S&P Global Ratings has warned that reinsurers and primary insurers to brace themselves for hurdles in the transition to International Financial Reporting Standards (IFRS) 17.
The implementation of IFRS 17 takes effect from 1 January 2023, and S&P explained that it requires insurers and reinsurers globally, excluding those based in the US, to restate their balance-sheet comparatives with new key metrics.
The ratings agency said that in June 2020, the International Accounting Standards Board published its final amendments to IFRS 17, addressing issues for primary insurers regarding their purchase of reinsurance. According to S&P, these amendments dissolved some significant accounting mismatches between market value assets and book value liabilities, which would have created risks for reinsurers.
“Despite this improvement, we believe the transition to IFRS 17 is a major challenge for reinsurers and users of their financial reporting. Reinsurers are likely to be up against technical accounting challenges. They’ll also have to develop new key performance indicators (KPIs) and bring important stakeholders, both internal and external, up to speed. Furthermore, although we expect pending updates to GAAP will somewhat improve the comparability between those standards and IFRS 17, differences will remain,” warned S&P.
The agency added that the new KPIs could affect reinsurers’ risk appetite and bring about shifts in business and financial strategies that could, in the long term, have a ratings impact.