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Calculation differences hinder comparisons of IFRS 17 results

Comparing insurers' IFRS 17 results will be difficult initially due to differences between companies' approaches under the accounting standard, Fitch Ratings says in a new report.

One aim of IFRS 17, which took effect for most insurers on 1 January 2023, was to improve comparability. But Fitch Ratings’ analysis of 10 major European insurers’ accounting policies and calculations has found major differences that can significantly affect the results.

Discount rates are not set consistently

The choice of discount rate can significantly affect IFRS 17 metrics, notably, the contractual service margin (CSM), which represents the unearned profit an insurer expects to earn as it provides services.

Some companies incorporate an illiquidity premium into their discount rates based on their own asset mix while others are using the illiquidity premium from their Solvency II calculations, which is based on a standard investment portfolio prescribed by the European Insurance and Occupational Pensions Authority. As a result, two companies with similar portfolios could report very different contractual service margins.

Lack of a standard definition The lack of a standard definition under IFRS 17 for certain key metrics also hinders comparisons. For example, the market has not settled on a clear definition of ‘operating result’ or the 'non-life combined ratio'. Shareholders’ equity is typically slightly lower under IFRS 17 than under IFRS 4, particularly for insurers with life business, where profits previously recognised in shareholders’ equity at contract inception are now partially accounted for in the CSM. But shareholders’ equity plus CSM after tax is typically higher.

Shareholders’ equity should become less volatile as liability values and asset values under IFRS 17 move similarly in response to interest rate changes, in contrast to IFRS 4. But net income will be more volatile as more assets are accounted for at fair value. Despite the initial imperfections, IFRS 17 is an improvement on IFRS 4, making financial statements more transparent.

Fitch expects IFRS 17 results to become more (but not fully) comparable over the next two years, with insurers, analysts and investors gradually developing enough confidence in the new accounting standard to use it as a basis for decision-making. In the meantime, Fitch does not expect IFRS 17 to significantly affect insurers’ business models – or their credit ratings.



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