Main Takeaways
For most insurers, the transition from IAS 39 to IFRS 9 will result in more assets being measured at fair value and corresponding volatility of reported profits. This in turn may drive changes in an insurer’s investment strategy and encourage a more disciplined management of their balance sheet. Since its effective date on 01 January 2018, IFRS 9 has changed the way in which institutional investors have to classify and measure their financial assets. For insurers, the IASB has proposed to postpone the effective date of IFRS 9 to 2022, so that it will become effective together with IFRS 17, the new insurance contract standard.
Fixed Income
Depending on an insurer’s business model, debt instruments can be either measured at amortised costs or at fair values with unrealised gains or losses being recorded directly on the passive side of the balance sheet without going through profit or loss (P&L) before realisation. Only (expected) impairment gains or losses are directly recorded in P&L which may encourage a more thorough credit analysis. An insurer can also choose to measure fixed income investments at fair value through profit or loss in order to reduce accounting mismatches.
Equities
Equity instruments are typically measured at fair value through P&L. For any equity instrument not held for trading, an investor can make an irrevocable election to present changes in fair values in other comprehensive income (OCI) without going through P&L. In contrast to fixed income investments, these capital gains or losses cannot be ‘recycled’ to P&L once they have been realised. This could discourage long-term equity investments. As dividend income is recorded directly in the P&L, high dividend strategies may be more attractive under the new provisions.
Investment funds
Under IFRS 9, there is no look-through for non-consolidated funds. Funds are typically classified as puttable instruments, which are measured at fair value through P&L. Depending on the underlying exposure, this can lead to a strategic disadvantage compared to a direct investment in these assets. Therefore, an insurer may consider to switch fund exposures into direct mandates or focus on less volatile fund strategies to reduce P&L volatility.
Risk Management
Besides new rules regarding the classification and measurement of financial instruments, IFRS 9 also introduces new provisions regarding hedge accounting. In general, hedge accounting will become easier under IFRS 9 better reflecting common practices in risk management. For example, the 80%-125% effectiveness test under IAS 39 has been replaced by more qualitative criteria. This may further encourage the use of derivatives for risk management purposes, e.g. to hedge long-dated liabilities.
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