Securities Times reporter Pan Yurong
In the capital market, if you want to say the most difficult financial statements, insurance companies are one of them. Different from ordinary enterprises, due to the complexity of insurance accounting standards, it is difficult for external users to accurately judge the actual situation of their liability structure and profit sources.
IFRS 17 Insurance Contracts, which came into effect on 1 January this year, aims to make insurers' financial statements more in line with their business substance and improve transparency. At the same time, insurance companies listed at home and abroad have prepared financial reports in accordance with IFRS17 standards since January 1 this year, which is in line with international standards.
After the implementation of the new accounting standards, has the transparency of insurance companies' financial report information been enhanced? Judging from the quarterly and semi-annual reports disclosed by listed companies this year, the format of each financial report varies greatly, and the quality of information disclosure is uneven, and the timeliness, completeness, and consistency of information disclosure need to be improved.
Lifting the mysterious "hijab" of insurance companies
2023 is the first year for the insurance industry to switch to the new accounting standards. On the insurance liability side, the portion of premium income recognized as insurance service income decreased significantly, while on the investment side, there was a significant increase in the financial assets classified as "financial assets measured at fair value through profit or loss", resulting in a greater impact on the current profit from fluctuations in investment income.
Although the financial data has changed, the essence of insurance operations has not changed. The financial reporting under the new standard is like a new mirror, reflecting the insurance industry that is different from the past, which is closer to the truth?
As a special industry engaged in risk pricing, the operating results of insurance companies are based on the actuarial calculation and management of risks, the estimation and expectation of future cash flows, and how to scientifically reflect the true state of an insurance company has been debated internationally for many years.
Under the old standard, the problem of "inconsistency, incomparability, and non-transparency" in insurance financial reporting was prominent. The operating income of the insurance industry is inconsistent and incomparable with other industries; the early recognition of income leads to a mismatch between the income and the expense recognition period; the income contains an investment component, resulting in the income information of insurance companies and other financial institutions being incomparable; after the adjustment of actuarial assumptions, the impact on future profits is included in the current profit or loss, resulting in some insurance companies being able to adjust their performance by adjusting actuarial assumptions.
After years of discussion, the IASB issued IFRS 17 Insurance Contracts in May 2017 and the Amendment to the Right in June 2020, which will come into effect on 1 January 2023.
Subsequently, the Ministry of Finance of the People's Republic of China also issued the Accounting Standard for Business Enterprises No. 25 - Insurance Contracts. According to the regulations, the new standard will be implemented from 1 January this year for insurance companies listed both domestically and overseas, and the new standard will be implemented from 1 January 2026 for other insurance companies that implement the accounting standards for domestic enterprises, and non-listed insurance companies will be encouraged to switch between the old and new standards ahead of schedule.
Compared with the old standard, the new standard has been greatly upgraded. Under the new standard, premium income must be recognized in installments and the investment component is excluded, which can more truly reflect the actual income level of insurance companies, although it has led to a significant decline in the income of insurance companies, especially life insurance companies. In addition, the new standard also makes a clearer distinction between the performance of insurance services and the performance of investments, making it easier to see the sources of profits. The new standard requires more information disclosure, such as separate disclosure of loss-making contracts and changes in the amount of losses, which greatly improves the visibility of insurance companies' financial reports.
An insurance company executive said that since the release of the new insurance contract standard, the insurance industry has set off a "brainstorming of self-awareness".
In the insurance industry, IFRS9, the new standard for financial instruments, was implemented in parallel with IFRS17. Among domestic insurers, except for Ping An, which implemented the new financial instruments standard in 2018, all other listed insurers switched to the new insurance contract standard on January 1 this year.
There are large differences in the disclosure of financial report information
After the implementation of the new standard, the format of financial reports of insurance companies has changed significantly.
At the end of December 2022, the Accounting Department of the Ministry of Finance revised and issued the format of the financial statements of insurance companies for 2023 and explained the subjects with changes in the old table. So far, listed insurance companies have disclosed a quarterly, semi-annual and three quarterly reports, from the overall situation, the company's statement style roughly follows the format of the Ministry of Finance, but individual differences are large, the format of financial reports is not uniform, and the completeness, timeliness, consistency, comparability and other aspects of the disclosure indicators need to be enhanced.
According to the statistics of the 12 semi-annual reports disclosed by seven listed insurance companies in the A-share and H-share markets, the "financial report" chapter, which has the greatest impact on the new accounting standards, is between 66 and 139 pages, with an average length of 100 pages, of which the notes to the financial statements are between 58 and 123 pages, with an average length of 88 pages. The complexity of the disclosure content varies greatly among companies, with the number of pages of the company with the most disclosure being twice the number of pages of the company with the least disclosure.
