8 minute read 17 Nov 2021
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IFRS 17 and investor stories: five key actions for insurers

Authors
Phil Vermeulen

EY Global IFRS 17 Leader; Partner, Insurance, Ernst & Young AG

Transformation leader and client relationship partner. Passionate about helping insurance clients fulfill their potential. Average runner; better cook. Father to twin boys.

Jan-Hendrik van Lengerich

Senior Manager, Insurance, Ernst & Young AG

Advisor to project and client teams worldwide. Advocate of clear and insightful investor stories. Motivated to optimize performance measurement of insurers. Passionate triathlete and ironman.

8 minute read 17 Nov 2021

Global EY survey explores changes to KPIs under IFRS 17 and recommends actions insurers should take now. 

In brief
  • IFRS 17 represents a major change to insurers and reporting on KPIs, however, over a third of survey respondents haven’t yet started an impact assessment.
  • This article outlines our key findings and, importantly, shares recommendations insurers can act on now, especially in the realm of investor communications.

Most senior finance and accounting executives in the insurance industry understand just how big a change IFRS 17 represents. Recent EY research confirms the scope of the impacts and offers insights into the current state of IFRS 17 planning, particularly relative to developing an investor story. 

In our view, the majority of insurers are asking the right questions and prioritizing the right topics as they prepare for the January 2023 implementation date. However, much work remains to be done. There is also the risk that the emphasis on technical matters may distract from the need to develop a clear storyline for investors. Given that initial communications are only a year away for most insurers, developing the investor narrative should be a top priority. Specifically, there is a lack of consensus on big-picture key performance indicators (KPIs), including combined ratios and return on equity (ROE). 

This article highlights a few key findings from our survey of life, property and casualty (P&C) and composite insurers, representing all of the major IFRS reporters from around the world. It also outlines recommended actions for insurers that are looking for a smooth migration to IFRS 17, especially in the realm of investor communications. The full research data shows both the big-picture strategic priorities and the many technical details that must be managed. Further, it outlines how most firms will have to define their own path forward, both in reporting their own numbers and relating to evolving market standards.

Responses by region and type of insurance company 

Responses by region and type of insurance company
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1

Chapter 1

Current state

For the most part, firms understand the technical impacts of IFRS 17/9.

Over one-third of our respondents have not yet started an impact assessment of IFRS 17/9 on their KPIs. Firms that have conducted a quantitative impact analysis are already seeing the value of their efforts, primarily in the form of engagement with boards and management regarding future performance and identifying levers for optimization.

EY Global IFRS KPI Survey 2021

38%

of our respondents have not yet started an impact assessment of IFRS 17/9 on their KPIs

Firms generally understand the technical impacts. Of firms that have completed assessments, two-thirds say they view the overall impact of IFRS 17 on performance as either high or medium, with the most significant impacts on ROE and accounting volatility. It’s important to note that overall impacts will differ for firms based on their underlying business models and current reporting environment. However, there are important policy choices, such as transition methodology and what to take through P&L or other comprehensive income (OCI). These decisions will impact the “shape” of the financials and have a knock-on impact on KPIs. They also underscore the need to conduct impact analysis, which will help define the range of outcomes across policy choices, and across business plan scenarios, and inform the narratives insurers will share with investors.

Nearly one-third, or 31% of respondents say their organizations are using IFRS 17 implementation to drive full finance transformation, while 37% are fully focused on IFRS 17 as the primary motivation for adoption. Only 13% are aiming for minimum compliance. A significant percentage of insurers see the opportunity to create business value (through finance transformation) given the widespread impacts and level of effort required to achieve compliance.

Approach to IFRS 17 implementation

Approach to IFRS 17 implementation
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Chapter 2

Looking ahead

Consider using IFRS reporting to explain your performance as often as possible

The full impact of IFRS 17 will be felt for a long time to come, partially because KPIs and metrics will change. For instance, certain non-GAAP economic measures, such as market-consistent embedded value (MCEV), will be much less significant for life insurers in the future. However, in certain cases it will remain very important to measure and demonstrate profitable new business growth. More than half of our survey respondents, from composite life and health insurers, will shift to using IFRS 17 new business contractual service margin (CSM) instead of value of new business (VNB) measures to do so.

We believe it will be in insurers’ best interests to use audited IFRS reporting to explain their performance as often as they can, if only because it will simplify matters for all stakeholders. Those insurers planning to continue with market-consistent VNB typically have a strong view on parameterization differences with the IFRS standard; thus, they will need to explain and reconcile these for users of the accounts.

Non-GAAP measures, such as combined ratio (CR) and gross written premium (GWP), will continue to be important metrics for P&C insurers. CR is viewed as useful for communicating profitability; however, as the definitions adopted by firms diverge, comparability across IFRS and also with US GAAP reporters may become a challenge. Over time, we expect a consensus, industry-standard definition of CR to emerge.

GWP is still seen by most firms as a more useful measure of volume and growth than IFRS insurance revenue. Thus, many carriers intend to disclose it as an additional non-GAAP measure. However, IFRS 17 also offers future cash inflow information that could replace GWP in the long run.

There is not yet an industry consensus on how to measure ROE under IFRS 17. A full 60% of firms have not yet finalized their definition of ROE. Among those that have determined how they will calculate ROE, there are a range of approaches; some are continuing with the current definition of net profit divided by equity, while others are considering alternatives, including the use of CSM information.

