While the introduction of IFRS 17 in 2022 will transform insurance accounting, it won’t change insurers’ underlying economic position, according to analysts at Moody’s Investors Service.
Furthermore, while the new accounting standard is unlikely to affect Moody’s view of their creditworthiness, it may make their performance more transparent and shape their strategic decisions.
The standard, set to come into force in January 2022, is designed to improve visibility of earnings and make insurance companies’ performance more comparable.
IFRS 17 was originally scheduled for implementation in 2021 but was delayed by a year following criticism by financial bodies, as well as insurers and reinsurers.
For some insurers, Moody’s analysts say IFRS 17 will meaningfully alter reported equity and/or profit recognition patterns.
“As we already look beyond reported figures to focus on the underlying economic picture, we don’t expect IFRS 17 to alter our view of insurers’ creditworthiness,” said Helena Kingsley-Tomkins, AVP-Analyst at Moody’s.”
The financial impact will largely depend on insurers’ business mix and current accounting standards.
Annuity writers and traditional life insurers with exposure to policies carrying high guaranteed rates of return, particularly in Germany, Korea and Taiwan, which are reserved using historic discount rates, are most likely to report a decline in equity.
IFRS 17 is unlikely to affect the regulatory capital of insurers operating under regimes that tailor capital requirements to underlying risks, such as Solvency II in Europe, say analysts.
But in other markets, it could expose weak balance sheets and may trigger capital enhancement measures. Moody’s says this has already occurred in the Korean life insurance sector.
In a few exceptional cases, Moody’s says an unexpected or outsized drop in reported equity relative to peers would increase leverage, potentially harming investor perception, and constraining financial flexibility.
