Australian insurers will have to replace legacy computer systems as a new global insurance contracts accounting standard takes effect in the next decade.

After 12 years’ development, the International Accounting Standards Board’s insurance contracts project will publish the final standard – IFRS 17 Insurance Contracts – next March.

Phasing-in is expected to start in 2019, with implementation possibly as early as 2022.

Deloitte Global Insurance IFRS Leader Francesco Nagari says insurers’ accounting systems face a significant transition.

“Nobody has really started implementing changes because they are waiting for the final standard due in March next year,” he told insuranceNEWS.com.au.

“There won’t be many places in the world that won’t face considerable transformation when the standard comes into force.”

Australia has a slight jump on other markets, due to its regulators adopting parts of other measures such as Solvency II.

“There has been plenty of activity building up capital in insurers,” Mr Nagari said. “But there is a lot more to do across many areas to be compliant with the new standard.”

The standard aims to produce transparent accounting systems that display all expected profits from an insurance contract.

It will make insurers measure the difference between the risk-adjusted present value of a contract and expected outflows at the time of signing.

Probability-weighted estimates of cash inflows and outflows from the contract will be accounted for as the insurer delivers the cover.

With careful planning, insurers could benefit strategically, Mr Nagari says.

“But if an insurer wants to do nothing, implementation will be more complex when the standard arrives.”

In 2012 Deloitte estimated the cost of compliance equated to a 1% reduction in return on equity, with Solvency II accounting for 60% of that cost.

“Legacy computer systems will make this harder for insurers and a lot are now looking at their core systems,” Mr Nagari said. “But this is an opportunity to replace these systems as the new standard is introduced, delivering substantial benefits.

“Many insurers have put off replacing their legacy systems, but they cannot put it off any longer if they want to maximise the benefits from complying with the new standard.”

One positive for insurers is that transparency on expected profit from inforce premiums should assist with solvency capital.