Some insurers will pre-emptively boost their capital buffers in the run-up to the introduction of new global accounting rules in 2021, S&P Global Ratings has predicted.
The new global insurance accounting regime, IFRS 17, is designed to improve the comparability of insurance accounts across countries, but is expected to lead to "complex and costly changes" to the way insurers report profits and losses, the rating agency said. The changes include a shift to full market valuation for insurance liabilities.
In a report explaining how IFRS 17 will affect insurers' credit quality, S&P Global Ratings said: "We expect some insurers' capitalization to weaken due to full market valuation of liabilities under IFRS 17. That said, the insurers will likely manage their portfolios and pre-emptively build more of a capital buffer toward 2021. In that way, we think the market-consistent view of liabilities under Solvency II puts insurers in the European Economic Area (EEA) ahead of the curve."
The report said it expected the impact of IFRS 17 implementation to be greater for South Korean insurers because of the "negative spread" arising from legacy high-yield guarantee policies, especially for life insurers. Negative spread occurs where the interest rates fall below the guaranteed payout rate in certain life policies, meaning investment income cannot keep pace with what the insurer is paying out.
S&P Global Ratings said: "To prepare for IFRS 17, some South Korean insurers have raised new capital as part of their proactive capital management policy to ensure sustainable capital buffers. This comes on the back of their refinement of product strategies to focus on insurance protection policies with limited interest rate guarantees."
Overall, S&P Global Ratings said it welcomed the new accounting regime because of the improvements to comparability and consistency of financial reporting. The agency also expects "limited" changes to insurers' ratings, and it said the accounting change itself is unlikely to be sufficient to trigger ratings changes.
It added, though, that adjustments to existing key performance indicators and the creation of new ones in response to the new regime may prompt insurers' management to enter or exit lines of business or change their risk profiles, which could trigger rating changes.
IFRS 17 is due to be adopted by insurers globally, with the exception of those reporting under U.S. Generally Accepted Accounting Principles, and those reporting solely under local, statutory GAAP.
S&P Global Ratings and S&P Global Market Intelligence are owned by S&P Global Inc.
