Rating agency A.M. Best says that insurers must step up their implementation of the IFRS 17 accounting standard for insurance contracts if they hope to meet the Jan. 1, 2021 deadline. The London office reports that many European insurers are still using hybrid formulations of the standard, midway between the IFRS and their previous local standards.
In a briefing, A.M. Best stresses that time is running out to prepare for IFRS 17. To compare the 2021 data, insurers must prepare their financial data for 2020 in IFRS format, the rating agency explains.
A sense of urgency is apparent. “The major (re)insurers are in very early stages of adopting IFRS 17 and there have already been calls for a postponement to its implementation date,” A.M. Best writes.
The briefing does not mention Canada specifically, but the Canadian Life and Health Insurance Association (CLHIA) has asked the London-based International Accounting Standard Board (IASB) to delay the application of IFRS 17, for two years.
A.M. Best notes that the laggards are concentrated in continental Europe, where several countries maintain approaches based on local regulation. Other countries like the United Kingdom have adopted valuation methods closer to IFRS 17, the briefing adds.
At first, IFRS 17 may cause comparability problems, A.M. Best predicts. “There are likely to be some areas of interpretation, such as the determination of discount rates, and the criteria on which segmentation of business will be based.”
On a more reassuring note, the agency anticipates that approaches will eventually converge to improve insurer comparability. It also expects IFRS 17 to provide a better overview of underwriting performance. Insurers should not see their results impacted negatively unless they deviate sharply from the IFRS 17 principles.
In a recent A.M. Best TV webcast, Carlos Wong-Fupuy, senior director at A.M. Best in London, said that the implementation of IFRS 17 is worth the effort. IFRS will ensure that the presentation of financial results is harmonized around the world. He adds that IFRS 17 will not affect life insurers exclusively; it also concerns P&C insurers and any other institution that must allow for prudential margins and discount long-term liabilities.
He allays insurers’ fears about the IFRS 17 increasing the volatility of their financial results. “Some analysts expect volatility. Volatility would depend on how close an institution matches assets and liabilities. It would have no immediate impact if reporting reflects economic reality,” Wong-Fupuy explains.
A.M. Best points out that IFRS 17 will help analysts rate insurers because it asks insurers to clearly segment groups of loss-making contracts. “Companies will have to differentiate clearly between insurance and investment profits, which will provide additional key indicators to measure the performance of long-term business,” the briefing says.
Canadian insurers have long complained that IFRS 17 is a poor fit to their reality.
Meanwhile, the Financial Accounting Standard Board, which sets accounting standards in the US, opted to go its own way. As a result, after the adoption of the IFRS, the world may find itself in a similar situation to that of units of measurement, with some countries using the metric system and others using the imperial system.