IFRS 17 Adds Complexity to Reinsurers' Financial Statements, Profitability Stable

The ongoing shift to International Financial Reporting Standard (IFRS) 17 is significantly reshaping financial reporting within the reinsurance market, according to a new report from AM Best. The report, titled "IFRS 17 — Economic View Adds Complexity to Reinsurers' Financial Statements," highlights the challenges that reinsurers face as they adapt to this new accounting standard, which was implemented at the end of 2023. 

This report is part of AM Best's broader analysis of the global reinsurance industry, released ahead of the Rendez-Vous de Septembre in Monte Carlo. It accompanies other reports that provide insights into the top reinsurance groups and examine various segments of the market, such as insurance-linked securities, Lloyd's, life/annuity, health, and regional reinsurance. 

The adoption of IFRS 17 comes during a period of historically hard reinsurance markets and represents a complete overhaul of the methods used to measure and report insurance results. The new standard introduces different terminology and reporting structures, complicating the preparation of financial statements for (re)insurance companies. "It alters the way users of financial statements—whether policyholders or investors—understand, interpret, and compare these new statements," said Antonietta Iachetta, senior financial analyst at AM Best. 

Effective from January 1, 2023, IFRS 17 is being gradually adopted by European and Asian reinsurers over the next 3 years. Under this new standard, traditional metrics like combined ratios, return on revenue, and return on equity remain in use but are not directly comparable to US generally accepted accounting principles (GAAP). This change particularly impacts reinsurers, as the ability to compare underwriting performance based on claims and expenses is reduced. Notably, companies are no longer required to report gross premium written; instead, the top line is now reflected as insurance service revenue. 

"In past years, IFRS 4 and US GAAP had been compared against one another and even consolidated into composites. Some may attempt to consolidate and compare IFRS 17 and US GAAP financial statements, but doing so will very likely result in distorting what the numbers are really telling us," said Dan Hofmeister, associate director at AM Best. 

Despite these complexities, overall profitability is not expected to change significantly under IFRS 17. However, the timing of profit recognition may vary, especially for life reinsurers. "Under the new standard, the expectation is that as the insurance service is provided over time, earnings will be recognized in the income statement, which is expected to produce a more stable earnings trend that is more representative of an underlying run rate," Hofmeister added. 

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