New IFRS Standard to Significantly Change Insurers’ Financial Reports: A.M. Best

July 29, 2014

“The emerging international accounting standard for insurance contracts will change the data that form one part of the material used by A.M. Best in the insurance sector,” the rating agency said in a Special Report.

“The standard, known as Phase 2 of the International Accounting Standards Board’s (IASB) insurance accounting project (Phase 2), is expected to be published in 2015 with implementation in 2018.”

Best’s report – titled “New IFRS Standard to Significantly Change Insurers’ Financial Reporting,” states that “since Phase 2 will change the data available to users of insurance company financial statements, it will be important to the working of the credit rating process. However, the new data do not change the underlying economics of an insurer, and should not, in principle, affect insurers’ credit ratings.”

Best warned, however, that “Phase 2 will present several challenges for the credit rating process, including whether and to what extent newly reported quantities such as the risk adjustment and contractual service margin (CSM) are treated as part of capital for modeling purposes. In addition, how different discount rates and sensitivities under Phase 2 will be treated in the credit rating process will likely need to be resolved.”

Best explained that under Phase 2, the “CSM would be ‘unlocked,’ meaning that certain changes in estimates would not impact the profit and loss directly but would instead impact the CSM and subsequently be amortized into profit.”

Best said it “believes the proposals for the CSM is among the most positive features of the Phase 2 project, as it holds the potential to provide a powerful indicator of underlying performance for a life insurer that is not available under generally accepted accounting principles or through supplementary reporting.

Anthony Silverman, a senior financial analyst and author of the report, commented: “A.M. Best believes the advantages of the CSM favor its wider use, and the IASB could explore ways in which its use might be widened to include changes in more investment and credit items beyond those for unit-linked contracts.”

Source: A.M. Best

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