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.