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Annuities Providers Come to Terms with IFRS 17

In May the International Accounting Standards Board published its proposals for implementation of the IFRS 17, a new accounting standard which has been some 20 years in the making and which promises to have a significant - if uneven - impact across the European insurance industry. 

The standard proposes and aims at a more transparent and comparable level of profitability reporting, presenting a clearer snapshot of the impact of new and back book business - and thus a better understanding of the real health (or otherwise) of an insurance company's balance sheet.   

Insurers of all categories must present to the market separate tabulated results for underwriting and financial information, thus allowing analysts and investors to view the real source of profits.  Premium income will cease to be reported as revenue and there will be an accompanying clean up of some of the inconsistencies associated with hedge accounting processes.               

However, insurers involved in 'lumpy', large and long duration transactions (yes, we are looking at you, bulk annuities providers) will feel some pain as the standard becomes fully implemented, because they will no longer be able to take credit upfront or the illiquidity spread they might expect to earn by holding credit assets to maturity.  A friend of mine in the insurance department of a big 4 accounting firm likened the bulk annuities market to date to an addict, needing ever larger transactions year on year, as there is a need to fund and replicate the profits booked from the previous year's transactions as back-book profits fall away.  IFRS 17 promises a smoother run of business as profits for annuities are recognised across the lifetime of the book itself.

But storing information by cohort of business and product will be highly challenging from a logistical point of view - life insurers will have to go back 30 or more years to re-estimate individual books of business, which will need to be re-priced and booked on an annualised basis to the present day.

IFRS 17 falls due for implementation in 2021 but could be simplified for businesses which face the brunt of these headaches.  Insurers whose cup is 'half full' could see it as an opportunity to improve and modernise reporting systems in a more cost efficient fashion.  For the 'half empty' ones all this change may result in a certain sense of deja vu... 

UK life insurers are facing the prospect of lower and more volatile profits under the most radical shake-up of accounting rules in the sector in decades. On Thursday, the International Accounting Standards Board will launch a new set of regulations, IFRS 17, designed to simplify insurers’ notoriously complex financial statements. The standard has taken 20 years to develop and will cost billions to implement. Hans Hoogervorst, chairman of the IASB, said: “Insurance is one of the last parts of the economy where we do not have an international standard. There is no high-quality accounting information in many cases . . . there is no way that investors can have a good view of what is going on.”

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