IFRS 17 will not affect insurers’ business models in near term, Fitch argues

Written by Adam Cadle

06/07/2022

IFRS 17 will not affect insurers’ business models in the near term, Fitch Ratings has said, with the ratings agency arguing that Dutch insurer ASR’s recent accounting announcement supports this.

ASR said in an update last month 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. Instead, it will continue to focus on organic Solvency II capital creation, underlying business performance and existing segment-specific metrics, such as the non-life combined ratio (claims and expenses to premiums).

IFRS 17 is due to take effect for accounting periods starting from 1 January 2023. However, Fitch Ratings said it expects 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, particularly given the sensitivity of IFRS 17 metrics to the economic and demographic assumptions used in the underlying calculations. “During this time, we do not expect IFRS 17 to affect insurers’ business models 0 or their credit ratings,” it said.

It added: “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. 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 highlighted 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.

“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.”

Related Articles