21 May 2019

Commercial Risk Europe: Moody’s says IFRS 17 unlikely to alter credit assessments

IFRS 17 will meaningfully affect some insurers’ reported profit and equity, but their underlying financial position will not change, according to Moody’s Investors Service. As a result, the new accounting standard is unlikely to alter its credit assessment in the vast majority of cases.

Moody’s said IFRS 17, which is set to come into force in January 2022, is designed to improve visibility of earnings and make insurance companies’ performance more comparable. The ratings agency said it may make insurers’ performance more transparent and shape their strategic decisions. It said the financial impact will be material for some insurers, influencing their product, pricing and investment strategies.

According to Moody’s, IFRS 17 is unlikely to affect the regulatory capital of insurers operating under regimes that tailor capital requirements to underlying risks, such as Solvency II in Europe. “But in other markets, it could expose weak balance sheets and may trigger capital enhancement measures. This has already occurred in the Korean life insurance sector. In a few exceptional cases, an unexpected or outsized drop in reported equity relative to peers would increase leverage, potentially harming investor perception and constraining financial flexibility,” said Moody’s.

It added: “Greater earnings transparency could shape strategic decisions. IFRS 17 should improve the visibility of earnings drivers and new business performance by product line. This will encourage insurers to optimise their business mix, reprice products and/or manage their back books.”

Moody’s explained that the increase in comparability between insurers as a result of IFRS 17 will be partly offset by the complexity of the new standard, and the level of “optionality” it offers. It pointed out that there will remain a wide gap between the new IFRS standard and the accounting approaches used under US GAAP and Japanese GAAP, the other key global accounting frameworks. However, it said there are planned changes to US GAAP accounting that, like IFRS 17, place greater emphasis on the insurance industry’s underlying economics.

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