Reinsurers affected by changes to IFRS 17

In a commentary, rating agency A.M. Best warns that financial data published by reinsurers will be affected by changes to IFRS 17, which were to take effect on June 30, 2020.

The rating agency confirms that accounting data will remain its basis for assessing reinsurers’ financial health.

The commentary was issued at a time when the format and effective date of the future accounting standard for insurance contracts is constantly changing. IFRS 17 has been deferred repeatedly due to uneven levels of implementation around the world. Any change to the standard affects insurers and reinsurers alike, in both P&C and life insurance.

Deferral to 2023 will change accounting

A.M. Best views the latest deferral of the effective date of the standard as noteworthy. Canada, among other countries, has repeatedly lobbied the IASB to obtain a deferral until 2022. Now the COVID-19 pandemic has postponed the effective date of IFRS 17 until January 1, 2023. In Canada, Ottawa eased up on insurers.

The IFRS 17 exposure draft initially proposed a one-year delay, namely until January 1, 2022. In March 2020, the International Accounting Standards Board (IASB) decided to reschedule the effective date of IFRS 17 to January 1, 2023 for several reasons, A.M. Best writes. The agency points out that the two-year delay resulted from IASB’s consideration of the challenges of implementing IFRS 17, the possibility that jurisdictions might not adopt the standard before its effective date, and the advantages of a widespread and simultaneous takeup.

The IASB chose to defer the effective date of the IFRS 9 standard on financial instruments to coincide with that of IFRS 17, A.M. Best notes. The rating agency explains that this decision could lead some insurers to move the accounting for loans from amortized cost to market value. This will favour a better balance sheet match to liabilities at market value, A. M. Best continues.

Deferred acquisition cost

A.M. Best adds that a new exposure draft published by IASB in 2019 reopened the standard, allowing amendments to the IFRS 17 document, which has now taken 20 years to materialize. The agency will consider this draft in its evaluations.

One of the changes highlights a gap in an element foreseen by the previous exposure draft of 2017: accounting for the deferred acquisition cost. The change made on December 11, 2019 proposed to amortize a proportion of the business costs that were not yet written. Insurers thus had to identify renewals or policies that were not yet written, that will arise from the acquisition costs incurred in the reporting period.

Policy presentation evolves

Also in December, the IASB recommended that insurers and reinsurers present profits or losses by referring to portfolios rather than groups of policies. A.M. Best thinks this change will widen the definition of bundles of policy within each cohort that are used to identify loss-making policies. The agency expects this change to reduce the proportion of policies considered “loss making,” and will make IFRS 17 easier and less costly for insurers to implement.

In addition, the June 2019 ED allows some value changes to be taken directly as a profit or loss instead of going first to the contractual service margin. For example, the reinsurance profit might move immediately from this margin to the profit or loss account, and be matched to the corresponding premiums allocation approach (PAA) loss.

A. M. Best says that all of these changes will optimize the collection and use of data under IFRS 17. The agency announced that it will evaluate these financial data according to its capital adequacy ratio along with other analytical tools at its disposal.

Americans on separate track

The United States will partly dodge these upheavals because their accounting authority, the Financial Accounting Standard Board (FASB), decided to produce its own revised version of the generally accepted accounting principles (GAAP). All the same, the FASB advises its insurers who operate overseas to ensure that their entities active in IFRS-governed countries comply with the standard.