Insurers take one step closer to intelligibility

LONDON (Reuters Breakingviews): Insurers are inching closer to intelligibility. New accounting rules will force them to give a clearer picture of their liabilities. That should sweep aside national oddities, and stop firms using outdated assumptions. Yet aligning capital positions will remain a chore.

The new “IFRS 17” standards were long overdue. The current system, in force since 2005, isn’t fit for purpose and looked out of whack with new risk-based solvency rules introduced this year. Like so-called Solvency II, the new accounting rules try to provide a clearer measure on insurers’ potential risks and the rate at which they should be discounted.

One of the main differences is a single international standard. Before, different national accounting rules implied similar risks could be measured in different ways by the same company. 

One extreme example: in some countries insurers writing deposit-like savings products could book those deposits as revenue, even though they will have to be handed back.

The other focus is to make profits align more closely with reality. Insurers will need to update frequently their assumptions for risks and discount rates. 

That should stop them using outdated, higher discount rates to reduce future liabilities, or using more generous ones based on hypothetical asset returns. They will also have to spread profits over the life of a contract, and factor in the cost of servicing.

For insurers this presents a few headaches. Profits are likely to be more volatile and less lumpy. Life insurers, with long-dated liabilities and accustomed to booking profits upfront, may be particularly unhappy. 

Those already used to updating assumptions regularly, as in Canada, or with shorter-dated liabilities may be less worried.

Unfortunately, investors still have their work cut out. Even if insurance accounts are international, there are still discrepancies with Solvency II, like insurers’ ability to book upfront profit in capital, or the benefits of diversification. Moreover, the various different carve-outs for different European markets hinder easy comparisons, and US regulators may yet revisit a decision to allow European insurers to operate locally. As such, shareholders may still focus on dividends, without being that much wiser about their sustainability.