounting for agencies, be sure they know independent insurance agency accounting.
• Each category consists of several smaller accounts that break down the specifics of a company’s finances.
• Hopefully this provides a simplistic and clear understanding of the different pieces of an insurer’s balance sheet.
• These accounts vary widely by industry, and the same terms can have different implications depending on the nature of the business.
• An independent agency cannot be sold without a balance sheet because without a quality balance sheet, it is impossible to determine if the agency has clear title to its assets.

The problem is especially bad with small agencies, although quite a few medium to large agencies have faulty balance sheets, and even their accountants do not know what a proper independent agency balance sheet looks like. Some agencies operate for decades with no balance sheets, or poor ones, and then they go to sell and learn, painfully, that they have a serious problem. An agency cannot legitimately be sold without consideration of a quality balance sheet. A bank statement is often used by parties outside of a company to gauge the company’s health. Banks, lenders, and other institutions may calculate financial ratios off of the balance sheet balances to gauge how much risk a company carries, how liquid its assets are, and how likely the company will remain solvent.

Includes non-AP obligations that are due within one year’s time or within one operating cycle for the company (whichever is longest). Notes payable may also have a long-term version, which includes notes with a maturity of more than one year. Accounts Payables, or AP, is the amount a company owes suppliers for items or services purchased on credit. As the company pays off its AP, it decreases along with an equal amount decrease to the cash account. Significantly, new ways of financial reporting will involve managing businesses to a new set of KPIs.

How the Balance Sheet is Structured

We briefly go through commonly found line items under Current Assets, Long-Term Assets, Current Liabilities, Long-term Liabilities, and Equity. On the right side, the balance sheet outlines the company’s liabilities and shareholders’ equity. Then, when the expense is incurred, the prepaid expense account is reduced by the amount of the expense, and the expense is recognized on the company’s income statement in the period when it was incurred. As noted above, prepaid expenses are payments made for goods and services that a company intends to pay for in advance but will incur sometime in the future. Examples of prepaid expenses include insurance, rent, leases, interest, and taxes. Valuations of assets and liabilities under IFRS 17 will be based on market value rather than on historic or book value, meaning balance sheets could fluctuate more with market conditions.

A company’s property insurance, liability insurance, business interruption insurance, etc. often covers a one-year period with the cost (insurance premiums) paid in advance. The one-year period for the insurance rarely coincides with the company’s accounting year. Therefore, the insurance payments will likely involve more than one annual financial statement and many interim financial statements. Prepaid expenses aren’t included in the income statement per generally accepted accounting principles (GAAP). In particular, the GAAP matching principle requires accrual accounting, which stipulates that revenue and expenses must be reported in the same period as incurred no matter when cash or money exchanges hands.

Publicly owned U.S. insurance companies, like companies in any other type of business, report to the SEC using GAAP. Accounting principles and practices outside the U.S. differ from both GAAP and SAP. Accounting is a system of recording, analyzing and reporting an organization’s financial status. In the United States, all corporate accounting and reporting is governed by a common set of standards, known as generally accepted accounting principles, or GAAP, established by the independent Financial Accounting Standards Board (FASB). Any amount remaining (or exceeding) is added to (deducted from) retained earnings.

Stocks Mentioned

As a result, the competitive landscape for specialty brokers is becoming more dynamic and fragmented, with a strong tier of up-and-coming brokers likely to pursue aggressive growth in the next few years, particularly in London. Recent major transactions highlighted investors’ continued interest in the distribution space. In addition, the number of managing general agents (MGAs) and the players that support them, such as fronting carriers, continues to grow. Those with scale and sophisticated capabilities in operations and analytics look for opportunities to “go upstream” and attract capital to co-invest in balance-sheet risk-taking—for instance, by setting up their own Lloyd’s syndicate. In the long run, this new model of pairing distributors’ data-and-analytics insights with high-quality alternative capital could disrupt a significant portion of the specialty market focused on lower-premium, higher-volume products.

Doing so will allow internal teams to more quickly and smoothly take over tasks that may initially require external resources. Adequate preparation and regular reinforcement will further help teams effectively manage new KPIs under IFRS 17. Balance sheets should also be compared with those of other businesses in the same industry since different industries have unique approaches to financing. Click here to extend your session to continue reading our licensed content, if not, you will be automatically logged off.

