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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 significantly impact 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 three articles on the new requirements, New IFRS financial reporting standards: a game changer for insurers?, we assessed the implications of the new accounting standards for managing insurance investment portfolios and balance sheets. Our second article, New IFRS reporting standards: how should insurers implement the changes?, outlined the implementation approach that insurers should consider to create value for shareholders and mutual members. Our final article focuses on the investment implications of the changes to the accounting rules and explores potential multi-asset investment solutions.
The new IFRS regulations have implications for insurers’ investment strategies in three key areas: asset and liability management, hedging and equity investments.
Some insurers use hedging instruments to adjust the interest-rate and currency exposure relating to the assets in their portfolio, technical provisions or the joint asset and liability exposure. Accounting rules can influence insurers’ choice of hedging techniques. In extreme cases, insurers may choose not to hedge economic risks due to the accounting volatility that hedging can introduce into the income statement.
The changes IFRS 9 and 17 introduce to valuation and profit recognition may help to remove some of the accounting volatility arising from hedges in the existing standards. Insurers should assess the likely impact of the new standards on their hedges and consider amending existing hedges or introducing new hedging techniques as required.
The way in which insurers should respond to the IFRS changes will vary significantly by type of business, jurisdiction, initial balance-sheet structure and risk appetite. However, these general observations should apply in most cases and across both public and private markets:
For fixed income investments:
For equities and funds, insurers with limited tolerance for income volatility may wish to:
1 A 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/ | 2 Funds in which holders may receive a pro-rata share of net assets in the event of liquidation qualify as puttable financial instruments.
Mapping physical climate risks
Mapping physical climate risks
Working with Woodwell Climate Research Center, we have developed a geospatial mapping tool designed to help our investors visualize and quantify physical climate risks.