The total number of pages of the financial report is one of the observation windows for the amount of information disclosure, and the quality of information disclosure and the granularity of information presentation should focus on the disclosure of the notes to the financial report. Insurance companies usually use words to explain the specific content of relevant accounts in the notes to financial reports, and use tables to disclose detailed data and show changes in relevant accounts. Statistics on the number of tables with key points in the financial reports of 7 listed insurance companies can reflect the amount of data disclosed by each company to a certain extent. The data shows that the average number of tables in the notes to the consolidated statements is 42, with the highest number of tables being 65 and the lowest being 23.
The notes to the consolidated financial statements are the most informative places in the financial statements. Overall, Ping An and CPIC have the most tables disclosed here, and the granularity of the disclosed data is relatively fine.
For example, the new subject "Insurance Contract Liabilities" under the new standard is the most important liability of insurance companies, usually accounting for more than 80% of the total liabilities. According to the new standard, the account is required to disclose in detail the balance reconciliation statement from the beginning to the end of the period in the notes to reflect the nine items of information related to the carrying amount of the insurance contract, of which the losses incurred in the current period are also required to be disclosed separately. However, in the semi-annual report, many insurance companies only disclose a few of them.
In terms of consistency of reporting information between the two places, Chinese People's Insurance and China Pacific Insurance performed the best. The biggest difference in information is Chinese life. The semi-annual report of Chinese Life A shares is still disclosed in accordance with the old standard, and the new standard statements are only reflected in the form of supplementary information on the last few pages, while the half-year report of H shares is implemented in accordance with the new accounting standards. It is understood that between 2023 and 2025, Chinese Life will adopt the transition plan of the new accounting standards for insurance contracts and disclose reports in different formats at home and abroad.
The important intention of the implementation of the new standard is to improve the authenticity, accuracy and comparability of accounting information of insurance companies. However, judging from the current progress, the semi-annual reports released by various companies on the grounds of simple disclosure are not complete enough, the granularity is not fine enough, and the comparability between peers needs to be improved.
Guo Zhenhua, director of the Department of Insurance at Shanghai University of International Business and Economics, said that there is no mandatory requirement for insurance companies to prepare semi-annual reports in accordance with the unified format of the Ministry of Finance, and he looks forward to the first annual report of the new standard released next year, and there will be more complete disclosure of various information. Compared with the financial reports of the old standard, the new financial reports will reveal more important business information and show the outside world a more transparent insurance industry.
Non-listed insurers
Accelerate the switch to new guidelines
Because of the responsibility to pay compensation to the majority of policyholders, insurance companies are in a sense "public companies", and their business status needs to be placed under public supervision. Regulators require non-listed insurance companies to make public information disclosure every year.
1 January 2026 will be the final point for more than 100 non-listed insurers to switch to the new standard, and 1 January 2025 will be the transition date for the new standard statements. Until then, insurers have a lot of work to do.
In order to meet the metrology requirements of the new standard, insurers need to transform the input and output of data in existing business scenarios. Taking the finance department as an example, the specific business actions such as premium payment, claim payment, policy refund, and commission issuance need to be analyzed and sorted out according to the connotation of the new standard, and then the data entry will be transferred to the corresponding account under the new standard.
According to an industry insider, the implementation of the new insurance contract standard is the biggest change the insurance industry has encountered so far, involving the linkage of finance, actuarial and IT departments, and the complexity is unprecedented. In order to ensure a smooth transition, insurers need to take three steps: first, to speed up the construction of relevant systems and reform the financial system, second, to apply the original business to a basic assessment under the new standard, and third, to add new business to test the operating results and complete the switch.
A senior executive of an insurance core system supplier predicts that 60% of small and medium-sized insurance companies will enter the bidding and implementation stage of system construction in the first half of next year. It is understood that the investment of listed insurance companies in the transformation of the new accounting standards is at the level of 100 million yuan, and the procurement needs of small and medium-sized insurance companies are mostly concentrated in the million and 10 million levels.
It is generally believed in the industry that the implementation of the new standards will put pressure on small and medium-sized companies, especially some insurance companies with unclear accounts, weak operating capabilities and poor foundations may be affected. In the next three years, the insurance industry will not only face a change in the measurement standards of insurance contracts, but also an opportunity for financial digital transformation, and a major change that will drive the reshaping of the entire industry's operational value chain.