By John Bowers, Actuarial Product Director, RNA Analytics
In March 2024, insurers published their first full set of reports under the new standard, providing the first real insights into its effects, and, just a few short months ago, we looked at a PwC report analysing disclosures from major UK life and general insurers, which found notable differences in methodologies, granularity and calibration – reflecting cultural and regional influences, as well as highlighting the flexibility inherent in the principles-based standard.
Since then, fresh analysis of the way in which the new standard is being applied in insurance companies has shed more light on its impact. The latest research, conducted by Fitch Ratings among global life and non-life insurers, shows that, in spite of the improved transparency of financial statements under IFRS 17, comparability across carriers remains limited by the large number of insurer-specific underlying modelling and disclosure choices.
This is something we expect to improve as the standard beds in. Achieving full comparability across insurers will take time. Indeed, the ratings agency also expects this to evolve in the months and years ahead, as the initial impact of the new standard dissipates, and the industry begins to shift naturally towards both transparency and comparability.
What IFRS 17 has thus far achieved, in Fitch’s view, is the realisation of previously unavailable insights into insurers’ capitalisation and earnings’ drivers – thanks to the contractual service margin (CSM).
The CSM, which represents future unearned profit recognised over time in line with the insurance service provided by the insurance contract issuer, exposes insurers’ profitability much more clearly and predictably than was possible under IFRS 17’s predecessor, IFRS 4. According to the ratings agency, some carriers even provided a CSM analysis of movements at a line of business level, allowing for the identification of potential growth areas, as well as vulnerabilities, in profit trajectories.
Fitch’s analysis further found the life and non-life sectors to have been broadly equally affected by the introduction of IFRS 17 in terms of reported financials. It found volatility to be mainly apparent with respect to the combined ratios in the non-life segment. More generally, the introduction of the new standard resulted in improved combined ratios as a result of the one-off effect of discounting. The ratings agency also noted inconsistencies in the combined ratio calculation method and disclosures. Whether or not the addition of discounting will lead to the combined ratio becoming more volatile due to its sensitivity to interest rate movements and the unwinding of the discount rate, as Fitch predicts, remains to be seen.
IFRS 17 implementation remains an evolving process, but – even now – a degree of scepticism persists. Audience polls conducted at the ratings agency’s Insurance Insights conferences in London and Paris this quarter revealed a high degree of scepticism towards the new standard. In fact, over half of the respondents in both locations (59% in Paris and 56% in London) said they liked “nothing” about the standard – suggesting that the industry is still adjusting to the significant resource demands of adopting the new standard.
One of the more notable takeaways from the data is that relatively few participants acknowledged the new standard’s intended benefits. Enhancing transparency was only recognised by 3% of the Paris audience and 9% in London, while comparability was rated slightly higher, at 8% in Paris and 10% in London – indicating that, despite the standard’s aim to improve financial reporting clarity, many stakeholders are either not yet seeing these benefits, or consider them to be outweighed by the challenges.
Despite this, a higher proportion of respondents (25% in Paris and 17% in London) agreed that IFRS 17 adds useful information to financial analysis – so while the standard may be considered burdensome, a good number of insurers acknowledge its potential value in improving financial decision-making. Additionally, 5% (Paris) and 8% (London) found IFRS 17 beneficial in creating more predictable profitability patterns.
These findings raise some important questions for both insurers and technology providers alike. Is resistance primarily down to technical complexity, the resource burden, or concerns about the comparability of financial statements? We know that even large insurers with substantial resources have faced challenges in upskilling teams and fully understanding results.
As solution providers, we must consider what further guidance might improve confidence in IFRS 17. We will be working closely with insurers to provide clarity and support, as the industry adapts to the evolving landscape of financial reporting under IFRS 17.
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