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The implementation of IFRS 17 has been a significant step towards increasing transparency and comparability in insurers’ financial statements, according to a new report by ratings agency Fitch Ratings.
The “Key Learnings from the First Full Reporting Cycle Under IFRS 17” report, released this week said that although IFRS 17, effective since 1 January 2023, has not achieved full comparability, the financial statements of insurers are becoming more aligned, with further improvements expected in upcoming reporting cycles.
“While IFRS 17 has not changed its view on insurers’ profitability, the
CSM has enhanced the predictability of insurers’ profitability."
According to the report, this had made some changes to investment portfolios – as well as affecting Life and Non-Life insurers equally.
“While IFRS 17 has not fundamentally changed its view on insurers’ underlying profitability, the introduction of the contractual service margin (CSM) has significantly enhanced the predictability of insurers’ profitability,” said Fitch. “The CSM, reflecting future unearned profit, is recognised over time, allowing clearer identification of growth opportunities and vulnerabilities.”
Despite these insights, IFRS 17 has had limited influence on insurers’ strategic plans and capital management policies of European and Canadian insurers, which remain driven by regulatory solvency metrics.
However, some insurers in Asia-Pacific regions, including South Korea and Taiwan, are reconsidering their product offerings due to IFRS 17.
In October last year, Insurance Investor reported on the many changes being brought about in conjunction with IFRS 17, and how it was changing several regimes around the world, especially with changes to stress-testing. Alongside this new enthusiasm of regulators to present demanding stress-testing scenarios has been a series of major changes to accounting standards driven by the International Accounting Standards Board (IASB).
“IFRS has been in formulation for a long time, but the changes are now beginning to bite, imposing more demands on the financial and technical resources of insurers,” the article said. “After nearly a decade of arguments between insurers and the IASB, from January 2023 IFRS17, and its cousin IFRS9, imposed new rules requiring the profit on long-term policies to be accounted for evenly across their lifetime.
At that time, many insurers were still not happy with the IFRS regime, especially as it imposes a more relaxed regime on banks.
Elsewhere, Fitch’s rival rating agency AM Best reported in August last year that traditional profitability metrics such as loss and expense ratios could change significantly under IFRS 17, particularly for reinsurers.
In its “IFRS 17 - Economic View Adds Complexity to Reinsurers' Financial Statements” report, the rating agency said the ongoing shift in financial reporting to IFRS 17 was now fully underway at the time, which represented “a significant accounting change that has necessitated segmentation of performance analysis in the reinsurance market”.
This was also seen in specific countries: A report from Fitch Ratings said that South Korean insurers were likely to maintain relatively sound earnings performances in the near term because of their continued focus on protection-type long-term insurance business but saw more volatility.
Fitch said in its new report that the life and the non-life sectors have been broadly equally affected by the introduction of IFRS 17 in terms of reported financials.
“In non-life, volatility is mainly apparent with respect to the combined ratios, as IFRS 17 incorporates the time value of money and the uncertainty of future cash flows,” said the report. “We see this approach as useful for assessing economic profitability.”
"We see the accounting standard as having limited to no influence on
most insurers’ business plans and capital management policies."
Most of the insurers’ combined ratios improved following the introduction of IFRS 17, because of the one-off effect of discounting, it added.
“Fitch considers the undiscounted combined ratio in addition to the discounted one in its analysis,” the report said. “This is to ensure that any potential decline in an insurer’s underlying underwriting profitability is not covered by stronger investment performance.”
One of the key takeaways from the report, however, was that Fitch believed IFRS 17 was so far not affecting insurers' planning greatly.
“Based on conversations with IFRS 17-reporting insurers, we see the accounting standard as having limited to no influence on most insurers’ strategic business plans and capital management policies in the short to medium term,” it said.
