It’s been nearly two years since the IFRS 17 insurance accounting standard came into effect on Jan. 1, 2023, and the kinks are still being worked out.
In Canadian Underwriter’s latest What’s on Dec? podcast, MSA Research president Nevina Kishun and JSCP consulting actuary Benny Chan take a comprehensive look at some of the key performance indicators (KPIs) in the standard. They describe how these metrics are calculated, and compare IFRS 17 to its predecessor, IFRS 4.
Nevina and Benny also explore some of the differing views on which KPIs should be used.
Looking to the future, the two discuss which changes or expanded metrics the industry should consider.
Audio transcript
Intro: You’re listening to What’s On Dec?, the Canadian Underwriter podcast, focusing on the hottest topics in the P&C community, featuring insights, analysis, and interviews with subject matter experts throughout the year.
Pete Tessier:
Hey everyone. Welcome to another edition of What’s On Dec?, the Canadian Underwriter podcast. I’m Pete Tessier here with Curt Wyatt and we’re from The Insurance Podcast, and we’re happy to get into something not everyone wants to talk about, and that is accounting regulation with insurance. But if you’ve been to any conferences lately, you know that IFRS 17 is becoming an issue and there’s a lot to discuss.
Curt Wyatt:
This is a tough topic. Like, it really dives into the nuts and bolts of insurance. I mean, let’s face it, we’re in the numbers industry.
Pete Tessier:
Yes, we are.
Curt Wyatt:
Calculating those numbers, putting them out, making sure that we can measure and understand where the industry is going. We’ve got to be forecasting for the future. We’re seeing a lot of stuff happen in the insurance space in 2024, and having good numbers is going to be critical for the future of how insurance companies function.
Pete Tessier:
Yeah, absolutely, Curt. And I think the other part that is interesting with this is there’s an opportunity here to understand about KPIs, how they integrate into this compliance aspect of IFRS 17, and what the outlook is. And so I think with our guests, Nevina Kishun and Benny Chan, Nevina’s the head and president now of MSA Research, and Benny is an actuarial consultant. They’re going to shed some really cool light on how the mechanics of all this can work, and how you can get ahead of some of the changes that are coming and get a lot of context.
Curt Wyatt:
Absolutely. And Canada’s a unique place, right? We have regulation, whether it’s federal, provincial, we have to keep all this together. And when you bring a third party in, like MSA Research, it gives the other entities working within this space as the insurers, reinsurers, regulators, an opportunity to consolidate and bring back valuable information that really propels us into a better space as a country when it comes to managing risk, Pete.
Pete Tessier:
100%. So Curt, look, we can talk about this, but why don’t we bring in the experts and get them to share their thoughts. So let’s bring in Nevina and Benny. So we brought in Nevina Kishun and Benny CY Chan, and Nevina is the president of MSA, and Benny is a consulting actuary. So as you know from the intro, we’re here to talk about IFRS 17, what it’s evolved to from IFRS 4, which came out in 2004. Welcome to What’s On Dec, the Canadian Underwriter podcast. Let’s get into what IFRS 17 is and what it’s replacing and its purpose, then.
Nevina Kishun:
Yeah, so IFRS 17 is a new accounting standard. It’s not really new because insurance companies have been in the trenches for converting their accounting practices over to 17 for the past couple of years. And the reporting year started in 2023, so we do have a little bit of data. The differences are really that, previously under IFRS 4, actuaries had a lot of leeway into…they still had standards, not to say that there wasn’t, but they worked sort of in a silo. Whereas IFRS 17 forced them to work with accountants and IT to try to get the underlying data, both agree on what the assumptions were and present those shared assumptions to the regulator. So IFRS 17, the purpose of that was to increase the transparency and to standardize the way things are calculated as they go into the financial statements for the regulator.
Curt Wyatt:
Hey, hi, Nevina and Benny. It’s Curt here. And this is interesting. Hey, I’ve got a CPA CFA just down the hall from me here, so I’m the last guy to talk about IFRS. So from what my understanding is, is that it’s making it better for everyone in the sense that we’re now having a more clear definition of what goes on. And let’s face it, we rely on all these departments, whether it’s the actuarial teams or the accounting teams, and from that we create KPIs, and these KPIs lead us to being better organizations, whether it’s the insurance companies, whether it’s the captives that take on risk and things like that. Where do you see the different views when it comes to the KPIs? How should they be calculated in this new environment? What’s a win, I guess, is people are asking?
