In response to changes brought about by the new accounting standard, Malaysian Financial Reporting Standards 17 (MFRS 17) Insurance Contracts, which took effect on 1 January 2023, Ratings agency RAM has updated its disclosure formats for the financial statements of insurance companies and refined the computations of some key financial ratios.
The key change under MFRS 17 is to recognise profit over the coverage period of the insurance contract instead of recognising profit upfront when premiums are received under MFRS 4 previously. With this change, comparability among insurers as well as with other sectors is expected to improve. The new standard also provides better disclosure. For instance, losses from onerous (i.e. loss-making) contracts are now separately recognised.
Importantly, the overall economic profit of insurance contracts does not change with the adoption of MFRS 17. Most insurers have indicated that the new standard will not cause a shift in their fundamentals and business strategies. At present, RAM said it has no impact on regulatory capital of insurance companies and takaful operators in Malaysia until after 2024 at the earliest, according to Bank Negara Malaysia.
While the new standard entails significant changes in the manner in which insurance profit and liabilities are measured and presented, it does not fundamentally change our approach to assessing an insurer’s credit standing. The Ratings agency does not expect these updates to have any credit implications on the ratings of any RAM-rated issuers or debt instruments.
