The International Financial Reporting Standards (IFRS) 17 framework – issued by the International Accounting Standards Board - became effective on January 1, 2023. It replaced IFRS 4 as the accounting practice for insurance contracts. The IFRS 17 framework changes how Canadian insurers value their insurance contract liabilities and how they recognize income on their financial statements.

A new in-depth article by TD Asset Management Inc. sheds light on the new standards, examining how portfolio considerations have evolved from IFRS 4 to IFRS 17. The article also discusses how insurers can optimize their portfolios in the new complex regulatory landscape.

What The New Rules Mean for Insurers

The IFRS 17 standards aim to increase transparency and harmonize financial reporting for insurance companies in the countries that have chosen to adopt IFRS 17. The new standards also make financial statements more directly comparable against each other. IFRS 17 delinks liability cash flow discounting from the actual portfolio, instead of basing it on the portfolio's expected return less actuarial margins.

In terms of investment objectives, IFRS 17 places a greater focus on achieving an effective hedge against liabilities and limiting mark-to-market volatility, as well as earning incremental return over time. In particular, hedging credit spread sensitivity is a concept that insurers haven't had to worry much about until now, and credit spread movements play a larger role in contributing to insurers' bottom line under IFRS 17.

The standard also shifts the way insurers should think about the roles of various asset classes and investment strategies, such as how public corporate bonds and private fixed income should be incorporated in their portfolios.

Insurers can assess the risk versus return trade-off of their investment strategy by conducting stress testing. Deterministic shock analysis and stochastic projections can help insurers gauge near-term financial statement impacts and better understand downside risks relative to their IFRS 17 liabilities.

For more detail, read the full article.

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