Countdown starts on insurance accounting shake-up

Life insurers are bracing themselves for a shake-up of accounting rules that some say will give investors more confidence to put money into the sector.

The International Accounting Standards Board on May 18 published the new set of regulations, called IFRS 17, which will be implemented for accounting periods from Jan. 1, 2021. The new rules are aimed at simplifying insurers' complex financial statements by providing consistent, principle-based accounting for insurance contracts. Twenty years in the making, they are meant to replace IFRS 4, which was originally brought in as an interim standard, and will apply to the 125 jurisdictions that use IFRS — effectively most of the world.

A key difference between the old and the new rules is that profits from annuities will be spread out over the life of the contract and not, as current rules allow, be recognized up front. Mark-to-market accounting will also be used more extensively, adding to the volatility of insurers' bottom lines.

"Particularly for life insurers … whilst ultimate profits will not change, the emergence of those profits can change significantly," Alex Bertolotti, global IFRS insurance leader at PwC, wrote in a statement. "Both insurers and their analysts will need to assess the full impact in terms of telling the performance story of their companies. Key performance indicators and income statements will look significantly different following implementation."

He added: "Systems and processes will likely change significantly to accommodate the granularity of data needed to comply. We have already noticed a trend of companies taking the opportunity to revamp and update legacy systems, as part of wider transformation projects, to get a bigger return for their investment."

S&P Global Ratings warned that implementation will be "arduous" for insurers, yet added that it does not expect rating actions as a direct result of IFRS 17's introduction.

"We welcome the increased comparability that IFRS 17 will bring," S&P Global Ratings' analysts wrote. "Its introduction will make insurance accounting more consistent and transparent and will aid our rating of insurers globally. We do not, however, expect that the standard will have an immediate rating effect for insurers when it comes into force in 2021. Moreover, it could prove costly for insurers to implement and have longer-term implications on insurance business pricing."

A more attractive investment

The current rules give companies dispensation to use national accounting standards for insurance contracts, resulting in a multitude of different approaches. This makes it difficult for investors to compare and contrast the financial performance of otherwise similar companies, effectively putting a premium on the cost of investment.

"A single set of rules should help reprice the premium," wrote Robert Bruce, an IFRS 17 specialist with Deloitte. "Complexity will remain of course; insurance is not a simple business given it relies on judging the future. And the degree of comparability will depend partly on the quality of the disclosures, of which there will be many."

Gary Reader, who heads KPMG's insurance practice, said the greater comparability and greater transparency that IFRS 17 provides "should be a clear benefit to analysts and users of financial information."

But Kamran Foroughi, a director at Willis Towers Watson, an insurance brokerage, warned that it could take time for investors to understand the new rules.

"Adequately preparing for the new complexity of IFRS 17 will be a challenge," Foroughi wrote. "The new standard will impact profit, equity and volatility, as well as reserving and financial reporting processes, actuarial models, IT systems, and potentially executive remuneration, so insurance companies should not underestimate the work required."

S&P Global Ratings and S&P Global Market Intelligence are owned by S&P Global Inc.