IFRS 17 Could Enhance Insurance Sector Analysis


Friday, January 07, 2022 / 09:22 AM / by Fitch Ratings / Header Image Credit: London Market Forums


IFRS 17 can enhance our insurance sector analysis, Fitch Ratings says. We expect most ratios used in our financial performance analysis to be maintained, and to adopt new ratios using additional information.

The most fundamental change is that profits will be booked in the income statement over the coverage period of the insurance contract. The Contractual Service Margin (CSM) concept - the unearned profit that an entity expects to generate as it provides services - will bring profit recognition largely into line with the provision of the insurance services under the contract.

Profits released under IFRS 4 are typically higher at inception and in the first policy year than under IFRS 17, but lower subsequently. The difference will depend on how far IFRS 17 requirements differ from accounting policies currently applied to insurance contracts, given IFRS 4's less explicit guidance. Profitability over time is likely to be very similar, but timing will differ.

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We expect return on equity, return on assets and the combined ratio to remain key ratios in our analysis. But their parameter values could change and we may calibrate separate criteria guidelines for companies switching to IFRS 17.

New financial performance ratios could enhance our analysis, using new information available under IFRS 17. This includes a variation on the return on equity to fully reflect organic capital generation, considering the net CSM increase as an additional earnings component, which could resemble ROE calculated on a current IFRS basis. We will consider using additional ratios analysing CSM development and margin analysis for life and non-life insurance.

IFRS 17 will not change risk structures or insurance operations, and we do not expect it to alter our credit views on most insurers. But new information or changes in strategy could be credit-relevant.

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