- ALM & Regulatory Capital Strategist
- About Us
- My Account
The views expressed are those of the author at the time of writing. Other teams may hold different views and make different investment decisions. The value of your investment may become worth more or less than at the time of original investment. While any third-party data used is considered reliable, its accuracy is not guaranteed. For professional, institutional, or accredited investors only.
From 1 January 2023, new accounting standards set out in the International Financial Reporting Standards (IFRS) on Insurance Contracts and Financial Instruments1 (IFRS 17 and 9, respectively) will affect every sector of the insurance industry and will have a significant impact on long-term contracts, notably for life and health insurance. In particular, the changes will influence how insurers’ investment teams and actuaries manage assets and liabilities, and allocate to fixed income, equity and hedging strategies.
In the first of our three short articles on the new requirements, New IFRS financial reporting standards: a game changer for insurers’ investment and asset-liability management?, we outlined the implications of the new accounting standards for managing insurance investment portfolios and balance sheets. Here, in our second article, we outline the implementation approach that insurers should consider in order to create value for shareholders and mutual members.
Under the current accounting standards, because the valuation methods applicable to assets and technical provisions differ, accounting for investments is only loosely connected to the liabilities funding them. In contrast, the new accounting standards increase the alignment between valuation methods for assets and technical provisions, therefore affecting profit emergence. This link varies by line of business, as summarised in Figure 1.
Under the current standards, volatility of earnings is cushioned by not marking-to-market certain assets and technical provisions and/or by making changes in valuation flow through “other comprehensive income” (OCI). The new standards extend the scope of marking-to-market of assets and technical provisions and limit the flow of changes in valuations through OCI. Figure 2 outlines the investment implications of these changes.
As both valuation of assets and liabilities and profit emergence are key to stakeholders, insurers will need to implement a strategy to successfully transition to the new accounting standards. This strategy should generate investment returns that sufficiently exceed the cost of funding to create value for shareholders and mutual members, while minimising balance-sheet and earnings volatility.
Under such an approach, insurers should consider:
In addition, insurers may also wish to consider issues such as taxation, which should be incorporated into tailored assessments for individual insurers.
In the final article of the series, I will focus on effective investment solutions for insurers under the new accounting rules.
1A list of the countries covered by the new IFRS requirements is available at: https://www.ifrs.org/use-around-the-world/use-of-ifrs-standards-by-jurisdiction/ | 2Recycling gains and losses refers to reclassifying into the statement of profit or loss income and expenses that have been included in OCI in a previous period. IFRS 9 prohibits the recycling of gains and losses on investments in equity instruments for which an entity has elected to present fair value changes in OCI.
Shareholder activism in Japan: Integrating ESG within the investment processContinue reading
2022 Sustainability ReportContinue reading
US banking system: Three pressing questionsContinue reading
The value in valuing employeesContinue reading
ESG integration in public and private marketsContinue reading
Key updates to Wellington’s 2023 proxy voting guidelinesContinue reading
Shareholder activism in Japan: Integrating ESG within the investment process
In the final article within our series on shareholder activism in Japan, ESG Analyst Soo Ho Jung shares how the Japan equity team integrates ESG to help realize value for investors.
2022 Climate Report
2022 Sustainability Report
We appreciate the opportunity to share our approach to advancing sustainable practices across our investment, client, and infrastructure platforms.
US banking system: Three pressing questions
Equity Strategist Andrew Heiskell asks three questions investors ought to ask when it comes to the recent US banking system volatility.
The value in valuing employees
Companies able to adapt and respond to challenges in the labor market will find themselves well positioned for the future, say Equity Portfolio Managers Yolanda Courtines and Mark Mandel.
ESG integration in public and private markets
Two ESG leaders discuss why ESG matters for investors, and how their teams help inform the investment process. They also share their priority research and engagement topics for 2023.
Key updates to Wellington’s 2023 proxy voting guidelines
We periodically update our guidelines in an ongoing effort to help Wellington's investment teams vote proxies in our clients' best interests. Read about key updates for this year from two members of Wellington's ESG team.
Impact measurement and management practices
What constitutes an impact investment? How is impact measured? And, what are the benefits of impact investing? Our Impact Management and Measurement Practice Leader Oyin Oduya discusses our approach.
Building climate resilience: Toward a practical corporate framework
The need for systemic climate change resilience is becoming clear. We present a practical framework to help companies enhance resilience in their own operations.
Annual message from our CEO: Forward thinking
After a year of profound economic and market change, CEO Jean Hynes discusses the path forward, including the role of alternatives and sustainability, the firm's investments in talent, and the importance of stability and innovation.
Human capital management for private companies
We discuss why effective people management is critical for private companies and outline four strategic focus areas that can help companies navigate evolving employee needs, regulatory changes, and investor expectations.