While Insurers are likely to see a moderate increase in investment income volatility following the implementation of IFRS 9 accounting standards at the start pf 2018, IFRS 17—to be implemented in 2021— is likely to pose a greater challenge to them both operationally and financially, said Fitch Ratings today.
Insurers will have to re-assess their business models through the lens of the new standards, as their business models will determine the classification of financial assets, Fitch noted.
IFRS 9 prescribes three classification categories: fair value through profit and loss (FVPL), fair value through other comprehensive income (FVOCI) and amortized cost, said Fitch, adding that the FVPL classification will be the least favored by insurers, as it requires changes in fair value to be recognized in profit and loss as they arise, potentially increasing earning volatility.
IFRS 9 also replaces incurred-based credit losses with an expected credit-loss model, Fitch said.
While the previous standard was less forward-looking, with losses recognized only upon objective evidence of impairment, the new model may create more loss-provisioning volatility for insurers with loan portfolios, as it is based on macroeconomic forecasts, the firm added.
The bulk of insurers' investments remain in traditional fixed-income-type securities and most of these are likely to be initially classified as FVOCI or amortized cost, Fitch observed.
“As such, we expect the impact on insurers' financials to be manageable,” Fitch pointed out. “However, most equities could now be classified as FVPL, although insurers may separate a proportion as FVOCI owing to IFRS 17 considerations. Overall, the amount of financial assets measured by FVPL will increase compared with the previous standards.”
Life insurers in Asia Pacific’s developed markets should be cautious
Life insurers are likely to see a greater impact on income volatility than non-life insurers due to the long-term nature of their businesses and higher exposure to non-fixed-income investments, said the rating firm.
This is especially so for life insurers in Asia-Pacific developed markets, which have been shifting towards equities and alternative investments in search of higher yields amid a low interest-rate environment, the firm added.
IFRS 9 should be viewed in tandem with the imminent introduction of IFRS 17—the new standard for insurance contract accounting, Fitch advised.
“The new standards together move the industry to a new accounting era of increased transparency, granularity and comparability,” said Fitch. “The interaction of the two new reporting standards may affect insurers' financials, as investment assets and insurance contract liabilities are often managed together.”