The insurance industry is on the verge of a “major overhaul” with the introduction of IFRS 17, the new international accounting standard for insurance contracts.
IFRS 17 was introduced by the International Accounting Standards Board (IASB) in May 2017. It is set to replace the existing IFRS 4 standard from January 2021 in all countries barring the US.
IASB’s new standard is set to increase transparency around the profitability of insurance business by: separating the presentation of underwriting and finance results; no longer considering premium volumes as “top line” investment components; and increasing consistency and transparency around accounting for options and guarantees.
How else could IFRS 17 impact the global insurance industry?
Fitch Ratings has forecast a potential temporary increase in the cost of capital for insurers, contrary to a major aim of IFRS 17 to reduce cost of capital. Fitch attributes this possible increase to unfamiliarity with the new system, and says investors will need time to get familiar with the new standard, get used to the new accounts and to understand their impact on analytical metrics. Over time, as investors gain trust in IFRS 17, opacity premium is likely to fall back towards, and ultimately perhaps below the pre-IFRS 17 level.
“At Fitch, we do not think IFRS 17 will have a significant impact on insurance ratings,” said Harish Gohil, managing director, Fitch Ratings. “This is because the economic substance of an insurer’s balance sheets will not change. In fact, IFRS 17 should mean a better reflection of economics of business, with more consistency and comparability.”
IFRS 17 remains subject to a formal process of review. A number of jurisdictions have expressed concern about the new standard, especially around the potential volatility of accounting results. One thing’s for sure, according to Gohil, which is that: “Implementation of IFRS 17 is likely to be a major and costly challenge for insurers.”
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