The new international accounting standard for insurance contracts to be implemented in 2021, IFRS 17, could temporarily increase the cost of capital for European insurers due to investors’ concerns over IFRS restatement effects.
In an audience poll of investors, insurance issuers, bankers and others with an interest in the insurance market at Fitch’s Insurance Roadshow in London, 39% thought IFRS 17 would increase insurers’ cost of capital, only 13% thought it would reduce the cost.
Fitch Ratings said; “We think some generalist investors may be driven away by the challenge of having to get to grips with IFRS 17 and its complicated “day one” restatement effects.”
The IFRS 17 aims to improve consistency and comparability among insurers reporting in different jurisdictions, this is expected to reduce the “opacity premium” that investors often demand for the perceived lack of transparency.
As with other changes in financial reporting, IFRS 17 could create some initial confusion in the investor space as it adjusts to the new analytical metrics.
However, over time, investors will come to grips with and gain trust in the changes, and cost of capital could fall back with less opacity premiums for the sector, and Fitch said “ultimately perhaps below the pre-IFRS 17 level.”
Fitch said current comparability in reporting standards is poor as practices vary significantly between jurisdictions and accounting liabilities are also often based on assumptions that are outdated compared to current economic conditions.
The IFRS 17 is due to replace the existing IFRS 4 standard from 1 January 2021, although industry lobbying may impede its adoption in some jurisdictions, and it won’t be adopted in the U.S.
The rating agency doesn’t expect the new legislation to impact on insurers’ ratings or significantly affect their balance sheets.