IFRS 17 still beset by some uncertainties, says AM Best

Ratings agency AM Best has highlighted concerns about further amendments being proposed to the International Accounting Standard, IFRS 17, which seeks to reflect market values in the published financial statements of insurers.

IFRS 17 had been due to be implemented at the beginning of 2021, but the date was put back to January 1, 2022, after lobbying from the industry. The standard requires insurers to record more information.

Analysts currently have to adjust insurance companies’ financial positions and performance to be able to compare them, said commentators. IFRS 17 increases transparency about profitability and will add comparability. The main effects are on the allocation of profits to different periods, rather than the total profit earned.

The issues being debated were re-opened to consider limited changes in November 2018. Stakeholders now have until September 25 to respond to the June 2019 Exposure Draft “Amendments to IFRS 17”, in which the International Accounting Standards Board (IASB) published its proposals.

AM Best has pointed out “some uncertainties that remain untackled by the amendments”.

The agency noted that although the IASB's proposed changes do not modify the nature of IFRS 17, some would have quite material effects.

One term that is central to the discussion on IFRS 17 is the Contractual Service Margin (CSM), which has been defined as an estimate the profitability that the entity expects the contract to generate over the coverage period

AM Best’s concerns include issues related to the spreading of acquisition costs over expected renewals, attributing CSM to - and amortising it over - the provision of investment return service. AM Best also noted the discussion regarding the matching of losses on onerous underlying contracts with reinsurance recoveries.

As losses on onerous contracts are taken in full when the contracts are identified as onerous, the intention is that corresponding reinsurance recoveries should also be taken at the same time rather than being spread over the term of the reinsurance policy. Without this change, the standard has the effect that the profit from relevant reinsurance, if accounted under the Building Block Approach ( a methodology set out under IFRS 17), would be spread over a period of years using the CSM.

AM Best said that there would be conceptual difficulties in allocating the proceeds from many excess of loss policies, which may reference quite broad portfolios, to the groups of policies used in IFRS 17.

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