Asian insurers, particularly those in South Korea and Taiwan, are continuing to evolve their product mix towards higher margin protection business due to this segment’s treatment under the IFRS 17 accounting standard which was introduced by a number of countries in the region in 2023, according to Fitch.
Hong Kong, Singapore, South Korea, China, New Zealand, and Malaysia all updated their accounting rules in line with IFRS 17 standards on 1 January 2023, with several other markets including India, Nepal, Sri Lanka, and Indonesia following over the next two years.
A Fitch analysis of the first two years of IFRS 17’s impact on the insurance sector shows that, unlike European insurers, Asian insurers, especially in South Korea and Taiwan, had reviewed their product strategy before IFRS 17 was implemented.
“These include insurers with aggressive sales strategies, such as some Chinese life insurers that rely on single premium products sold through bancassurance channels, and South Korean and Taiwanese life insurers with savings-type products.
We observe these insurers gradually moving towards higher-margin products including protection-type business,” Fitch said.
IFRS 17, in combination with the wave of risk based solvency (RBC) capital regimes which have been introduced by a number of countries in the region such as Hong Kong, China, South Korea, and in April Japan, penalises duration mismatches on insurers’ books. Fitch said that carriers in the region were adjusting their asset liability strategies as a result.
“Fitch also expects APAC insurers to become more proactive in their assets and liability management and further narrow the duration mismatch between their assets and liabilities as these are now evaluated on an economic basis,” Fitch said.
Delayed introduction
While a major chunk of the region’s economies has already switched to IFRS 17, there are still a number of outliers – most notably Taiwan – which are slated to introduce the accounting standard next year. India has also pushed back implementation to 2027.
Fitch said that the decision by the relevant national authorities to delay introduction of IFRS 17 made sense in the context of the prevailing insurance environment in each country.
“Some APAC countries, for example, Indonesia, Taiwan and Thailand, have delayed the implementation of IFRS 17 to either 1 January 2025 or 1 January 2026.
We believe this has allowed them to buy time to find the most efficient solutions and learn from implementation strategies in other markets,” Fitch said.
One of the main aims of introducing IFRS 17 was to improve the comparability of insurers’ accounts, particularly those in different markets, and Fitch said that on this measure there was still some way to go.
The ratings agency said that it will take several years before the insurance sector achieves a high degree of comparability in terms of financial reporting,
“Nonetheless, the sector is progressing towards achieving consistent, comparable reporting, which we expect to begin emerging in the coming months as part of the end-2024 financial reporting,” Fitch said.
Fitch noted several areas of inconsistency between how insurers reported their results such as a failure to the Contractual Service Margin (CSM) analysis of movements or sensitivities in their preliminary disclosures, choosing to show this in their annual reports, which were published several weeks later.
Fitch also said there were major differences in where insurers showed the relevant information in their financial reports and the granularity of the information shown.
“Some insurers, typically listed companies, provided a complete breakdown of the main figures between life and non-life, by product and gross/net of reinsurance, including detailed analysis of movements and reconciliations to prior year’s numbers. Others only did that to a certain extent,” Fitch said.
Challenging peer comparison
In the fact of IFRS 17’s stated aim of improving comparability between insurers, Fitch said that a number of firms produce company-specific metrics which they believe better reflected their business models.
Fitch said that while this provided additional market insight it also made peer comparison more challenging.
“In some cases, as part of our analysis, we had to carefully read the ratio definitions to ensure their interpretation of the main key performance and growth indicators was correct,” the ratings agency said.
Fitch said this reporting flexibility demonstrated the provide a reconciliation of any alternative metrics to the most directly related accounting line item and explaining why the alternative metric provided more reliable and relevant information than the standard approach.
“In some other cases, the choice of transition methods and specific simplifications allowed by IFRS 17 were not fully disclosed.
This occurred in relation to the explanations given when the application of full retrospective approach was not practicable or about the key judgements, assumptions and valuation inputs used to determine fair values,” Fitch said.
Despite the increased level of financial disclosures involved in IFRS 17, Fitch said that in the two years since the standard had been introduced it hadn’t taken any ratings actions in relation to the additional information that is now being published.
But it said this could change in the future.
“Changes to reported results have provided additional insight into insurers’ profit drivers that may in future reveal weaknesses, risks or strengths not previously incorporated into Fitch’s analysis, in particular with regards to profit recognition and deferral over the duration of the life contract,” Fitch said.