Given that ROE is ranked by firms as a top-three performance indicator, the lack of a standard approach will likely result in comparability issues and challenges. As with CR, we expect the industry to reach consensus on the definition of ROE under IFRS. 

Given that return on equity (ROE) is ranked by firms as a top-three performance indicator, the lack of a standard approach will likely result in comparability issues and challenges. As with combined ratio (CR), we expect the industry to reach consensus on the definition of ROE under IFRS 17.

Our survey respondents believe that future management reporting frameworks and incentives are expected to be heavily influenced by IFRS. Almost 60% of firms stated that IFRS would be the main driver of management reporting, and more than 40% said they would base corporate incentives either entirely or mostly on IFRS. These trends suggest that consensus definitions on key metrics will emerge sooner rather than later. 

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Chapter 3

Focusing on investors

Most respondents plan to disclose IFRS 17 impacts before the effective date.

These redefined and evolving metrics are perhaps most important in the context of the investor story. Most respondents plan at least one public disclosure of IFRS 17 impacts prior to the effective date, though these will be mostly qualitative. Half of the respondents anticipate their first communication to be released at some point in 2022.

Respondents are mostly planning to provide qualitative explanations of their methodology choices and the potential impacts of the IFRS transition. Less than one-third plan to share quantitative information (e.g., ROE targets, restated 2022 financials).

Most survey respondents planned to disclose information only for 2022. Thus, there is a risk that with access to limited information prior to the effective date the users of the accounts will face a challenge in understanding the impacts in 2023. However, the need to educate the market requires significant effort – working through metrics, conducting a few “dry runs” with actual numbers, and providing guidance – which has a knock-on effect on timetables. 

The need to educate the market requires significant effort – working through metrics, conducting a few “dry runs” with actual numbers, and providing guidance – which has a knock-on effect on timetables.

Overall, insurers believe the investor story will be driven largely by earnings (cited by 32% of respondents) and growth (24%). The narrative itself will be shaped by a few key principles, which respondents ranked as follows:

  • Transparency of financial performance: 53%
  • Market comparability: 47%
  • Alignment to business steering: 46%
  • Understandability: 46%
  • The need to manage accounting volatility: 41% 
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Chapter 4

Five recommended actions

Here’s what insurers can do now to ensure a smooth migration to IFRS 17.

While the right path forward will be unique to each insurer, the following steps can serve as a foundation for reporting and communicating effectively with investors in the post-IFRS world: 

  1. Conduct impact assessments to reveal gaps and challenging details: Most firms that have conducted impact assessments have been able to identify potential complexities and pitfalls, especially relative to the shape of future results and the definition of future KPIs. With any change of this scope, the devil is in the details which impact assessments help reveal.

  2. Plan for multiple dry runs: Determining the right future KPIs and best underlying definitions with real performance numbers provides insights into how the new metrics will play out, and what investors will need to know.

  3. Recognize that success will be measured both absolutely and relatively: Investors evaluate companies based both on individual results and performance relative to peers and competitors. Thus, your metrics must explain your bottom-line numbers and have a clear relationship to market expectations and standards. That is, your definitions of CR and ROE must make sense in the context of what other insurers are doing if investors are to find them credible.

  4. Focus investor communications on the big picture: Insurers understand what investors want from financial reporting – transparency, comparability and a lack of volatility in results, as well as a focus on earnings and growth. Given how much IFRS 17 will change reporting, insurers must also prioritize understandability, and making sure investors understand the context of the new metrics. It’s a matter of ensuring investors understand why you are reporting the way you are, as well as what and how you are reporting.

  5. Align internal performance management to external reporting: Our survey results demonstrate that insurers recognize the potential IFRS 17 has for internal steering and how new disclosures enable meaningful management reporting. Finance and accounting leaders can start planning now to realize the benefits of this consistency in the future.

As the long-delayed IFRS 17 implementation deadline gets closer, our survey results clarify that insurers are beginning to understand the scope of the technical impacts and are preparing in earnest. However, there remains considerable nuance and detail to manage on the road ahead, not least because the definition of key metrics will continue to evolve.

That uncertainty puts a premium on the investor story – helping capital markets understand how your company is performing and how it’s positioned for an era of ongoing change in insurance. We would be delighted to share more detailed survey findings, and discuss the unique impacts and opportunities presented by IFRS. Contact one of the authors to learn more.

IFRS 17 implementation

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Summary

Despite IFRS 17 being the biggest insurance accounting change in decades, our survey found that 38% of insurers haven’t yet carried out an impact assessment.

This article has outlined five actions insurers can take now to ensure a smooth migration to IFRS 17, especially in the realm of investor relations.

About this article

Authors
Phil Vermeulen

EY Global IFRS 17 Leader; Partner, Insurance, Ernst & Young AG

Transformation leader and client relationship partner. Passionate about helping insurance clients fulfill their potential. Average runner; better cook. Father to twin boys.

Jan-Hendrik van Lengerich

Senior Manager, Insurance, Ernst & Young AG

Advisor to project and client teams worldwide. Advocate of clear and insightful investor stories. Motivated to optimize performance measurement of insurers. Passionate triathlete and ironman.