Analysts at Fitch Ratings have assured that the introduction of IFRS 17 is expected to have a “limited” impact on ratings and no overall changes to its view on capitalisation for most re/insurers.
While IFRS 17 is an important and major accounting change for insurance contracts, in itself it does not change the risk structure of the underlying insurance operations, Fitch said in a new report.
However, it added that in some cases IFRS 17 may reveal new insights that could change its view of insurers’ credit profiles, despite the significant level of existing disclosures and the non-public information already received as part of the rating process.
The introduction of IFRS 17 could also make companies change their strategies and product offerings, which could alter insurers’ risk profile but likely not to an extent that would trigger rating actions.
IFRS 17 introduces a new accounting approach for insurance contracts, replacing IFRS 4, and will be effective for annual reporting periods beginning on or after 1 January 2023.
The standard affects any entity issuing insurance contracts that needs to report according to IFRS standards.
According to Fitch, IFRS 17 will reduce the accounting mismatch between assets and liabilities, and establish a more market-consistent balance sheet.
The rating agency expects the introduction of the ‘contractual service margin’ (CSM) will provide it with a better view on capital, and it expects to consider the CSM as a component of available capital in its Prism FBM.
The CSM represents the profit that a company expects to earn over the contract duration, and is therefore viewed it as having the characteristics of loss-absorbing capital.