How IFRS 17 changes the language insurers must use

For Canada’s P&C insurance industry, IFRS 17 is ushering in an era in which people must understand how to speak multiple languages.

But for an industry that used to know what COR meant, the old order has turned upside-down, says Alister Campbell, president and CEO of the Property and Casualty Insurance Compensation Corporation.

“The logical thing to do is take a look at the combined ratios of your markets, because if it’s over 100%, that’s not good. And if it’s under 100%, it’s better….

“But when you imagine that loss ratio and expense ratio are no longer — it’s like the end times. The sun is no longer rising in the East. Cows will stop giving milk. And Canadian property casualty financial statements are now incomprehensible even to the executives running the company.

“This is not progress.”

Related: What will change the P&C industry’s rosy outlook?

IFRS 17 language will start to make sense over time, as a collective understanding forms, industry sources tell CU. But until then, IFRS 17 KPIs are still very much a work in progress.

“Insurers can differ in their interpretation of some of the movement of line items in IFRS 17, such as expenses and financing income,” IBC’s assistant chief economist and head of industry data Sarah Fong told Canadian Underwriter.

“The lack of consistency across companies leads to difficulty in benchmarking. It will be a few years before consistent key performance metrics emerge and year-over-year comparison is more accurate.”

New performance metrics

Campbell predicts IFRS 17 skeptics today may start sounding like the old guard – resistant to change as the industry comes to grips with the new KPIs.

“Over time, I’m sure it will work out,” he says. “And I could be sounding like one of those old guys who’s complaining that kids don’t pull their pants up and wear their hats backwards. But honestly, this stuff is challenging and stressful, and expensive, and it’s not actually helping companies understand the drivers of their business.”

The key to interpreting the differences between IFRS 17 results and IFRS 4 metrics is to ask the right questions, says Bobby Thompson, a partner in the audit practice of KPMG Canada, who advised insurers on the implementation of IFRS 17.

“A lot of the cashflow methodology between IFRS 4 and IFRS 17 are similar, and you’re going to see some differences coming via the discount rate, the ‘other risk’ adjustment, and a few other factors like that, because expenses are also accrued in there, so there might be differences in expenses,” he tells CU. “I think it’s important to understand the differences, but understand that, in both [IFRS 4 and IFRS 17] scenarios, they’re an estimate.

“The question that should be asked is: ‘Did my liability for incurred claims go significantly up? Or significantly down? Or stay very close? And does that make sense based on what I know about the company and its performance?”

Related: Which IFRS 17 combined ratio should you use?

This article is excerpted from one appearing in the June-July 2024 print edition of Canadian Underwriter. Feature image courtesy of iStock.com/chris2766