A significant shift in financial reporting to International Financial Reporting Standards (IFRS) 17 is currently underway, bringing substantial changes to accounting practices and necessitating a new approach to performance analysis in the reinsurance market, according to a recent report by AM Best.
The report highlights that the implementation of IFRS 17 at the end of 2023 coincides with one of the hardest reinsurance markets in decades. The new standard has completely restructured the methods for measuring and reporting insurance results, introducing new terminology and creating challenges for re/insurance companies as they prepare their financial statements.
Antonietta Iachetta, senior financial analyst at AM Best, noted that this shift alters the way users of financial statements, including policyholders and investors, interpret and compare these new reports.
IFRS 17 officially took effect on Jan. 1, 2023, although its adoption will be phased in over the next three years by some European and Asian reinsurers. Historically, the reinsurance industry has used various metrics, such as combined ratios, return on revenue, and return on equity, to compare market participants' performance.
While these metrics continue to be used under IFRS 17, they are generally not directly comparable to those reported under US GAAP. As a result, the ability to compare underwriting performance based on claims and expenses is reduced, particularly for reinsurers compared to the direct insurance market.
Notably, companies are no longer required to report gross premium written; instead, insurance service revenue now captures the top line.
In previous years, IFRS 4 and US GAAP were often compared and even consolidated into composites. However, Dan Hofmeister, associate director at AM Best, cautioned that attempts to consolidate and compare IFRS 17 and US GAAP financial statements could distort the understanding of the underlying data.
While overall profitability is not expected to change significantly under IFRS 17, the timing of earnings recognition may vary, especially for life reinsurers.
Hofmeister explained that under the new standard, earnings are expected to be recognized in the income statement as the insurance service is provided over time, leading to a more stable earnings trend that better reflects an underlying run rate.
AM Best also observed that identifying a consistent allocation of group expenses to non-life expense ratios has always been challenging. With the development of reporting under IFRS 17, the relevance of separate loss ratios and expense ratios is diminishing, with greater emphasis placed on the combined ratio as the primary measure of underwriting performance for non-life reinsurers.
However, the combined ratio under IFRS 17 differs from that under IFRS 4 or U.S. GAAP, as it incorporates the time value of money and the uncertainty of future cash flows. This approach is considered useful for assessing economic profitability, though it presents challenges in interpreting and comparing the new inputs with historical trends under different accounting regimes.
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