Insurance Business Insurers profits to be rocked by shake-up

Insurers profits to be rocked by shake-upby Paul Lucas and Will Koblensky

The insurance industry has gone through its fair share of changes in recent years – however, arguably none may have the impact of a new set of regulations set to launch today.

That set of regulations is IFRS 17, launched by the International Accounting Standards Board – a new set of rulings that are set to drastically impact the profits of life insurance firms around the world.

The idea behind the standard is that it will make insurers’ complex financial statements much simpler – and it’s taken decades to bring into action.

“Insurance is one of the last parts of the economy where we do not have an international standard,” Hans Hoogervorst told the Financial Times. “There is no high-quality accounting information in many cases… there is no way that investors can have a good view of what is going on.”

Described by Deloitte’s Francesco Nagari as a “once in a lifetime” regulatory change, it is set to impact life insurers more heavily than property and casualty insurers – and indeed their profits could be slashed. The reason for this is because under the previous set of rules annuity profits were recognized straightaway – but thanks to the new regime they will be recognized across the contract’s lifespan, potentially hitting profits at some firms by 10-20%.

“Existing insurance accounting treatments around the world are very variable and none are the same as IFRS17,” Richard Martin, head of corporate at ACCA said in a statement issued to Insurance Business. “They will, by 2021, be replaced by a consistent treatment in all countries using global standards.”

“The scope of this standard is limited because it applies only to the relatively restricted number of insurance companies, but they do form a very significant sector in the economy,” he added. “But for those companies the impact will be very significant – both in terms of the changed accounting numbers that they will report and in terms of the data that may need to be assembled. Investors and other users of those financial statements will also have to adapt to the new numbers.”

According to Martin, even though the regulation has taken 20 years to come up with, many parties may not be satisfied with its content – but that is just something companies have to deal with.

As for the Canadian market, insurers in this country are in the middle of the pack globally when it comes to IFS adoption according to KPMG’s IFRS insurance lead, Dana Chaput and Johannes Pastor, the global financial services audit leader and insurance sector lead.

“There will be differences in determining cashflows in IFRS 17 compared to what Canadian insurers currently do,” Chaput said, referencing the new standards stipulation that historic risk costs should be left behind in favour of current values.

Moody’s has warned of a potentially massive impact globally – with it set to reduce the level of capital held by insurers in Korea in particular, significantly.

Tom Stoddard, chief financial officer for Aviva, commented that the rules may also fall short of their aims stating that “there is still a lot of complexity.” He told the Financial Times that “we spent £500 million (approximately C$881 million) on Solvency II. This won’t be quite that amount, but it will be another large number.”

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