Global financial services ratings agency, Fitch Ratings, has said that the overhaul of insurance accounting as a result of the latest International Financial Reporting Standards, IFRS 17, is unlikely to have a direct impact on insurers’ ratings.
Fitch says that insurers’ ratings most likely won’t be affected by the implementation of IFRS 17, which is scheduled to take effect from the beginning of 2021, as the “economic substance of their balance sheets will not change.”
However, were adjustments to the way insurance companies recognise profits to make certain products either more or less attractive to the insurer, which would result in a change to its business model, credit profiles could be indirectly affected in the medium term, warns Fitch.
“The transition will present challenges as insurers will need to recognise each group of contracts by applying IFRS 17, and derecognise the existing balances as if IFRS 17 had always applied. The net difference between these two measurements must be recognised in equity and may vary depending on the transition method selected.
“Issuers that recognise profits earlier under current accounting practices will take a hit to equity and recognise larger profits over the remaining life of the contracts,” said Fitch.
“Conversely, if profit recognition is currently more conservative than under IFRS 17, the transition adjustment will boost equity and result in lower profits on the contracts over their remaining life, all else being equal,” continued the ratings agency.
The application of IFRS 17 will be extremely complex and will need to include the efforts and expertise of both the actuarial and the finance functions within the business.
“As a result, it is likely to result in significant implementation costs for insurers, both financially and in terms of management time and effort, as was the case with the implementation of Solvency II in Europe,” said Fitch.