The levels of balance sheet reserves to be maintained are regulated by law. Although the balance sheet is an invaluable piece of information for investors and analysts, there are some drawbacks. Because it is static, many financial ratios draw on data included in both the balance sheet and the more dynamic income statement and statement of cash flows to paint a fuller picture of what’s going on with a company’s business. For this reason, a balance alone may not paint the full picture of a company’s financial health. The term balance sheet refers to a financial statement that reports a company’s assets, liabilities, and shareholder equity at a specific point in time. Balance sheets provide the basis for computing rates of return for investors and evaluating a company’s capital structure.

It cannot give a sense of the trends playing out over a longer period on its own. For this reason, the balance sheet should be compared with those of previous periods. Insurance companies are likely to focus on some combination of these themes based on their ownership type and specific owners. Even within the broader classifications of insurers, however, individual insurers will have unique situations—and thus unique expectations. Below we offer a simplified overview of how four broad insurance models could respond to organizational goals and investor expectations by using their strengths to differentiate themselves in the industry. The value pools and sources of creation across the life insurance industry are not homogenous.

Why Is a Balance Sheet Important?

Today, many players in US and European markets are applying insights from their 2020 performance to emerge stronger amid increased consolidation, digitization, and specialization, as well as persistently low interest rates. Insurance expense is the amount that a company pays to get an insurance contract and any additional premium payments. The payment made by the company is listed as an expense for the accounting period. If the insurance is used to cover production and operation, then the insurance expense can be listed in an overhead cost pool and divided into each unit produced during the period.

The Securities and Exchange Commission (SEC) requires companies that file financial statements with them to follow GAAP or IFRS depending on whether they are U.S. issuers or foreign private issuers. Over time, the FASB has evaluated and to some extent aligned their standards with International Financial Reporting Standards (IFRS) through a joint project or have decided to in other cases to not align them. The 12-month rule allows taxpayers to deduct prepaid expenses in the current year if the asset does not go beyond 12 months from the date of the payment or the end of the tax year following the year in which the payment was made. The implementation timeline for IFRS 17 is short, uncertain, and may even be extended. Skillful management can keep costs down even if implementation timelines are extended. Organizations should be agile during the transition, monitoring and responding promptly to possible changes to the IFRS 17 deadline.

Insurance: The Basics

An independent agency cannot be sold without a balance sheet because without a quality balance sheet, it is impossible to determine if the agency has clear title to its assets. Simplifying an insurer’s balance sheetThe toughest part of understanding insurance companies and their finances is wrapping your head around new terminology. Things like prepaid reinsurance premiums, premiums receivable, and deferred acquisition costs seem calculated to confuse the average investor. Insurers backed by private capital and alternative-asset-management players.

Higher future expected profitability will reduce IFRS 17 shareholder’s equity,¹ meaning that insurers need to make a trade-off between post-implementation profitability and balance-sheet strength. December 4, 2019Insurers subject to the International Financial Reporting Standards (IFRS) are preparing to implement IFRS 17, which will replace IFRS 4 in January 2022. As a result, the entire organization beyond the finance function will be affected by wave integrations the new standard’s far-reaching strategic implications. Insurers will need to review their strategies to ensure they are adapted to the post–Solvency II world. Areas of focus should include the product and investment portfolio, asset and liability management (ALM), key performance indicators (KPIs), and strategy. The long-term asset construction in progress accumulates a company’s costs of constructing new buildings, additions, equipment, etc.

Balance Sheet Outline

A company will be able to quickly assess whether it has borrowed too much money, whether the assets it owns are not liquid enough, or whether it has enough cash on hand to meet current demands. If a company takes out a five-year, $4,000 loan from a bank, its assets (specifically, the cash account) will increase by $4,000. Its liabilities (specifically, the long-term debt account) will also increase by $4,000, balancing the two sides of the equation. If the company takes $8,000 from investors, its assets will increase by that amount, as will its shareholder equity. All revenues the company generates in excess of its expenses will go into the shareholder equity account.