A key ongoing shift in financial reporting to the International Financial Reporting Standards (IFRS) 17 is underway, representing a significant accounting change that has necessitated the segmentation of performance analysis in the reinsurance market, according to a new AM Best report.
The Best’s Special Report, “IFRS 17 — Economic View Adds Complexity to Reinsurers’ Financial Statements,” is part of AM Best’s look at the global reinsurance industry ahead of the Rendez-Vous de Septembre in Monte Carlo.
According to this report, reporting under the IFRS 17, implemented at year-end 2023, comes amid the hardest reinsurance markets in decades. The shift to the new standard has completely overhauled prior approaches for measuring and reporting insurance results and introduced new nomenclature, creating challenges for (re)insurance companies as they prepare financial statements. “It alters the way users of financial statements—whether policyholders or investors—understand, interpret, and compare these new statements,” said Ms Antonietta Iachetta, senior financial analyst at AM Best.
IFRS 17 became effective on 1 January 2023, although some European and Asian reinsurers will be adopting it over the next three years.
Historically, the reinsurance industry has relied on a variety of measures to compare the performance of market participants, such as combined ratios, return on revenue ,and return on equity. Although these metrics are still used under IFRS 17, in most cases, they are not directly comparable to US GAAP reporters. Consequently, the ability to compare underwriting performance based on claims and expenses is diminished—and considerably more so for reinsurers than for the direct market. In particular, companies are no longer required to report gross premium written; instead, the top line is now captured in insurance service revenue.
“In past years, IFRS 4 and US GAAP had been compared against one another and even consolidated into composites. Some may attempt to consolidate and compare IFRS 17 and US GAAP financial statements but doing so will very likely result in distorting what the numbers are really telling us,” said Mr Dan Hofmeister, associate director, AM Best.
Profitability
Overall profitability isn’t expected to change materially under IFRS 17; however, timing can differ significantly under the new approach, particularly for life reinsurers.
“Under the new standard, the expectation is that as the insurance service is provided over time, earnings will be recognised in the income statement, which is expected to produce a more stable earnings trend that is more representative of an underlying run rate,” said Mr Hofmeister.