Two years on, IFRS 17 still doesn’t offer investors transparency

Two years after the wholesale shift to new global accounting standards intended to enhance comparability between insurance companies, investors are still baffled by some of the intricacies of IFRS 17.

The start of 2023 saw the majority of Asian jurisdictions switch over to IFRS 17 accounting standards, with Korea, China, Hong Kong, Singapore, and Malaysia all switching over on that date to move to an accounting standard which was intended to increase transparency between insurers accounts.

Two years on and the aim of creating a standardised framework that would enable third parties to compare an Asian group, with a European peer on metrics like capital efficiency or profitability has failed, according to Mark Kai, Chief Financial Officer at BOC Group Life Insurance.

Speaking at an industry conference in Hong Kong, Kai said that he had spent a considerable amount of time in the run of IFRS 17 implementation and in optimising the result post roll-out  and the CFO delineated between two groups when describing the usefulness of IFRS 17 as a comparison tool.

“The question is who is the audience for IFRS 17? The first group is industry professionals and for this group I would say it is helpful as I have previously found it difficult to analyse rival insurer’s profit streams and now these are clearer.

But the second part of the audience is made of people like stock analysts and for this group which are not insurance professionals it can be difficult to understand IFRS 17. They don’t know what a CSM is, and whether a 6% amortising rate is good, or if instead it should be 8%.

IFRS 17 jargon

Companies are still using loan gap measures for their main investor communication. All the IFRS 17 jargon is just put in italics – it’s more like academic information for insurance professionals that love it. But not for the investors who want to understand financial performance,” Kai said.

Sanchit Maini, Prudential Group Chief Financial and Sustainability Risk Officer, also expressed frustration at the scale of the challenge brought by the introduction of IFRS 17.

He said that despite the large sums of money the carrier had spent on meeting risk based capital regime changes, the switch to new accounting standards was a huge wrench.

“A few years back we spent a lot of money on Solvency II and you would have thought that as a result we would be ready for other changes, but oh no. IFRS 17 came in and it’s huge, it’s massive, and it doesn’t seem to stop there,”  Maini said.

Market inconsistency

According to Maini the quest for transparency from investors meant Prudential was switching away from European Embedded Value (EEV), a concept put forward by the CFO Forum and is based on market not book prices, to a traditional embedded value approach.

“And a lot of that has been a reflection of the feedback we’re getting from investors and analysts. And that feedback is about comparability. It really boils down to people saying, ‘in our case, there is a certain competitor, and you analysts want to compare us against them.  Can you help us bridge between the two?

Can we get consistent messaging, and then can you be transparent in terms of the disclosures for ease of comparability? And the fact is IFR 17 isn’t solving any of that and in this part of the world, certainly I think embedded value will remain another important metric,” Maini said.

BOC Group is owned by a banking parent and in response to a question from the chair, Kai said that the introduction of IFRS 17 had enabled a greater comparability between the banking and insurance segments of the business.

“Even though IFRS 17 isn’t a perfect tango with the bank, and there has had to be some kind of educational process involved, I would say that IFRS 17 has made this situation of understanding each part of the business better,” Kai said.

Double materiality

Away from accounting regulations, Maini said that it was important for actuaries to get their heads around the concept of double materiality as a concept in the context of sustainability.

Double materiality is an accounting concept which recognises and understands a company’s impact on the environment and society is material to its financial performance.

“Under a traditional mindset, if interest rates move the question to ask is, ‘what’s the impact on my balance sheet?’ Double materiality then gets into the reverse approach – what is the impact of the organisation and its operations on the external environment?” Maini said.

“The other one is dynamic materiality, which is also very relevant in the world we live in. It refers to a topic which is not very material but which suddenly becomes very material in a short span of time in this space,” Maini.