Comparing insurers’ IFRS 17 results will be difficult initially due to differences between companies’ approaches under the accounting standard, which took effect for most insurers on 1 January 2023, Fitch Ratings says in a new report.
Some companies incorporate an illiquidity premium into their discount rates based on their own asset mix while others use an illiquidity premium based on a standard investment portfolio. As a result, two companies with similar portfolios could report very different contractual service margins (CSMs).
The lack of a standard definition under IFRS 17 for certain key metrics also hinders comparisons. For example, the market has not settled on a clear definition for the ‘operating result’ or for the non-life combined ratio.
Shareholders’ equity is typically slightly lower under IFRS 17 than under IFRS 4, particularly for insurers with life business, where profits previously recognised in shareholders’ equity at contract inception are now partially accounted for in the CSM. But shareholders’ equity plus CSM after tax is typically higher.
Shareholders’ equity should become less volatile as liability values and asset values under IFRS 17 move similarly in response to interest rates changes, in contrast to IFRS 4. But net income will be more volatile as more assets are accounted at fair value.
Despite the initial imperfections, IFRS 17 is an improvement on IFRS 4, making financial statements more transparent. Fitch expects IFRS 17 results to become more (but not fully) comparable over the next two years, with insurers, analysts and investors gradually developing enough confidence in the new accounting standard to use it as a basis for decision-making. In the meantime, we do not expect IFRS 17 to significantly affect insurers’ business models – or their credit ratings.