Nevina Kishun:
So maybe I can start with where they came from. So MSA Research has been really lucky to assemble key representatives from the industry to start talking about IFRS 17 before the data was released. So we started talking to everyone to say, “What data do we have? How do you want want them presented? And what are the KPIs?” We were really lucky that OSFI, the regulator, provided a really good starting point of KPIs that they said we should take a look at. And we started a KPI committee that had IBC, OSFI, the four big audit firms, direct insurers as well as reinsurers. And then this committee developed these KPIs, took it to the CFOs of the Canadian insurance companies, and they got a lot of feedback. The first was at 30 is just way too many. You really needed to cut that down and cut it down at least to half. So we came up with a list of 14 KPIs.
The one thing is that previously the industry would look at the combined ratio, and no one could agree with the right way to calculate the new combined ratio under IFRS 17, and no one could even standardize the formula. So this actually left us with different calculations of KPIs, which show different things depending on what you’re trying to understand about financial performance. So one of the net combined ratios that we’re left with is fully discounted and one is partially discounted, and there’s arguments to each, and the industry hasn’t aligned on which one they want to start using. But the one thing that the CFOs did agree on is that the calculations will need to be standardized as we start seeing the data. Next year, we likely won’t have two different calculations for net combined ratio. The industry will figure out which one they want to use and figure out how to speak to stakeholders about them.
Pete Tessier:
So let’s then talk a bit about the difference between using audited versus unaudited statements. What kind of issues can crop up if a company is using those unaudited statements when looking at industry-wide results?
Nevina Kishun:
Yeah, during the KPI committee meetings and discussions, this actually came up more times than I expected. So audited statements essentially are the ones that the audit firms take a look at, go back, and the question was, can we use numbers from unaudited statements? The short answer is yes, you can trust those numbers because they are sent to the regulator. And if the regulator has any questions about any of the numbers and there are any discrepancies, it’s sent back, and that’s when an insurance company refiles. And any refiling of those statements come back to MSA, so we have the right numbers as well. But this is actually getting more technical, and MSA’s sister company, JSCP, provides a lot of the technical pieces for KPIs, and Benny is an appointed actuary for multiple insurance companies in Canada. So I’ll actually let him provide additional information on unaudited versus audited.
Benny Chan:
Thank you, Nevina. I think unaudited financials are usually reliable enough to profile a snapshot of the company’s latest financial position. We just have to keep in mind that they do rely on the company’s internal control, and then without going through an independent auditor. One thing that’s worth mentioning is that IFRS 17 does require disclosure at a higher level of granularity in certain areas. For example, companies are required to split the incurred losses into insurance service expenses and insurance finance expenses, and splitting the expenses into attributable and non-attributable.
Since IFRS 17 is relatively new, I think we cannot expect all companies will have the perfect system to perform those calculations. And on the positive side, the bottom line, it’s not a lot likely to change because how the numbers are split, but they do affect how some of the key KPIs are calculated. I think many companies and consultants are suggesting changes to KPIs to MSA, including myself. So we may see more changes to the KPI in the near future. And for that reason, right now for comparing against the industry-wide result, I’ll probably suggest to use both quarterly and annual KPI together, and don’t just focus on one single KPI.
Curt Wyatt:
Hey Benny, that’s really interesting. And you alluded to the fact that you’ve got these stakeholders that are in the industry, like yourself, that are looking at this. This is something still pretty new considering this industry doesn’t move that fast. And so for example, I know you’ve engaged with Munich Re on some of this stuff as part of your partnerships, and how they compare primary insurers. But that being said, they’re looking for some changes as well, like you just said. So for example, what would they be considering that maybe you as an independent resource would also be considering that should be different?
Nevina Kishun:
So Reyan Weston and Claudette Cantin from Munich Re actually suggested that for benchmarking, gross or direct ratios should be used instead of net of reinsurance. And this really does make sense under IFRS 17, because the ceded or reinsurance premiums are net of fixed commission. The net earned premiums that we use cannot easily be deducted from the financial statements. So that’s one of the changes that they suggested. The other one was to move attributable expenses from the gross claim ratio to expense ratio, which also makes sense. However, depending on which company you’re looking at, it may not always be clear or easy to locate that figure in the financials. Reyan and Claudette actually wrote an article in the most recent quarterly outlook, MSA’s quarterly outlook. So we’re asking for people and our readers to really give us feedback on that and tell us what they think and if that’s a good idea.
Pete Tessier:
So what can you describe, then, when it comes to some of the key metrics and how they are calculated as this all…to help contextualize what’s going on with the bigger workflows that are required?
