IFRS 17 will have more profound impact on insurance
KUCHING: The mandatory International Financial Report Standard 17 (IFRS 17) which will come into effect on January 1, 2021, will have a more profound impact on the insurance sector but analysts stressed that the new standard was to ensure more transparent financial practices in the insurance industry.
“Although it seems a long way with more than two years to go for the effective implementation of the new accounting standard, the changes are seen as complex and challenging for insurance companies.
“It is expected have a more significant impact on life than general insurance companies owing to the former’s longer duration for contracts/policies,” AmInvestment Bank Bhd’s research arm ( AmInvestment) said in its sector report on Malaysia’s insurance sector.
Nevertheless, it pointed out: “The new standard will enhance the comparison of insurance companies in the future and provide greater transparency in their financials.”
Amongst the key changes expected from the new standard, the research team noted that premium income would no longer appear on the profit and loss (P&L) of insurance companies.
“Hence, gross written premium ( GWP) will not be stated as part of insurers’ revenue in the future. This will be replaced by profits from contracts which will gradually be amortised/released and recognised on the P&L of insurers from their contractual service margins ( CSM),” it explained, noting that CSM represents the unearned profit of the group of contracts of insurance companies and it could also be viewed as the present value (PV) of future profits.
“We understand that extensive work will be involved in the gathering, storage and usage of data for the new standard.
“There will be a need to group insurance contracts which are similar in risk together (aggregation). This will be for the purpose of recognising losses from a group of onerous contracts and the timing of recognising profits from a group of profitable contracts.
“Contracts can be grouped into any of the following categories onerous at inception, those with no significant possibility of becoming onerous subsequently or other profitable contracts,” AmInvestment added.
Despite the complexity in shifting to a new landscape under IFRS 17, the research team highlighted that the new standard is expected to smooth out earnings of insurance companies and smoothen insurer’s profits in the event of any changes in assumptions.
“Losses on onerous insurance contracts will be flagged immediately on P&L statements under FR 17. This will result in transparency on less profitable contracts which can then be compared with the other insurance companies on the profitability/ health of their policies.
“Clearly, earnings for insurance companies with lower losses from onerous contracts will be less volatile. This is expected to result in lower betas and consequently a favourable valuation compared to insurers with higher losses from a large number of onerous contracts,” it explained.
Aside from that, the IFRS 17 would make it more difficult for insurance companies to harvest the fruits of equity investments for insurance contracts with direct participation features as any fair value gains from investments would be amortised out instead of recognising it in full immediately on the P&L of the companies.
Hence, AmInvestment pointed out that insurance service expenses would become more transparent with the actual and expected expenses reported.
On the financial impact of the IFRS 17 on Malaysian insurance companies, the research team noted that it is still preliminary to assess the impact on the retained earnings of insurance companies under its coverage as changes to guidelines could be still be taking place before the effective implementation date on January 1, 2021.
As for now, AmInvestment pegged a ‘neutral’ rating on the insurance sector as premium (topline) growth for insurance companies is expected to be modest with the slowdown in GDP growth.