Every year, the release of the Fortune Global 500 list will set off a wave in the global business community, some cheering, some overshadowing, including foreign and domestic.
On August 5, the 2024 Fortune Global 500 list was announced, and Chinese insurance companies such as Ping An of China, Chinese Life, Chinese People's Insurance, China Taibao, Taikang Insurance Group, and AIA were among them.
Different from the list in previous years, due to the switch between the "new and old" accounting standards, the ranking has fluctuated greatly, with some ranking "improving", some ranking "retreating", and even falling out of the list.
As soon as the list came out, the most talked about such a big ranking change in the market was due to the compliance with the "old and new" accounting standards.
So, how did the new accounting standards pull down the ranking of most insurance companies?
2024 "List"
The Fortune Global 500 list, published annually by Fortune magazine, is a list that measures and compares the world's largest companies. The ranking refers to factors such as operating income, profit, and data transparency, and is ranked by the operating income of the company's accounting year from the highest to the lowest. As a result, operating income becomes the most important factor in the ranking.
From the Fortune Global 500 ranking in 2024, 6 Chinese insurance companies, Ping An of China, Chinese Life, Chinese People's Insurance, China Taibao, Taikang Insurance, and AIA ranked 53rd, 59th, 158th, 331st, 381st, and 446th of the world's top 500 companies, respectively, with operating income of US$145.759 billion, US$139.616 billion, US$78.182 billion, US$45.760 billion, and US$39.412 billion in 2023, respectively. $34.851 billion.
From the perspective of 2023, a total of 7 insurance companies in China have been selected into the Fortune Global 500, namely Ping An of China, Chinese Life, Chinese People's Insurance, China Taibao, China Taiping, Taikang Insurance, and New China Life, ranking 33rd, 54th, 120th, 192nd, 385th, 431st, and 478th respectively.
Fortune Global 500 (domestic insurance companies) statistical table
Compared with 2023, the main feature of Chinese insurers in this year's Fortune 500 list is the decline in the ranking of listed insurers.
Analytical accounting standards
Why are these changes happening? This starts with the new accounting standards.
According to the requirements of the Ministry of Finance and the International Accounting Standards Board, overseas listed insurers are required to implement the new Insurance Contract Standard (IFRS17) and the new Financial Instruments Standard (IFRS9) from 2023, and non-overseas listed insurers are required to implement the new standard from 2026.
Under the new standard, the main financial indicators of insurers will change, as the investment component and the premiums collected will no longer be included in income, and scale premiums will no longer be the driving factor of "insurance business income" in the income statement. In other words, the premium income of insurance companies needs to be recognized in installments and the investment cost is excluded, which will also directly lead to a decline in the book income of insurance companies, especially the income of listed insurance companies with a large proportion of pure life insurance or life insurance will decline significantly.
Judging from the situation in 2023, listed companies such as Ping An of China, Chinese People's Insurance, China Pacific Insurance, China Taiping, and Xinhua Insurance have all used the new standards.
The change of the "old and new" criteria has directly led to a decline in the revenue of insurance companies, and there is a large difference between the insurance service income and the original premium, which is also the main reason why the operating income data of Xinhua Insurance and China Taiping are no longer on the list. CPIC's life insurance business, which accounts for most of the group's revenue, has also been significantly affected.
The impact of the new standard will be more visible if it is implemented on a case-by-case basis. Taking CPIC as an example, the annual report disclosure data of the group company shows that under the "old standard", the operating income in 2022 will be 455.372 billion yuan, and under the "new standard", the operating income in 2022 will be 332.140 billion yuan, compared with the difference between the two data by 123.232 billion yuan, a decrease of 27.1%.
From the perspective of life insurance business, the difference is even more obvious. Taking CPIC as an example, under the "New Standard", CPIC's consolidated insurance service revenue in 2023 will be reduced by about 37% compared with the premium income of the "Old Standard", of which life insurance companies will decrease by about 63%.
Statistical table of operating income of domestic insurance companies
(Unit: USD/million)
Note: Taiping and Xinhua USD revenue is estimated based on exchange rates, and the rest is disclosed by Fortune Global 500
Compared with insurers that have introduced the "new standards", domestic non-listed insurance companies still have a three-year window to adapt to the "new standards" and need to accelerate the adjustment of their business structure.
According to the data, in 2023, CPIC Life Insurance, a subsidiary of CPIC, will achieve a new business value of 10.962 billion yuan, a year-on-year increase of 19.1%, of which the new business value rate will be 13.3%, an increase of 1.7 percentage points year-on-year, and the bancassurance channel will achieve a scale premium of 38.069 billion yuan, a year-on-year increase of 12.5%, of which the regular payment of new insurance will be 9.024 billion yuan, a year-on-year increase of 170.2%, and the new business value will increase by 115.6% year-on-year.
Seize opportunities in change
According to a report by PricewaterhouseCoopers, one of the international accounting firms, IFRS17 brings the income of the insurance industry on par with other industries. Income is allocated in each period in proportion to the proportion of insurance liabilities and other services that the entity is expected to provide during that period, and the payouts are shown when they are actually incurred. The investment component (i.e. "the amount payable to the policyholder even if the insured event had not occurred") is excluded from income and payouts. Insurers are required to disclose amounts, judgments and risk information derived from the insurance contract. The disclosure requirements of IFRS 17 are more detailed than those of IFRS 4.
KPMG, also one of the world's Big Four accounting firms, believes that for most life insurers, using the current discount rate while no longer "lock-in" assumptions is likely to lead to significant changes in accounting. The burden and time value of the minimum guaranteed rate will become more transparent. Non-life insurers should fully understand and navigate the applicable standards of the premium allocation method in order to retain a more familiar accounting model. However, the method of discounting indemnity liabilities that have already been incurred may be a significant change.
As for the promulgation and implementation of the "New Standards", it should be said that the further convergence of the mainland accounting standards and the international accounting standards has been achieved, which is conducive to international investors to better understand the financial situation of Chinese enterprises, and is an important measure to improve the quality of accounting information of Chinese enterprises, guide insurance companies to focus on long-term value, and strengthen the internal control mechanism of insurance companies.
The critical period of switching between the old and new standards coincides with the transformation and upgrading of China's insurance industry, and most insurance companies are still in the stage of "growing pains".
After all, a financial power needs an insurance power, and an insurance power needs insurance institutions to go out and bring in, and an important premise is to be in line with international standards.