IFRS 9 to drive mod­est rise in in­sur­ers’ in­come volatil­ity: Fitch

Daily Mirror (Sri Lanka) - - FINANCE -

In­sur­ers are likely to see a moder­ate in­crease in in­vest­ment in­come volatil­ity fol­low­ing the im­ple­men­ta­tion of IFRS 9 ac­count­ing stan­dards for fi­nan­cial in­stru­ments at the start of 2018, as more fi­nan­cial as­sets will be val­ued on a fair­value ba­sis, says Fitch Rat­ings.

IFRS 17, the new stan­dard for in­surance con­tract ac­count­ing that is due to be im­ple­mented in 2021, is likely to pose a greater chal­lenge to in­sur­ers, both op­er­a­tionally and fi­nan­cially.

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. IFRS 9 pre­scribes three clas­si­fi­ca­tion cat­e­gories: Fair value through profit and loss (FVPL), fair value through other com­pre­hen­sive in­come (FVOCI) and amor­tised cost. The FVPL clas­si­fi­ca­tion will be the least favoured by in­sur­ers, as it re­quires changes in fair value to be recog­nised in profit and loss as they arise, po­ten­tially in­creas­ing earn­ing volatil­ity.

IFRS 9 also re­places in­curred-based credit losses with an ex­pected cred­it­loss model. The pre­vi­ous stan­dard was less for­ward-look­ing, with losses recog­nised 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 bulk of in­sur­ers’ in­vest­ments re­main in tra­di­tional fixed-in­come-type se­cu­ri­ties and most of these are likely to be ini­tially clas­si­fied as FVOCI or amor­tised cost. As such, we ex­pect the im­pact on in­sur­ers’ fi­nan­cials to be man­age­able. 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 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-fixed­in­come in­vest­ments. IFRS 9 should be viewed in tan­dem with the im­mi­nent in­tro­duc­tion of IFRS 17. The new stan­dards to­gether move the in­dus­try to a new ac­count­ing era of in­creased trans­parency, gran­u­lar­ity and com­pa­ra­bil­ity. The in­ter­ac­tion of the two new re­port­ing stan­dards may af­fect in­sur­ers’ fi­nan­cials, as in­vest­ment as­sets and in­surance con­tract li­a­bil­i­ties are of­ten man­aged to­gether. In­sur­ers will have to con­sider care­fully the im­pli­ca­tion of these in­ter­ac­tions. Fitch recog­nises the po­ten­tial for ac­count­ing mis­matches and will ac­count for this where pos­si­ble.

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