In its special report titled “IFRS 17 — Economic View Adds Complexity to Reinsurers’ Financial Statements,” AM Best delves into the global reinsurance industry as part of its coverage leading up to the Rendez-Vous de Septembre in Monte Carlo. This report is among several that AM Best will release throughout August and September, including rankings of the top reinsurance groups and detailed examinations of insurance-linked securities, Lloyd’s, and various reinsurance markets.
The transition to IFRS 17, which came into effect at the end of 2023, arrives during one of the most challenging reinsurance markets in decades. This new standard has fundamentally reshaped the methods for measuring and reporting insurance results, introducing new terminology and posing significant challenges for (re)insurance companies as they prepare their financial statements. As Antonietta Iachetta, Senior Financial Analyst at AM Best, explains, “It alters the way users of financial statements—whether policyholders or investors—understand, interpret, and compare these new statements.”
While IFRS 17 officially took effect on 1 January 2023, some European and Asian reinsurers will adopt it over the next three years. Historically, the reinsurance industry has used various metrics to assess market performance, such as combined ratios, return on revenue, and return on equity. Although these measures remain in use under IFRS 17, they are not directly comparable with U.S. GAAP figures, complicating the assessment of underwriting performance, particularly for reinsurers. Notably, companies are no longer required to report gross premium written, with the focus shifting to insurance service revenue as the top-line figure.
Dan Hofmeister, Associate Director at AM Best, noted that in the past, IFRS 4 and U.S. GAAP were often compared and even combined into composite figures. However, he cautions that attempting to do the same with IFRS 17 and U.S. GAAP will likely distort the true meaning of the financial data.
Although overall profitability isn’t expected to change significantly under IFRS 17, the timing of earnings recognition may vary, especially for life reinsurers. Hofmeister adds, “Under the new standard, the expectation is that as the insurance service is provided over time, earnings will be recognised in the income statement, which is expected to produce a more stable earnings trend that is more representative of an underlying run rate.”
