Great-West, Manulife and Sun Life jointly issue statement about new accounting standard

Three Canadian life insurance companies jointly released a document April 19, entitled Overview of earnings presentation and reporting under the new IFRS 17 accounting standard. The document addresses changes related to IFRS 17, Insurance Contracts, which takes effect on January 1, 2023.

“The adoption of this global accounting standard is expected to enhance the reporting of insurance business,” the companies state in a release announcing the publication of the overview document. “This is an accounting regime change. There are no changes to the underlying fundamentals of the business or to the financial strength or claims paying ability of the company,” they continue in the document.

The collective view on presentation and reporting concepts expected under IFRS 17 further states that IFRS 17 does not impact traditional asset management businesses and is expected to have minimal impact on wealth management businesses. 

More specifically, they say the new IFRS income statement, in combination with a “drivers of earnings” analysis will replace the current source of earnings disclosures. They add that under IFRS 17 the impact of new insurance business will be recorded in the contractual service margin (CSM), a liability which is established at the outset of a contract to offset new business profits at issue. The CSM liability is gradually amortized as services are provided. This will happen unless the contracts are onerous at issue, in which case, the impact will be recorded directly in earnings. They note that an onerous designation does not necessarily mean that the contract is not profitable over its lifetime.

“The CSM is an important metric for some insurance contracts, as it represents unearned profit and is expected to count as available capital for regulatory capital purposes. The CSM is by its nature positive, and is expected to amortize into earnings over time,” they add. “Growth in the CSM balance will result in growth in the CSM amortization and future period earnings.” 

Non-GAAP earnings, meanwhile, will continue to be presented under IFRS 17, excluding the direct impact of markets and changes in insurance and economic assumptions which are reflected immediately in income. “The removal of the direct link between asset and insurance liability discount rates and new requirements related to financial guarantees may result in period-to-period volatility, which will be excluded from the non-GAAP earnings measures,” they write.