Insurance companies’ results have the potential to become more volatile under the latest proposed International Financial Reporting Standards or IFRS 17 as it introduces several new concepts to the balance sheet and significantly alter earnings patterns, according to a new A.M. Best briefing.
The Best’s Briefing, “IFRS 17 – Enhanced Transparency Will Be Worth the Effort for Insurers,” notes that under current standards, insurers may use their jurisdictional accounting rules to report the value of the insurance contracts, which leads to difficulties in analyzing an insurer’s financial position by various stakeholders.
IFRS 17 represents efforts to increase insurance accounting consistency and transparency across international boundaries. Insurers at present may discount future cash flows from long-term insurance contracts with discount rates adopted at inception.
The IFRS 17 proposal aims to separate an insurer’s underwriting results from the financial results (i.e., non-underwriting, investment-related) that comprise investment income and other financial expenses not related to insurance operations, and would require periodic reassessments of the liabilities using up-to-date discount rates.
A.M. Best believes insurers with well-established asset-liability management strategies will be less affected than those who take on greater asset-liability management risk.