Fitch have stated that the first public comments from Dutch insurer – ASR, on the implications of IFRS 17 support Fitch Ratings’ view that the new standard will not affect insurers’ business models in the near term.
European insurers said that it does not plan to use IFRS 17 to “steer its business”, citing the inherent volatility of metrics calculated under the new accounting standard.
However, it will instead continue to focus on organic Solvency II capital creating, underlying business performance and existing segment-specific metrics, such as the non-life combined ratio.
With IFRS 17 due to take effect for accounting periods starting from 1st January 2023, Fitch have said that they expect that insurers, analysts and investors will need at least a couple of years to develop enough confidence in IFRS 17 to use it as a basis for decision-making. This is particularly due to the sensitivity of IFRS 17 metrics to the economic and demographic assumptions used in the underlying calculations.
Fitch also notes that it does not expect IFRS 17 to affects insurers’ business models, or their credit ratings.
The ratings agency said:
IFRS 17 should make insurers’ financial statements more transparent, and ultimately more consistent and comparable, but we believe it will take time for insurers’ calculation approaches to converge towards a market standard, with comparability compromised in the meantime.
Furthermore, ASR highlighted in its update that comparability of IFRS 17 reporting will be dependent on the emergence of a standard approach for the discount curve to value future cash flows. It also addressed that it does not expect the market to settle on an IFRS 17 ‘operating result’ definition in time for the first set of IFRS 17 financial statements.
Global Insurance industry after IFRS 17 goes live. According to WTW’s latest survey, entitled ‘IFRS 17: Will we make it insurers report material progress has been made since WTW’s previous IFRS 17 poll in 2021. However most survey participants also express ongoing delivery concerns resulting in the need to apply more shortcuts and simplifications in order to deliver on time.
The total cost faced by the global insurance industry to implement IFRS 17 is now estimated by WTW to be US$18-24bn. This represents a substantial increase of 20% compared to the original estimate made by WTW in 2021, primarily to reflect companies realising more work is required than first envisaged.
Even in the longer term, we do not expect IFRS 17 to have a direct effect on insurers’ ratings as it will not change the risk structure or the economic profitability of insurance operations. However, it could have an indirect effect if it eventually leads some insurers to refine their strategies, business profiles or product designs, as these could lead to changes in risk profiles.
Meanwhile, insurers have reported that there is still a huge amount of work to complete in order to successfully deliver IFRS 17 ahead of its 2023 deadline.
Despite certain similarities with the Solvency II regulations, IFRS 17 poses even greater challenges for businesses in terms of interpreting the standard, changing processes and the work required to implement it.