New IFRS financial reporting standards: how should insurers implement the changes?

Francisco Sebastian, FIA, ALM & Regulatory Capital Strategist
2023-07-31
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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.

Why are the IFRS changes so important for insurers?

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.

Figure 1
ifrs financial reporting standards fig1

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.

Figure 2
ifrs financial reporting standards fig2

How should insurers implement the new IFRS regulations?

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:

  1. Reviewing their current balance sheet by type of asset and liability, and classifying blocks of assets and liabilities by valuation and profit recognition method.
  2. Modelling their existing balance sheet using strategic asset allocation tools to assess expected asset returns, cost of funding and volatility.
  3. Implementing changes, where required, to asset classes, securities and investment vehicles and fine-tuning balance-sheet management.

In addition, insurers may also wish to consider issues such as taxation, which should be incorporated into tailored assessments for individual insurers.

Next steps: investment solutions

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.

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