Compliance with new accounting rules could affect equity and profit recognition patterns for insurance companies, but might not change their creditworthiness, Moody’s Investors Service said earlier this week.
When the International Financial Reporting Standards 17 (IFRS 17) take effect in 2025, financial regulators would require insurers to calculate contract liabilities at their present value, while amortizing gains over the policies’ duration.
“The new practice will transform insurance accounting, but will not change insurers’ underlying economic positions,” Moody’s said in a report.
The effects of IFRS 17 would depend on the business mix and current accounting standards of insurers, the ratings agency said.
Annuity writers and traditional life insurers in Taiwan, Germany and South Korea are likely to report a decline in equity due to their relatively heavy exposure to liabilities with high guarantees, it said.
The new rules are designed to improve earnings visibility and make it easier to compare the performance of insurers. The rules are being adopted in 2022 in major markets, except for the US and Japan.
The Financial Supervisory Commission said the rules are to take effect in 2025 in Taiwan, allowing local insurers more time to adjust.
Moody’s said that the implementation of IFRS 17 is unlikely to affect its view of insurers operating under regimes that tailor capital requirements to underlying risks, such as Europe’s Solvency II regime.
In other markets, the new standards could expose weak balance sheets and might trigger capital enhancement measures, it said.
This has occurred in South Korea’s life insurance sector. An unexpected drop in reported equity would lead to a corresponding increase in leverage, it said.
The adoption of IFRS 17 should improve the visibility of earnings drivers and new business performance by product line, Moody’s said, adding that it encourages insurers to optimize their business mix, re-evaluate products and manage their back books.
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