The global insurance industry is facing the most significant change to its accounting rules in 20 years, says DBRS Morningstar in a new report.
The firm said the implementation of a new accounting standard for insurance contracts, known as IFRS 17, starting on Jan. 1, 2023, represents a major shift in accounting practices, creating added challenges for insurers.
“Extensive changes to IT systems, processes, and tools are integral components of IFRS 17 implementation and have the potential to increase operational risk in the short to medium term, unless properly managed and mitigated,” DBRS said in its report.
For Canadian insurers, the new standard will also affect capital requirements and income tax rules, which adds further complexity, it noted.
There is also an element of uncertainty in the adoption of the new rules, as they are principles-based, which leaves room for interpretation in how they are applied by local regulators.
“In addition to changes to IT systems, processes, and tools, IFRS 17 introduces potential variations in how insurance companies interpret the standard as well as changes to key profit and volume metrics,” noted Nadja Dreff, senior vice-president, insurance, at DBRS Morningstar, in a release.
Nevertheless, the report said Canadian insurance companies should be able to absorb the shifting standards without hurting their financial strength ratings, given their strong capital positions and risk management frameworks.
Additionally, the Canadian insurers rated by DBRS “have already devoted significant resources, including funding and management oversight, to prepare to successfully transition to IFRS 17,” which should mitigate the operational risk, the report said.