The International Financial Reporting Standard (IFRS) 17 will have mixed results for reinsurers in different sectors, according to a new report from Deutsche Bank.
The report suggested that Property & Casualty (P&C) business was likely to be the least impacted segment due to IFRS 17’s inclusion of the simplified premium allocation approach (PAA), which is similar to the current prevalent accounting regime.
Deutsche Bank believes the vast majority of shorter-tail P&C re/insurance contracts will qualify for this model, which should substantially reduce the operational and financial burden of implementing IFRS 17, although disclosure will fundamentally differ from current practice in several areas.
For example, the ‘onerous contracts’ test may result in losses on certain P&C products to be recognised up front, which may lead to some changes in product design and pricing as companies try to avoid a drag on their IFRS P&L.
The new standard will also have the potential to severely distort the P&L of companies that rely heavily on reinsurance or retrocession, as it looks at primary contracts and reinsurance separately.
Additionally, companies will need to split incurred claims reserves between a best estimate liability and a risk adjustment, which should put an end to the opaque practice of implicit reserve margins, but may also cause some companies to release excess prudence through reserve releases in the next few years.
IFRS 17 will also require that incurred claims be discounted apart from claims expected to settle within a year, which may result in a slight acceleration of profits relative to the current standard.
On the life reinsurance front, IFRS 17 should overcome the inability of the current IFRS regime to show value creation of life re business, Deutsche Bank noted, allowing for a better insight into the expected profitability of the life re book.
Deutsche Bank’s report follows analysis from Guy Carpenter, who said that IFRS 17 will require reinsurers to rethink their approach to structuring contracts, and SAS, who said that the new standard will radically change reinsurers’ business models.
Insurance Europe also recently called for IFRS 17 to be reopened and delayed by two years in order to address a number of underlying issues identified by the European Financial Reporting Advisory Group (EFRAG).