IFRS 17 will change insurers' reported earnings and equity as it alters their profit recognition patterns and measurement of liabilities, while not directly affecting insurers' creditworthiness, said Moody's recently.
The new insurance reporting standard has been taken effect since January 2023. While the new standard is a profound accounting change, it leaves insurers' underlying economic position and performance unchanged, according to Moody's.
IFRS 17 has introduced the concept of a contractual service margin (CSM), a component of the insurance contract balance sheet liability consisting of unearned future profits, Moody’s pointed out.
The CSM will absorb some adverse impacts from changes in actuarial or financial assumptions, which directly eroded equity under the previous IFRS 4 standard, said Helena Kingsley-Tomkins, a Vice President and analyst at Moody's in London.
"Based on disclosures of how future financial reports may change, we might consider not more than half of the CSM of a typical life insurer as being equivalent to equity,” she noted.
IFRS 17 also creates a second new balance sheet liability, the risk adjustment (RA), designed to uplift the insurer's total liabilities closer to their fair value by taking into account non-financial risks, such as mortality and morbidity risks.
The RA has similarities to reserve margins under IFRS 4, which Moody's analysts do not currently see as commensurate with equity, the credit rating agency said.
The impact of IFRS 17 on reported equity will vary according to insurers' business mix and the assumptions used, according to Moody’s.
However, the new standard is unlikely to prompt strategic or financial policy changes that would materially alter a company's risk profile, the firm added.