Analysts at AM Best have reported wide variation in the impact of the transition to IFRS 17 on insurers and reinsurers, with the effects being far more pronounced in the life segment than in non-life.
For re/insurers that report under International Financial Reporting Standards (IFRS), the transition to the new accounting system at the beginning of 2023 impacted large parts of their external financial reporting and metrics, the rating agency notes.
Looking at early estimates of a few major selected measures under the new standard, AM Best concludes that the range of outcomes is wide for the life segment and biased to the downside.
However, for non-life insurers, the impact is considerably narrower and biased to the upside, it added.
Focussing on the impact to shareholders’ equity in particular, analysts note that movements are heavily influenced by the profile of profit over the duration of an insurer’s policies under IFRS 4, the relationship of that profile to the new profile under IFRS 17, and finally the overall maturity of the policies on an insurer’s balance sheet.
Under IFRS 17 there is no profit impact on shareholders’ equity at inception of a policy, but instead, a profit measure—the contractual service margin (CSM)—is assessed explicitly, deferred as a liability, and then earned into profit over the life of the policy.
By contrast, under IFRS 4, profit recognition patterns varied significantly according to the type of product and the accounting policies used by the re/insurer, and usually included a profit on inception.
“Practice under IFRS 17 will become clearer over time but disclosure so far suggests some movement of participating fund capital from equity under IFRS 4 to CSM under IFRS 17,” AM Best said, adding that its balance sheet strength assessments will “no doubt evolve under IFRS 17.”
In terms of expected returns on equity in the life segment, AM Best believes they will come closer to an achieved return on funds invested under the new system.
Previously, stated internal rates of return on life new business contracts have usually not been visibly related to RoEs calculated from audited financial reporting, but analysts suggest that changes to the treatment of participating fund capital will have a separate, and often positive, impact on RoEs over the transition to IFRS 17.
