Concerns over the impact of incoming IFRS 9 and IFRS 17 accounting rules are likely to lead some insurers in Asia and beyond to prioritise segregated accounts over mutual funds for their fixed income investments, say industry experts.  

IFRS 9 and IFRS 17 relate to the asset and liability sides of insurers' balance sheets, respectively, and govern the accounting treatment of financial instruments. The incoming rules, which must be adopted by insurance firms by 2022, are creating several headaches.

One likely consequence of IFRS 9, in particular, is that insurers experience more volatile profit-and-loss (P&L) accounts for bond holdings, the biggest part of their portfolios. To avoid this, some insurers could shift their fixed-income allocations from commingled funds into externally managed separate accounts, to circumvent or at least reduce the impact. 

Alexandre Mincier, Invesco

Some have already started doing so, said Alexandre Mincier, Paris-based global head of insurance at US asset manager Invesco. “We’ve seen insurers anticipating IFRS 9 and shifting from funds to mandates,” he told AsianInvestor.

One investment executive at a European insurer confirmed, on condition of anonymity, that his firm was considering moving money from some fixed-income funds into separate accounts.

The portfolios affected will be smaller and thus likely more niche ones, perhaps sub $100 million in size, because the larger, core allocations will probably already be in standalone mandates. 

However, some of these allocations may be too small to be segregated accounts on their own, added the insurance executive, so would either need to be increased in size, consolidated into other portfolios or done away with altogether.

NEW TREATMENT

Why this change in approach? Under IFRS 9, mutual fund investments will have to be classified according to their estimated fair value through P&L (FVPL), likely leading to greater P&L volatility. But securities held directly via investment mandates will not, as long as they satisfy certain criteria.

At present, insurance firms in some jurisdictions, including several in Asia and continental Europe, prefer not to use fair-value accounting for fixed income assets. One reason for this is that they sell a lot of participating policies, which pay dividends annually to the policyholder. These dividends are generated from an insurer's profits, so the firm would prefer not to see an increase in P&L volatility. 

Hence some insurers in Europe and Asia are considering moving away from fund vehicles towards segregated accounts, said Gareth Haslip, global head of strategy and analytics in the global insurance solutions team at JP Morgan Asset Management.

Their aim is to reduce uncertainty around investment income and thus help reduce overall P&L volatility, London-based Haslip told AsianInvestor

“Insurers have been talking about these issues for a couple of years but they are really starting to look at them now,” he added.

The shift into mandates will mean more work for insurers’ investment teams, as it will involve closer monitoring of the underlying assets, Mincier said. But the biggest increase in workload will be for the finance teams, which will have to price and account separately for all the separate instruments within the mandate, he added.

NO NEGOTIATION

Many industry players are still debating whether funds will have to be treated as fair value under IFRS 9, Haslip said.

Estelle Castres, Natixis

However, Invesco’s Mincier does not think there will be any room for negotiation over the new standards. He said regulators want insurers to better understand the risks on their books by being fully aware of the underlying assets they are holding.

Estelle Castres, Paris-based global head of key insurance clients at Natixis Investment Managers, confirmed she had seen more discussions around how to avoid accounting volatility fuelled by FVPL.

Hence insurers are considering using mandates or consolidating some investments, mainly for fixed income portfolios, she told AsianInvestor.

She added that these investments still need to pass certain criteria to avoid FVPL treatment, such as whether the bond’s contractual cash flows are Solely Payments of Principal and Interest (SPPI) on the principal amount outstanding.

IFRS 9 and 17 are clearly a central focus for insurance firms with international operations now, Castres and Mincier agreed.

That is true in Asia as well as Europe, with insurers from China to Malaysia to Thailand mulling the implications of the new standards for their businesses and investment portfolios. Some firms, such as China’s Ping An, have already implemented IFRS 9 by choice, while it is already in force for all Taiwanese insurers. 

Other implications of the new standards include increased P&L volatility around stocks, as Ping An has discovered, leading to a growing preference for longer-term, stable equity holdings. Another is the need to closer match assets to liabilities.

See the latest (December 2018/January 2019) issue of AsianInvestor magazine for a feature on how some UK insurance firms are increasing their private credit holdings amid rising concerns over liquidity risk, and how Asian players should take note.

AsianInvestor will host its insurance investment forum in Hong Kong on March 12 and in Singapore on March 14.