Exploring the impact of ECL model application under IFRS9 on belgian insurers

Abstract

IFRS 9 was implemented as a response to the concerns raised by the G20 regarding the complexity and inefficiency of the previous IAS 39 standard. The primary problem with IAS 39 was the delayed recognition of credit losses on loans and other financial instruments. To address these issues, IFRS 9 introduces new impairment rules. This updated standard became mandatory for Belgian insurers starting in 2023. This thesis undertakes a comprehensive examination of the implementation of the new regulatory requirement and the preparations made by institutions for adhering to the updated standard. The study begins by providing an overview of the IFRS 9 standard, elucidating its purpose, and highlighting the key stages involved in its implementation process. To answer the research question and put the theoretical concepts highlighted in the literature review into practice, we conducted qualitative research through interviews with Belgian insurer professionals to address the impact of the expected credit loss (ECL) model and the transition to IFRS 9 on these institutions through concrete examples of the ECL calculation. In addition, we conducted case studies of the bank insurers which adopted an early application of the standard to compare the results and findings with the interview output of these insurance companies, which are KBC and Belfius. In this context, the results show that the significance of the ECL model under the IFRS 9 impact model varies amongst institutions depending on the size of the insurance company. The application of the ECL model had varying effects on different Belgian insurers. Companies such as Ageas Insurance and Baloise primarily focussed on the implementation of IFRS 17, considering the impact of IFRS 9 to be relatively minor in comparison. However, for NN Insurance, Allianz Benelux, and Belfius, the adoption of IFRS 9 had a significant impact on their operations. It improved transparency and brought about alignment between asset values and liabilities. Moreover, Securex acknowledged the positive consequences of implementing IFRS 9, particularly in the realm of investment management. The new standard provided an additional layer of protection by facilitating the long-term analysis of credit risks. This enabled Securex to make more informed decisions and effectively manage its investments. It is recommended to continuously monitor and improve the application of the Expected Credit Loss (ECL) model. Insurers should establish mechanisms to regularly review and assess the quality of data, performance of the model, and adherence to regulatory requirements. This ongoing monitoring enables insurers to identify areas that require improvement, adjust the ECL model according to evolving market conditions, and effectively address emerging risks. By doing so, insurers can enhance the application of the ECL model under IFRS 9, resulting in more precise and transparent financial reporting, improved risk management practices, and increased comparability among insurance companies.