Tough reinsurance market compounded by IFRS 17

Although this shouldn’t affect a company’s financial strength, says AM Best.

The insurance industry is undergoing significant changes with the implementation of International Financial Reporting Standards (IFRS) 17, replacing IFRS 4. This new standard introduces major shifts in how insurance contracts are reported, particularly for life and composite insurers.

Key changes include the recognition of profits over the contract's duration and the mandatory early recognition of losses on onerous contracts, especially impacting life insurers. 

IFRS 17 also requires discounting liabilities, which could lower balance sheet liabilities and affect combined ratios, especially for reinsurers.

The new standard alters profitability metrics, introducing risk adjustment and contractual service margins (CSM) for longer-duration policies and replacing premiums written with insurance service revenue in income statements. 

These changes make traditional metrics like loss and expense ratios more complex.

The transition to IFRS 17 occurs during a challenging reinsurance market, posing significant hurdles despite assurances that it shouldn't affect financial strength. 

The standard, effective from 1 January 2023, changes how stakeholders interpret financial statements, emphasising the time value of money and future cash flow uncertainty.

As the industry adapts, a deeper understanding of these new metrics is crucial. Comparability across different accounting standards, such as US GAAP, will require careful interpretation. 

With only one year of reporting under IFRS 17, ongoing adjustments and disclosures are anticipated as the industry gains experience with the new framework.