While end users will benefit, insurers will have to bite the bitter pill of additional costs.
With the introduction of uniform international book-keeping standard, details of which are to be published on Thursday, slated to take place from January 2021, insurers in more than 100 countries are facing a “once in a lifetime” accounting change moment.
Twenty years in the making the regulation is aimed at making investor insurance choices easier. The new regulations will usher in new norms of transparencies by prising open a “black box” of opaque national practices.
This will means, billions of euros have to be additionally sunk in by insurers to comply with compliance norms to recalculate millions of contracts for each reporting period.
The new rules devised by the International Accounting Standards Board (IASB) will impact 450 listed insurers who, in total, manage $13 trillion in assets.
Hans Hoogervorst, IASB’s Chairman said poor quality accounting has put off investors and the benefits of the new standard will outweigh costs by a wide margin.
“We do not wish to belittle the costs. The increased transparency of the market should lead to improved investability of the sector. In the long run, it should lead to a lowering of the cost of capital for the industry,” said Hoogervorst.
Incidentally, IASB’s accounting standards are applied across the European Union as well as in many Asian countries and Canada.
It does not apply to insurance companies in the U.S., which is working on devising its own reform.
As an example of the coming change, under “IFRS 17” insurers will have to calculate income from policies like motor insurance to annuities using interest rates and other market information updated for each reporting period, thereby ending the practice of using data from when the policy was taken out, which in many cases can be in years old.
“It’s a big deal as it means accounting policies will change for all contracts, and profits could be more volatile than today,” said Kevin Griffith, who is responsible for IFRS 17 at accountants EY.
“More of the profit from a contract will be deferred over the contract period, which could mean increased volatility in earnings. Market reaction to this will depend on how companies manage the message to investors as a company’s fundamentals have not changed,” said Griffith.
As per Willis Towers Watson, an advisory firm, the new standard is likely to impact the ability to pay dividends and management bonuses by insurers, as well as meet market-wide performance benchmarks.
Underscoring this thought, accounting firm Deloitte, stated the “once in a lifetime change” would not come cheap.
“This effort will likely generate implementation costs for many insurers as large as those incurred in the European Union for the adoption of the Solvency II regulations – estimated between three and four billion euros for the EU insurers as a whole,” said Mark McQueen, responsible for IFRS 17 at Deloitte.
As per Insurance Europe, an industry body, very few insurers would have seen full versions of the text before it is released.
“The implementation cost and effort for IFRS 17 will be substantial, but a proper cost-benefit analysis can only be performed once the final text is available,” said Olav Jones, Insurance Europe’s deputy director general.
Hoogervorst was confident that the new rules would be wholly endorsed across the EU. It will also apply to Britain despite its choice to leave the bloc.
Britain is set to leave the EU in 2019.
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