IFRS 17 gives risk managers sharper tool to analyse insurer performance

Risk and insurance managers need to keep a close eye on the financial performance and health of their leading carriers and, in an ideal world, check what their brokers are telling them about the security of their key partners. No risk manager likes surprises and they have faced many during the recent hard market as carriers pulled capacity at often brutally short notice after years of talk of the benefits of long-term partnership. The recent hardening has provided something of a wake-up call for risk and insurance managers in Europe and worldwide. It has perhaps reminded them of the importance of keeping abreast of developments at leading insurers and anticipating future changes in direction. The quarterly and annual results published by insurers, accompanied by often revealing senior management commentary, are therefore a very useful tool for insureds and their brokers to work out what is coming next from insurer partners. No risk and insurance manager has the time to listen in on all these calls, of course. This is why the Commercial Risk’s reporting team spends a good deal of time sifting through the results and commentary to try to pick out the underlying messages of relevance to insurance buyers. We are told by our readers that this regular analysis provides, if nothing else, a useful body of evidence to show to CFOs who may doubt suggestions that coming insurance renewals will be tough. For this reason, the transparency of insurer results is really important and the introduction of new insurance accounting standard IFRS 17 to replace the old IFRS 4 should be welcomed by insurance managers and their brokers. Listed insurance companies have been applying IFRS 17, developed by the London-based International Accounting Standards Board (IASB), since the beginning of this year and, according to the German insurance association GDV, it has been a success. "The transition is done. With IFRS 17, capital market-oriented insurers are putting their accounting on a globally uniform basis. The balance sheets are more up to date, more transparent and more comparable,” says GDV general manager Jörg Asmussen in a recent note. The GDV has argued for some time for the need of a holistic insurance accounting standard. German insurers have therefore supported the completion of the global accounting standard from the outset and campaigned for its timely adoption in the EU. The GDV stresses that IFRS 17 is an accounting standard and does not mean that the business model of insurers changes in any way. The new standard also has no impact on the regulatory capital requirements for companies – and thus the security of customer deposits. However, as the GDV points out, IFRS 17 provides better insight into the performance drivers at individual insurance companies and this gives customers who care to investigate a clearer picture of the strategic direction. This is more important than ever at a time of heightened financial instability. The Swiss banking crisis has no doubt caused every serious risk manager to think about another global financial crisis to match that of 2008-2009. This does not feel like Lehman all over again. But markets can be spooked easily, especially when there are other ongoing crises such as the war in Ukraine. Risk managers and their brokers should be looking more closely than ever at the potential for another reserving crisis sparked by real world inflation and therefore claims inflation, especially in the US. And they should also be looking closely at the other side of the insurer balance sheet, as market and credit risk rises to the fore in these uncertain times. As the GDV states, from an insurance company financial health and reporting perspective, the most important lever here is transparency, and IFRS 17 helps out in this respect. “The aggregated figures in the balance sheet and the income statement (P&L) are explained in detail, with extensive information and detailed interim accounts in the appendix. In this way, the calculation provides a deeper insight into the sources of earnings of the insurers,” explains the association. “At the same time, the new standard increases the comparability of financial statements from capital market-oriented insurance companies. This applies both to each other, between insurers, and in comparison with industry and other sectors. With the new standard, the companies improve their overall position on the international capital markets,” it adds. The IASB deserves a pat on the back for making sure that the new standard is principles rather than rules based. This means that explicit guidelines are given, within which companies can exercise various accounting options so long as this is adequately explained. “In this way, the company-specific reality can be adequately taken into account. The options exercised are reported in detail in the notes to the balance sheet, so that the necessary transparency is also provided. Furthermore, the new standard offers sufficient scope for discretion. These enable a company-specific, and at the same time truthful and realistic, presentation of the assets and earnings of the company. This is the primary goal of accounting under IFRS,” notes the GDV. Looking forward, for everyone concerned – insurers themselves, risk managers, brokers and of course investors – the main thing now is to have some stability in the regulatory environment. As the GDV stresses, the conversion to IFRS 17 was an enormous feat for the companies involved. Now companies, auditors, analysts and ultimately customers and brokers need to make sense of it all.

IFRS 17 gives risk managers sharper tool to analyse insurer performance

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Want to read this article?

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