A.M. Best Special Report: New IFRS Standard to Significantly Change Insurers’ Financial Reporting

LONDON--()--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, according to a new Best’s 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.

The 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.

However, 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.

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 amortised into profit. A.M. Best 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.

“A.M. Best believes the advantages of the CSM favour 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,” said Anthony Silverman, a senior financial analyst and author of the report.

To access a copy of this special report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=227196.

This report originally appeared in Best’s Journal, dated July 21, 2014. Best’s Journal is a biweekly publication that presents A.M. Best’s original research, analysis and commentary on the global insurance industry, and is available exclusively as part of a subscription to the Best’s Insurance News & Analysis service. More information about the Best’s Insurance News & Analysis subscription service is available at www.ambest.com/sales/bina/default.asp. To order, contact Customer Service at +(1) (908) 439 2200, ext. 5742 or at (800) 424-2378 when calling from the United States and Canada.

A.M. Best Europe – Rating Services Limited is a subsidiary of A.M. Best Company, the world's oldest and most authoritative insurance rating and information source. For more information, visit www.ambest.com.

Copyright © 2014 by A.M. Best Company, Inc. ALL RIGHTS RESERVED.

Contacts

A.M. Best Company
Anthony Silverman, +(44) 20 7626 6264
Senior Financial Analyst
anthony.silverman@ambest.com
or
Christopher Sharkey, +(1) 908 439 2200, ext. 5159
Manager, Public Relations
christopher.sharkey@ambest.com
or
Jim Peavy, +(1) 908 439 2200, ext. 5644
Assistant Vice President, Public Relations
james.peavy@ambest.com

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Contacts

A.M. Best Company
Anthony Silverman, +(44) 20 7626 6264
Senior Financial Analyst
anthony.silverman@ambest.com
or
Christopher Sharkey, +(1) 908 439 2200, ext. 5159
Manager, Public Relations
christopher.sharkey@ambest.com
or
Jim Peavy, +(1) 908 439 2200, ext. 5644
Assistant Vice President, Public Relations
james.peavy@ambest.com