IFRS 18 to Transform Insurance Financial Statements and Disclosure Requirements

The International Accounting Standards Board (IASB) has introduced IFRS 18—Presentation and Disclosure in Financial Statements—which will significantly affect how insurance companies present income and expenses in their financial statements. Effective January 1, 2027, IFRS 18 replaces the current IAS 1 and requires insurers to restructure financial statements, including the introduction of a new subtotal of operating profit. This standard complements IFRS 17 by prescribing an overall income statement format, focusing on transparency and consistency in financial reporting.

Insurance companies must reclassify income and expenses into three categories: operating, investing, and financing. Under IFRS 18, insurance service revenue and insurance service expense are included in the operating category alongside other items that do not fall under investing or financing. Insurers are also required to present operating profit or loss and profit or loss before financing and income tax, which will provide clearer insight into core operational performance.

A key innovation of IFRS 18 is the requirement to disclose management-defined performance measures (MPMs). These are subtotals of income and expenses used by management in public communications outside the financial statements to explain overall financial performance. Insurers will need to evaluate whether existing metrics such as the loss ratio, expense ratio, and combined ratio include MPMs within their components, as IFRS 18 mandates reconciliation of non-GAAP measures to IFRS figures.

IFRS 18 also introduces new principles for aggregation and disaggregation of financial statement items across all primary statements and notes. Specifically, operating expenses must be analyzed and presented on the profit or loss statement by nature, function, or a mixed approach. However, the aggregation policies relating to grouping insurance contracts into portfolios are not expected to change.

To comply with IFRS 18, insurers may need to remap their accounting systems and reassess existing disclosure practices. The standard enhances financial statement transparency, aligns management reporting with regulatory requirements, and improves the clarity of insurer performance metrics. Insurance companies should prepare for extensive operational and IT implications to meet the new reporting standards effectively.