Be sceptical when auditing insurers for IFRS 17, says UK regulator
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Firms should apply “professional scepticism” when performing audit inspections of insurers for their work on IFRS 17, the Financial Reporting Council has said.
Given the significance of expert judgment in applying the actuarial aspects of IFRS 17, the FRC has encouraged actuaries performing audit work “to ensure that professional scepticism is clearly evidenced in the actuarial working papers or actuarial reports within the audit file”.
The principles-based nature of IFRS 17 leaves insurers “considerable scope to apply expert judgment when developing methodologies and assumptions”, the FRC said in a letter to auditors on 9 December.
For instance, the FRC found companies have significant scope for interpretation and judgment when calculating the contractual service margin.
“Audit firms highlighted many such areas, for example in the determination of coverage units, the weighting of insurance services and determining which assumptions are locked-in when adjusting the CSM,” is said.
The CSM represents an unearned profit over the lifetime of an insurance contract.
Due to the level of data complexity associated with IFRS 17, the FRC encouraged auditors to “clearly set out in their audit files” the divisions of responsibility for checking data sets between the core audit team and actuarial specialists.
The audit file should contain sufficient evidence to support the conclusions drawn, said the regulator.
Auditors use in-house tools to validate CSM
Some audit firms intend to use their own tools to confirm whether insurers are modelling the CSM appropriately.
Insurers have made significant systems developments to calculate their future unearned profits. These are either built internally or purchased from external vendors.
The FRC noted it was important that auditors can demonstrate “how they have gained comfort that the software is operating as intended”.
The findings of the letter were based on information requested by the FRC in December 2021 from the UK’s eight largest auditors.
Do you find your auditor too sceptical with your IFRS 17 implementation?
