IFRS 17, the new international accounting standard for insurance contracts published today, will not trigger any immediate rating changes when it comes into force, Fitch Ratings says.
New accounting standards have no immediate impact on an insurer's credit profile as they do not change the economic substance of its balance sheet. The assets held and the financial commitments to customers and creditors are unaffected - it is only their presentation in the accounts that changes.
In the medium term accounting standards may influence insurers' business models, which could affect their credit profile. In particular, the timing and profile of profit recognition under an accounting system may make certain products more or less attractive.
The sensitivity of accounting metrics to interest rates and financial markets may influence the design and mix of products that insurers offer, their asset-liability management, and their hedging and dividend policies.
IFRS 17 aims to improve transparency and comparability among insurers and across jurisdictions. This should ultimately be helpful for investors, but they will first have to get to grips with the new standard and its "day one" restatement effects - complications that may drive some generalist investors away from what is already perceived as a complicated sector.
Fitch expects IFRS 17's valuation of liabilities based on discount rates linked to prevailing market yields to give a more meaningful picture for some business lines. For example, long-term savings contracts with built-in investment guarantees may have been designed and priced based on certain expectations of future reinvestment yields that are no longer valid.
But insurers in some jurisdictions still use liability discount rates based on yields when contracts were issued, which clouds the true negative effect of today's low market yields on portfolios of this type of business.
IFRS 17, previously referred to as IFRS 4 Phase II, is due to replace the existing IFRS 4 standard from 1 January 2021, although industry lobbying may impede its adoption in some jurisdictions, and it will not be adopted in the US. Implementation will be an onerous and costly exercise for insurers at a time when profitability is under pressure in many markets.