What the IFRS 17 temporary adjustments mean for insurers

The International Financial Reporting Standards 17 (IFRS 17) is now in place, but a temporary adjustment to the regulatory prudential limits related to investments, commercial lending and borrowing for P&C insurance companies will allow federally regulated insurers (FRIs) two years to become compliant with the new standards.

IFRS 17 introduces a new standard that changes the accounting, actuarial and reporting practices for insurers, and also affects tax, products and investments.

To measure the impact of IFRS 17 on insurers, OSFI launched an industry-focused Quantitative Impact Study in 2021.

Data from the study reveal total assets for each company are expected to decline about 20% on average upon transition to IFRS 17. This is due to a decline in asset balances for various accounts such as insurance-related receivables, deferred policy acquisition expenses, and other recoverables on unpaid claims.

Based on the study results, OSFI established a two-year temporary relief period starting at the beginning of 2023. This period is intended to  position companies to meet investment, lending and borrowing limit standards by Dec. 31, 2024.

This two-year relief period means regulatory prudential limits will increase by 25% for federally-regulated P&C insurers to adjust for the 20% decline in total asset balances.

“That 25% presumably isn’t just an arbitrary or capricious number,” said Martin Abadi, partner at Borden Ladner Gervais LLP (BLG). “It appears to be…on available information.. rationally connected to the studies that were conducted, and the feedback that they received from the insurers on the effect on asset balances of the new accounting standard….

“It’s going to be carefully monitored and I suspect there’s going to be a lot of feedback as well from insurers directly on this very point, under the new obligations, and on the accommodations that are being extended to them.”

Due to the changes in accounting, some companies would have become non-compliant with one or more regulatory prudential limits related to investments, commercial lending or borrowing.

The two-year temporary relief is designed to give federally regulated P&C insurers “reasonable time to become compliant with new International Financial Reporting Standard (IFRS) 17 Insurance Contracts,” OSFI told Canadian Underwriter in a statement last month. “Providing reasonable time for the property and casualty insurance industry to become compliant is prudent and supports a robust implementation of the new standard.”

Entering into a period of economic downturn and rising interest rates, a temporary adjustment of this nature may help the regulator to bolster the financial resilience of federally regulated P&C insurers.

“These important issues are always within the mind of the regulator, for financial resilience purposes, and certainly in times like these, where we do have a number of exogenous shocks to the economy, where we do see interest rates rising in response to inflationary pressures,” Abadi explained.

OSFI also released a specification of certain amounts and how they would be adjusted.

For example, under the temporary adjustment, instead of 2% (as prescribed by section 7 of the Borrowing (Property and Casualty Companies and Marine Companies) Regulations), 2.5% of the total assets of the company (i.e., a 25% increase from 2%) could thus be used for the purpose of section 476 of the [Insurance Companies] Act. In this instance, section 476 of the Act states that a company and its subsidiaries “shall not enter into any debt obligation…if as a result the aggregate of the total debt obligations of the company…and the stated capital of the company would exceed the prescribed percentage of the total assets of the company.”

Other specifications of certain amounts are also subject to a 25% increase. They include: 

• Instead of the percentage prescribed by section 5 of the Commercial Loan (Insurance Companies, Societies, Insurance Holding Companies and Foreign Companies) Regulations, 6.25% is to be used for the purpose of section 505 of the Act.
• Instead of the amount set out in paragraph 5(1)(b) of the Investment Limits (Insurance Companies) Regulations, if the company is a property and casualty company 12.5% of its total assets is to be used for the purpose of section 506 of the Act.
• Instead of the amount set out in paragraph 5(2)(b) of the Investment Limits (Insurance Companies) Regulations, if the company is a property and casualty company 31.25% of its total assets is to be used for the purpose of section 507 of the Act.
• Instead of the amount set out in paragraph 5(3)(b) of the Investment Limits (Insurance Companies) Regulations, if the company is a property and casualty company 43.75% of its total assets is to be used for the purpose of section 508 of the Act. 

Feature image by iStock.com/nevarpp