How the P&C industry’s making sense of IFRS-17

Several years ago, the P&C industry’s financial gurus rolled up their sleeves to figure out the new numbers in preparation for IFRS-17 reporting.

MSA Research, which supplies the data for Canadian Underwriter’s 2024 Stats Guide, convened an IFRS-17 working group in 2021. It included representatives of companies and audit firms to help create new KPIs for the P&C industry.

“OSFI gave us some starting points,” says MSA Research president and CEO Joel Baker. “And from there, we developed and established a whole bunch of KPIs with this group and we shared them with the industry last March. And in the CFO/CRO summit that we run, it was felt that there were too many complicated KPIs, so we slimmed them down to the first batch.”

Parallel to this process, the IBC formed its own IFRS-17 committee in 2023 Q1, featuring IBC member companies and accounting firms.

“The purpose of this group is two-fold: to assist IBC with identifying the appropriate metrics to use in its advocacy work, and to support the industry with a forum for discussion of the metrics,” IBC’s assistant chief economist and head of industry data Sarah Fong tells Canadian Underwriter.

Learning a new language

In late 2023, Baker described interpreting IFRS-17 results as like learning “a new language.”

Industry discussions over the past year have focused on how the old key metrics under IFRS-4 have dramatically changed, leaving the interpretation of some of the new key metrics under IFRS-17 up in the air.

Two central themes emerged in this discussion:

IFRS-17 has changed how expenses are calculated and allocated; and
These changes make it difficult to compare P&C insurers’ financial statements.

Under IFRS-4, the previous accounting standard, the industry used three standard ratios to measure profitability: loss ratios, expense ratios and combined ratios.

Loss ratios show the impact of a company’s claims expenses. You divide the cost of the company’s claims by premium collected for these risks. A number below 100% shows profitability in that line. A number higher than 100% means you are losing money in a certain line of business.

Expense ratios are calculated in the same way, except that instead of using claims losses, the number divided by premium is the insurer’s total operating expenses. These include salaries, wages, cost of maintenance and operation, materials, supplies, and other business expenses accepted under recognized accounting practices.

Combined ratios (COR) sum up all the company’s expenses — both claims expenses and operating losses — and divide the sum by premium collected. A number above 100% means the company is reporting an overall loss, whereas numbers below 100% mean the company is profitable.

Fast forward…

IFRS-17 totally changed how insurers calculate their expenses.

Under the new accounting rules, many companies report ‘discounted’ versus ‘undiscounted’ losses. Discounted losses give an estimate of what the company expects to pay out for the claim in present-day value.

But a claim could take years to pay out, so insurers add a ‘discount’ to the expected claims loss, factoring in things like inflation and other financial impacts that may escalate the cost of the future claim payout.

The discount ‘unwinds’ as the years pass, which means the loss expenses start to align with their true cost as the claim payout is made. For example, when the discount is unwound, the effect of interest rates is more accurately reflected in the expected loss. This in turn affects the loss ratio used to calculate the combined ratio.

As Bobby Thomspon, a partner in the audit practice of KPMG Canada, who advised insurers on the implementation of IFRS-17, explains, “we are seeing some interest rate sensitivity [in the results], where maybe we didn’t have that interest rate sensitivity before.”

Some companies are reporting a discounted rate, while others use an undiscounted rate. Which means their combined ratios aren’t really comparable.

Second, IFRS-17 separates expenses between underwriting and investments. Whereas COR previously included them both, now it only includes the underwriting expenses.

“For example, expenses are now allocated between insurance results and non-insurance operating expenses, which affects the underwriting profit and investment result,” says Fong. “Also, equity may have transition adjustments, and this would impact the return on equity.”

This article is excerpted from one appearing in the June-July 2024 print edition of Canadian Underwriter. Feature image courtesy of iStock.com/Diki Prayogo