A number of years in the past, the P&C business’s monetary gurus rolled up their sleeves to determine the brand new numbers in preparation for IFRS-17 reporting.
MSA Analysis, which provides the info for Canadian Underwriter’s 2024 Stats Information, convened an IFRS-17 working group in 2021. It included representatives of firms and audit companies to assist create new KPIs for the P&C business.
“OSFI gave us some beginning factors,” says MSA Analysis president and CEO Joel Baker. “And from there, we developed and established a complete bunch of KPIs with this group and we shared them with the industry last March. And within the CFO/CRO summit that we run, it was felt that there have been too many sophisticated KPIs, so we slimmed them all the way down to the primary batch.”
Parallel to this course of, the IBC fashioned its personal IFRS-17 committee in 2023 Q1, that includes IBC member firms and accounting companies.
“The aim of this group is two-fold: to help IBC with figuring out the suitable metrics to make use of in its advocacy work, and to help the business with a discussion board for dialogue of the metrics,” IBC’s assistant chief economist and head of business information Sarah Fong tells Canadian Underwriter.
Studying a brand new language
In late 2023, Baker described decoding IFRS-17 outcomes as like studying “a brand new language.”
Trade discussions over the previous 12 months have targeted on how the outdated key metrics underneath IFRS-4 have dramatically modified, leaving the interpretation of among the new key metrics underneath IFRS-17 up within the air.
Two central themes emerged on this dialogue:
- IFRS-17 has modified how bills are calculated and allotted; and
- These adjustments make it troublesome to check P&C insurers’ monetary statements.
Underneath IFRS-4, the earlier accounting customary, the business used three customary ratios to measure profitability: loss ratios, expense ratios and mixed ratios.
Loss ratios present the affect of an organization’s claims bills. You divide the price of the corporate’s claims by premium collected for these dangers. A quantity beneath 100% exhibits profitability in that line. A quantity increased than 100% means you might be dropping cash in a sure line of enterprise.
Expense ratios are calculated in the identical method, besides that as a substitute of utilizing claims losses, the quantity divided by premium is the insurer’s complete working bills. These embrace salaries, wages, value of upkeep and operation, supplies, provides, and different enterprise bills accepted underneath acknowledged accounting practices.
Mixed ratios (COR) sum up all the corporate’s bills — each claims bills and working losses — and divide the sum by premium collected. A quantity above 100% means the corporate is reporting an general loss, whereas numbers beneath 100% imply the corporate is worthwhile.
Quick ahead…
IFRS-17 completely modified how insurers calculate their bills.
Underneath the brand new accounting guidelines, many firms report ‘discounted’ versus ‘undiscounted’ losses. Discounted losses give an estimate of what the corporate expects to pay out for the declare in present-day worth.
However a declare may take years to pay out, so insurers add a ‘low cost’ to the anticipated claims loss, factoring in issues like inflation and different monetary impacts which will escalate the price of the long run declare payout.
The low cost ‘unwinds’ because the years move, which implies the loss bills begin to align with their true value because the declare payout is made. For instance, when the low cost is unwound, the impact of rates of interest is extra precisely mirrored within the anticipated loss. This in flip impacts the loss ratio used to calculate the mixed ratio.
As Bobby Thomspon, a accomplice within the audit apply of KPMG Canada, who suggested insurers on the implementation of IFRS-17, explains, “we’re seeing some rate of interest sensitivity [in the results], the place perhaps we didn’t have that rate of interest sensitivity earlier than.”
Some firms are reporting a reduced price, whereas others use an undiscounted price. Which suggests their mixed ratios aren’t actually comparable.
Second, IFRS-17 separates bills between underwriting and investments. Whereas COR beforehand included them each, now it solely consists of the underwriting bills.
“For instance, bills at the moment are allotted between insurance coverage outcomes and non-insurance working bills, which impacts the underwriting revenue and funding outcome,” says Fong. “Additionally, fairness could have transition changes, and this may affect the return on fairness.”
This text is excerpted from one showing within the June-July 2024 print version of Canadian Underwriter. Function picture courtesy of iStock.com/Diki Prayogo
