Insurance firms’ investment teams in Asia have been mulling the impact of incoming risk-based capital (RBC) rules for some time, but some are now more concerned about new accounting rules – notably International Financial Reporting Standard (IFRS) 9 for the asset side of balance sheets, but also IFRS 17 for the liability side.

“The biggest worry for the [Thai insurance] industry right now is not the RBC rules, but IFRS 9,” said Pattarapol Parin, chief investment officer of Bangkok-based joint venture Krungthai-Axa Life, noting that local insurers are due to adopt IFRS 9 and 17 from Jan 1, 2022.

Many parties, including the Bank of Thailand and the Thai Bond Market Association, need to come up with figures related to financial asset impairment, expected credit loss, probability of default and loss given default, he told AsianInvestor.

Pattarapol Parin, Krungthai Axa

The big question mark, said Pattarapol, is what the figure for the expected credit loss will be on domestic bonds, which make up more than 70% of Thai insurers’ portfolios. 

Insurers are considering how IFRS 9 will affect their accounting systems and processes but also need to consider its potential impact on their investments, noted Alan Yip, Asia head of insurance strategy at JP Morgan Asset Management.

IFRS 9 will replace IFRS 39 and introduce full mark-to-market treatment for assets. It is expected to affect the volatility of reported profits, which may in turn drive changes in investment behaviour, wrote JP Morgan AM in a client note.

A key point for insurers is the requirement to calculate expected credit loss on fixed income investments, which is likely to create more profit-and-loss (P&L) volatility. Insurers will need better credit analyses to mitigate this, Hong Kong-based Yip told AsianInvestor.

In addition, under IFRS 9, mutual fund investments have to be classified at fair value in P&L statements. This means two insurers investing in the same underlying assets with the same investment strategies could experience different P&L volatility, depending on whether they are allocating via separate accounts or pooled funds. That could make insurers’ balance sheets less consistent and thus harder to compare against each other. 

IFRS 17, meanwhile, will likely require insurers to have better asset-liability duration matching, added Yip, and they should also note its interactions with IFRS 9 to reduce accounting volatilities.

DELAYED IMPACT

For most, the regulatory impact will not be immediate. IFRS 9 was finalised in July 2014 and became effective from January 1 this year, but insurers in most jurisdictions can defer adoption until January 1, 2021, and some later than that.

Yet IFRS 9 is already in force in some Asian jurisdictions – Taiwan, for instance, noted Yip.

And some firms elsewhere have decided to move early. China’s second biggest insurer by assets, Ping An, has become the only one of its domestic peers to adopt IFRS 9 so far. That led it to drop its equity exposure from 11.1% to 9.5% in the first half of 2018 as it focused more on the stable valuations of high-dividend shares.

Alan Yip, JP Morgan

Korean insurers are set to adopt IFRS 9 and 17 in 2021, but they more focused on the country’s incoming risk-based capital rules (K-Insurance Capital Standard), said Stefan Gans, a senior sales executive at DWS Investments, formerly Deutsche Asset Management.

Certain large multinational insurers, including AIA and Prudential, also seem sanguine about the looming changes.

Mark Konyn, group CIO of Hong Kong-based AIA, said the accounting standards had been in the works for a long time. “There’s still some work to be done at the industry level, including at AIA [in respect of IFRS 9],” he told AsianInvestor. “But as it stands today, we don’t see it having a meaningful impact on the way we run assets.”

Similarly, Stephan van Vliet, CIO of Prudential Corporation Asia, said he doesn’t expect to see drastic changes at his firm as a result of IFRS 9 and 17, because it already manages its portfolios on an economic basis. The new accounting standards will have a bigger impact on insurers with more traditional business, he added.

Outside Asia, insurers – such as Germany’s Allianz and Zurich-based – are also considering the potential impact of the new rules.

Look out for a feature on how insurance firms in Asia are allocating in light of macroeconomic and regulatory concerns in the August/September issue of AsianInvestor magazine.