IFRS 17 may alter insurers’ strategy

The major overhaul of insurance accounting that will be triggered by IFRS 17 could influence insurers' business models, which may in turn affect their credit profiles, according to Fitch Ratings.

The new accounting standard is due to take effect from the start of 2021, although some insurers have called for a delay due to the cost and complexity of implementation, and is intended to improve consistency and comparability among insurers reporting in different jurisdictions.

The timing and profile of profit recognition under IFRS 17 may make certain products more or less attractive, Fitch said in a Dec. 14 statement. Profits on a contract must be recognised with reference to changes in the underlying risk over the life of the contract, while losses must be taken immediately. Insurers will need to think about these issues and their implications for investors, reinsurance arrangements, and their internal management incentives, amongst other considerations, according to the statement.

Applying IFRS 17 will be highly complex and will need to involve the joint expertise of the actuarial and the finance functions within the business. As a result, it is likely to result in significant implementation costs for insurers, both financially and in terms of management time and effort, as was the case with the implementation of Solvency II in Europe.

The major overhaul of insurance accounting that will be triggered by IFRS 17 is unlikely to directly affect insurers' ratings, because the economic substance of their balance sheets will not change, Fitch noted.