➤ IFRS 17 offers a much greater level of transparency, consistency and comparability than the previous standard.

➤ Contractual service margin represents a fundamental shift in insurance accounting.

➤ The non-life insurance sector is where the biggest accounting differences lie.

One year after the launch of the International Financial Reporting Standard 17 (IFRS 17), apples-to-apples comparisons among insurance companies are now much easier to do, experts said during a Feb. 22 S&P Global Market Intelligence webinar titled "Demystifying IFRS 17."

When the standard was rolled out in 2023, an unprecedented flow of data from companies' financial reports became available with a certain degree of uniformity. While the IFRS 17's predecessor, IFRS 4, was considered a big leap in 2005 for insurance contracts accounting, it was an "incomplete adoption" of a global standard, according to Francesco Nagari, global IFRS insurance leader for Deloitte.

In contrast, IFRS 17 offers a much greater level of transparency, consistency and comparability.

Moreover, IFRS 17 has also improved the comparability of insurer metrics with other industries. Nagari explained that this was made possible with the creation of an insurance revenue metric that has been disaggregated from any investment component in the profit and loss statement, specifically for life insurers.

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Contractual service margin's fundamental shift

Before 2023, the consistency between reporting, particularly for life insurers, was "highly questionable," Nagari pointed out. A lot of those from the sell-side had to extemporize using other forms of reporting to see how a company in one market would compare to another company in a different market.

Among the changes that have come with the new reporting standard, the use of a new heading called contractual service margin (CSM) has emerged as one of the most fundamental shifts in how insurers report their results. Unlike the old practice of booking profits upfront, expected future profits are reported under CSM and are then released into profits and equity during the servicing life of the policy.

Roderick Wallace, S&P Global Market Intelligence insurance product specialist, said CSM is a metric that exists alongside equity under the liability side and companies view it as a store of "future value" in long-term policies.

Howden Tiger's strategic advisory divisional director, Charlie Beeching, added that the use of CSM now means that the "pattern and profit signature for insurance is much more similar to other industries."

"Over time, while IFRS 17 is digested, this should allow for increased interpretation of the standard from generalist investors especially, which should reduce the cost of equity for the sector, and, given time and all else being equal, should increase valuations," Beeching noted.

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Clarity, convergence

As IFRS 17's benefits are slowly realized, questions still remain regarding investors' understanding of the new formats under the standard.

Beeching noted that on the non-life insurance sector, increased volatility has been introduced with the addition of discounting. With IFRS 17, liabilities will be discounted according to prevailing interest rates. When rates are stable, the discounting of new liabilities is offset by the unwinding of such discounts on older liabilities. When interest rates are rising, though, the discounting benefit on newer liabilities is greater than the offset from the unwinding of the discount from older liabilities since previous interest rates were lower.

"It's an ongoing process of understanding how investors and other stakeholders look at the reports, and then from this set of results onwards, how they will be presented and how KPIs will be developed for non-life earnings," Beeching said.

UBS Equity Research Analyst Nasib Ahmed also emphasized that IFRS 17 was adopted as interest rates had risen, and so the sensitivities of various components have not been fully grasped.

"The understanding is still developing," Ahmed said. "Over time, I think that once companies start to report a few sets of numbers, understanding will develop sensitivities ... it really isn't IFRS 17's fault, it's just that it's come about in a period where there's been high market volatility."

In terms of a wider, cross-regime comparison of reporting, life insurers' figures have had some semblance of comparability versus non-life insurers' disclosures, which have been left unchanged.

Nagari explained that between 2008 and 2014, the two major accounting regulatory bodies — the International Accounting Standards Board (IASB), which set the IFRS, and the Financial Accounting Standards Board (FASB), which set US GAAP standards — tried to converge and reconcile insurance accounting. However, US investors felt like they were giving up the certainty of understanding US GAAP figures by aligning it with IFRS, and so the FASB had to continue with a separate method, but with more targeted improvements for life insurers.

Since the completion of the improvements, a degree of convergence has already been realized in the life sector, and the non-life insurance side is where the biggest accounting differences lie.

"For the first time in 2023, US GAAP life insurers reported a liability in the balance sheet that is discounted on a market consistent basis, exactly like IFRS 17," Nagari said. "That requires a best estimate [that] is on a 50-50 basis ... but without an explicit allowance for prudence and without the CSM."

The way forward

The panelists agreed on a time frame of two to five years, or at least two more annual reporting cycles, for a clearer understanding of the new standards and the setting of new KPIs, which would allow for a better measurement of the benefits and pitfalls of IFRS 17.

Ahmed said some companies may take a different transition approach in their disclosures even for the same product mix but they would eventually converge as a reporting history is established.

Beeching described a two-step process for convergence as more reports become available and adjust to the new standard.

"The first step is for inter-insurance comparability to converge to a certain level. So, for example ... you have key disclosure items not being uniform such as risk adjustment percentiles and also sensitivities of the CSM only sometimes being disclosed. And I think these items need to be converged in order for the economics of insurance contracts to be fully recognized between insurers," Beeching said. "And then once we have that comparability between insurers, we can then start to look at acceptance in insurance companies being compared to different kinds of businesses."