A report from Moody’s Investors Service has suggested that IFRS 17’s Contractual Service Margin (CSM) has some loss-absorbing capacity similar to shareholders’ equity, though this will vary among insurers.
IFRS 17, the new insurance reporting standard which took effect in January 2023, introduced the concept of a CSM, a component of the insurance contract balance sheet liability consisting of unearned future profits.
Helena Kingsley-Tomkins, a Vice President and analyst at Moody’s in London, commented, “The CSM will absorb some adverse impacts from changes in actuarial or financial assumptions, which directly eroded equity under the previous IFRS 4 standard.”
She added, “Based on disclosures of how future financial reports may change, we might consider not more than half of the CSM of a typical life insurer as being equivalent to equity.”
IFRS 17 also creates a second new balance sheet liability, the Risk Adjustment (RA), designed to
uplift the insurer’s total liabilities closer to their fair value by taking into account non-financial risks, such as mortality and morbidity risks.
The RA has similarities to reserve margins under IFRS 4, which Moody’s analysts do not currently see as commensurate with equity.
Moody’s suggests that the new standard will change insurers’ reported equity as they will have to alter their profit recognition patterns and measurement of liabilities.
The rating agency notes that life insurers with long-dated contracts will be particularly affected, although recent interest rate increases will mute the impact for some.
It writes, “Given its size and equity-like features, some insurers are proposing to incorporate the CSM within equity when calculating some financial metrics, notably leverage.
“However, we foresee no meaningful impact on insurers’ overall debt capacity and appetite, or on their access to capital markets.”
IFRS 17 has transformed insurance accounting but will leave insurers’ underlying economic position and performance unchanged. Thus, Moody’s reports that there will typically be no direct impact on their creditworthiness.
