European insurers may face higher cost of capital due to IFRS 17
The new international accounting standard for insurance contracts from 2021, IFRS 17, could temporarily increase the cost of capital for European insurers, Fitch Ratings said in a Jan. 26 note.
The higher cost of capital would incur as investors familiarise themselves with the new standard.
Many investors already perceive insurance as a complicated sector and Fitch thinks some generalist investors may be driven away by the challenge of having to get to grips with IFRS 17 and its complicated "day one" restatement effects. In an audience poll at Fitch's Insurance Roadshow in London, 39 percent thought IFRS 17 would increase insurers' cost of capital, while only 13 percent thought it would reduce the cost.
A higher cost of capital might appear at odds with the aim of IFRS 17 to improve consistency and comparability among insurers reporting in different jurisdictions, which should in theory reduce the "opacity premium" that investors demand for the perceived lack of transparency.
However, Fitch does not see a contradiction. IFRS 17, like any change in financial reporting, could create confusion when it is introduced, as investors will need time to get used to the new accounts and to understand their impact on analytical metrics, according to Fitch. Over time, though, investors will gain trust in IFRS 17 and any opacity premium for the sector will fall back towards, and ultimately perhaps below the pre-IFRS 17 level.
Once the challenge of adapting to a new accounting standard is overcome, Fitch thinks IFRS 17 will improve comparability between insurers' accounts. Current comparability is poor as practices vary significantly between jurisdictions. In particular, accounting liabilities are often based on assumptions that are outdated compared to current economic conditions.
Join us at Intelligent Automation in Insurance - London 2018. Book by Jan 31st and you could save £400.
More of today's news
Enstar strikes £840m reinsurance deal with AXIS-Novae
ILS market recovers from $630m nat cat loss in Q4
Drones create gap in traditional aviation cover
QBE prepares Nordic expansion with new hire
Artex expands Asia Pacific presence; appoints Singapore CEO
Allianz partners with JLT for after the event insurance
Already registered?
Login to your account
If you don't have a login or your access has expired, you will need to purchase a subscription to gain access to this article, including all our online content.
For more information on individual annual subscriptions for full paid access and corporate subscription options please contact us.
To request a FREE 2-week trial subscription, please signup.
NOTE - this can take up to 48hrs to be approved.
For multi-user price options, or to check if your company has an existing subscription that we can add you to for FREE, please email Elliot Field at efield@newtonmedia.co.uk or Adrian Tapping at atapping@newtonmedia.co.uk
Editor's picks
Editor's picks
More articles
Copyright © intelligentinsurer.com 2024 | Headless Content Management with Blaze