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    FSI on Use of Accounting Standards for Insurer Solvency Assessment

    July 31, 2020

    The Financial Stability Institute (FSI) of BIS published a paper that explores the use of accounting standards for insurer solvency assessment in the context of the implementation of the IFRS 17 standard on insurance contracts. The paper, which is based on a survey of 20 insurance supervisors worldwide, discusses the changes in comparison to the older IFRS 4 standard, the potential impact of IFRS 17 on insurers, the associated implementation challenges, the use of this standard for prudential frameworks, and the related regulatory and supervisory implications. The paper argues that jurisdictions that are not intending to implement IFRS 17 for regulatory solvency purposes should reconsider this position, in the medium term, after gaining some experience with IFRS 17.

    The paper emphasizes that supervisors can play a role in helping to address the implementation challenges associated with IFRS 17. Supervisors are encouraged to undertake impact assessments of the introduction of IFRS 17 and IFRS 9 in their jurisdictions even if they do not have immediate plans to use IFRS for prudential purposes. IFRS 17 and IFRS 9 taken together result in restatement of the largest components of both sides of the balance sheet of an insurer. These revised standards will shape the way senior management strategically drives the future business of insurers and will also shape the risk management practices of insurers. The potential financial impact of IFRS 17 is unclear, as most jurisdictions have not undertaken a quantitative impact study. Some jurisdictions plan to review their capital adequacy frameworks in response to IFRS 17. The new accounting standards will not be the top priority for insurance supervisors or insurers during the COVID-19 pandemic. However, the January 2023 implementation date is looming. Supervisors and insurers can only afford a relatively short period of diverting resources from the implementation of IFRS 17 and IFRS 9 to address the pandemic. Initial impact analysis should ideally start by the beginning of 2021 at the latest.

    Overall, the paper concludes that IFRS 17 is expected to bring positive benefits to the insurance industry in the long term as well as to financial stability. However, more work needs to be done to fully understand the potential impact of IFRS 17, the most significant development in the insurance industry in recent years. The prudential implications of IFRS 17 need to be fully appreciated, regardless of whether regulatory frameworks use the accounting standard to assess the solvency of insurers. There is likely to be a wide range of regulatory approaches to the use of IFRS 17 or other accounting standards for insurance contracts for regulatory solvency purposes. If IFRS 17 is to be used for regulatory solvency purposes, further consideration should be given to achieving the desired comparability of results and addressing the unintended consequences that could arise from volatility of solvency results. 

    One way forward would be to specify aspects of IFRS 17 implementation where currently a wide range of techniques and inputs may be used. The specification could mirror what is provided in current regulatory valuation approaches (for example, specified discount rate methodologies or published discount curves could be applied in the IFRS 17 context). This may also lead to a consistent implementation of IFRS 17 within jurisdictions to the benefit of all stakeholders. Greater specification of the techniques and inputs to be used in IFRS 17 for regulatory solvency purposes should be developed through global coordination to avoid local versions of IFRS 17 being created. Significant regional and global consultation with the insurance industry, professional bodies, investor stakeholders, and consumer groups would be required to achieve this outcome. Jurisdictions with insurance groups that have considerable business outside their borders may find merit in coming together to work on such a project. Such jurisdictions would derive the most benefit from a globally consistent approach to regulatory solvency calculation within IFRS jurisdictions and more consistency of general purpose financial reporting.

     

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    Keywords: International, Accounting, Insurance, Insurance Contracts, IFRS 9, IFRS 17, Insurer Solvency Assessment, Financial Instruments, Regulatory Capital, COVID-19, Impact Analysis, FSI

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