Are accounting standards crushing innovation in retirement income products?

Remember when IAS 19 (AASB 119) put a chokehold on traditional longevity products – defined benefit pensions? By forcing companies to value pension liabilities using bond yields, it made defined benefit pensions look like financial kryptonite on balance sheets. The result? A mass exodus from traditional pensions all over the world, as businesses scrambled to avoid balance sheet volatility.

Now, enter IFRS 17 (AASB 17). This beast of a standard might just do to life insurance what IAS 19 did to pensions. It’s designed to clean up insurance contract accounting. But here’s the kicker: it could seriously dampen innovation, especially for innovative market-linked longevity products.

Why? Because IFRS 17 loves complexity. It could force insurers into a corner where they must use conservative risk-free rates to value liabilities, mirroring the IAS 19 playbook. Or if not the liabilities themselves, auditors are forcing life insurers to value any reinsurance backing the longevity risk using risk free rates. This isn’t just an accounting headache; it’s a chokehold on creativity. The fear is real that insurers might shy away from rolling out new, innovative products if their balance sheets start looking like a minefield.

So, are we watching the slow death of life insurance innovation, courtesy of IFRS 17? Could this be another tale of regulation gone wild, prioritising numbers on a page over real-world impacts like choice and competition in the life insurance market right when Australia needs longevity product innovation the most?

As IFRS 17 takes the stage, it’s a moment for reflection: How do we guard the future of insurance innovation against the unintended fallout of regulation? Because if history teaches us anything, it’s that balance sheet beauty shouldn’t kill innovation.

 Neekhil

     

About the Author: Neekhil is a partner at McGing and has worked on a number of AASB / IFRS 17 projects for life insurers and friendly societies.