Australian life insurers are unprepared for two new major accounting standards that will shake up the way profit is reported, a KPMG survey shows.
The global survey of 160 life and health insurers, and reinsurers included Australian companies.
It gauged the firms' level of preparedness for International Financial Reporting Standard 17 (Insurance Contracts) and International Financial Reporting Standard 9 (Financial Instruments).
From the 1 January 2021 reporting period, the standards will apply to the life and general sector.
Commenting on the local results, KPMG Australia insurance partner Scott Guse said Australian firms are slightly behind their global counterparts when it comes to commencing and implementing their transition to the requirements of IFRS 17.
IFRS 17 sets our principles for measuring and disclosing insurance contracts. It leads to different ways of valuing insurance contracts and assets, therefore making profit and loss more volatile, he said.
IFRS 9 will add to the volatility in insurers' profit and loss reporting as it allows more choices to be made in recording valuation gains or losses on investment portfolios.
In a sense, Guse said the two standards are inter-related.
"This is why insurers have been given the option to delay IFRS 9 in order to align it with the implementation of IFRS 17 - whereas for banks, it is already in force.
"Given the significant investment holdings by insurers, which are subject to the new requirements of IFRS 9, it is not surprising that three-quarters of insurers globally have taken advantage of this deferral option," he said.
The report warned insurers that implementing the two standards will need a "myriad of technical and operational decisions."
Larger companies are ahead of the game compared to smaller companies. Nearly half (45%) of the large insurers have teams of 50 or more working on the transition.
"It is also worrying that so many smaller insurers are yet to even reach the project start-up phase. They are likely to face very significant challenges indeed if they do not begin to come to grips with the task in the coming few months," the report said.
Hiring skilled people and securing the necessary budget have been major hurdles to make IFRS 17 and IFRS 9 operational.