Benny Chan:
Sure. So currently there are two sets of KPIs. One that follows the logic of IFRS 4, and the other is a new set of KPI that can be calculated directly from the IFRS 17 P&L. For the, I call them IFRS 4 KPI, we have the claim ratio, expense ratio, and combined ratio, fully discounted or partially discounted. I’ll just talk about the fully discounted because that one is more comparable to the combined ratio that we used in the previous standard with all the claims and expenses on the numerator and then the net premiums on the denominator. However, since IFRS 17 has changed how premium, claims and expenses are presented in the financial statement, even though the logic is the same, the net combined ratio that you calculate using the 17 statement is actually not 100% percent comparable to the combined ratio prior to the IFRS 17. And also the numbers to calculate the combined ratio are now coming from multiple pages of the financial statements. So it does require more work to come up with these IFRS 4 KPIs under 17.
Now the other set of KPIs that I mentioned, I usually refer them to the 17 KPIs, the best thing is they can be calculated directly from the P&L. For example, we have a combined insurance service ratio, which is calculated by taking your insurance service expenses, general and operating expenses, less the net reinsurance costs, and then divided by the insurance revenue, which is the top line gross premium. Now unlike the net fully discounted net combined ratio, that one is actually expressed as a percentage of gross revenue. And this combined ratio does not consider the unwinding of discount, the impact from the change in discount rate. So this 17 combined ratio actually will be more stable over a long run, especially nowadays when the interest rate is declining. So however, this IFRS 17 combined ratio rate is completely new and there’s nothing for you to compare from prior years.
Curt Wyatt:
Thanks Benny. And it’s interesting, because MSA has always sat there. I think a lot of us in the industry don’t really understand your role when it comes to helping us as an industry compete and be better for the consumer. And clearly you guys have a ton of understanding of what goes on. When it comes to the data and it comes to the numbers, what other expanded matrices should the industry be looking at, and why, I guess? At the end of the day, what do we really need to determine when we’re doing this, and what’s the better outcome when organizations like yours come in and question the status quo?
Nevina Kishun:
The industry actually came up to us after looking at the 2023 results and they said, “I don’t understand these numbers because everything in the data is discounted. And depending on the discount rate that different insurance companies have used, it actually puts a different slant to the numbers. And so we trust you, MSA. If we give you data that we’ve never given you before, can we trust that you will only show it to those people who provide it?” So in this upcoming outlook report, I’m going to have an article, Show Me Yours and I’ll Show You Mine. And companies have actually decided to, or asked us, to give their PC 5 and PC 6 statements.
So the PC 5 is unpaid claims and loss ratio analysis exhibit, which has so much information by year and detailed by line of business. And then the PC 6 has a discount curve. So at first we were told this information is like gold. It will really help the industry understand their competitors and their own positioning within the market. However, the industry wanted to make sure that if they’re providing this information, those who are not providing it won’t be able to have access to it. So we’ve actually done that, and the new data set is available in [MSA] Researcher starting mid-October, and we’ve had over 50% of the industry provide their data with multiple companies on the fence saying, “We’re opening to share, but only if your data set hits a critical mass.” So it’ll be interesting to see how many additional companies come on to choose and share, especially since it may be helpful with the context of Q4 and annual filings, which the discussions have started now.
Pete Tessier:
Hey, Nevina, Benny, this has been really interesting. There’s a lot of talk on the term IFRS 17 and you hear about it at different conferences and conventions. It’s integrating itself into different areas. But no one, unless you literally live at that high level insurance company accounting, you know it exists but you don’t understand it. And I think you guys have really quantified it quite well and made the trickle-down effect interesting so that it’s really digestible. Thanks for jumping on What’s On Dec? with us and sharing your expertise on this, because not everyone gets to think about such interesting accounting stuff. And it’s only insurance people who really get this geeky, and we appreciate you sharing your geekiness and fun with us.
Nevina Kishun:
Thank you both.
Benny Chan:
Thank you.
Nevina Kishun:
We really appreciate it.
Pete Tessier:
Curt, I hate to say it, but a lot of that was going over my head, but that’s not because I’m not smart enough. It’s because Nevina and Benny are that smart. And I think this is a really fascinating look at some parts of the insurance industry that we don’t always think about when we think about rates, how insurance companies have to behave, and the impact it has on regulatory frameworks when it comes to OSFI and all the compliance it goes through.
Curt Wyatt:
Absolutely, Pete. And I think as our listeners get out of this podcast and listen to us again talk about what they were just absorbing and digesting and all the other words that you could use to describe how much information there was that we just received. And there’s the KPIs that go behind, not just the running of a company for the purpose of performance and for the purpose of keeping customers happy, but really the KPIs that go into determining are you having success financially? And how in Canada we’re fortunate to have organizations that are doing this benchmarking so that we really do cover all aspects of what is a successful company.
Pete Tessier:
And Curt, I think the interesting point that Nevina and Benny both make is the transition from what they were doing with 04 to 17, and how long that takes. Just think about the difference in what’s happened in the financial economy with the great recession, the financial crisis of 2008, 2009, and then you’re still, seven years after that or eight years after that, and getting to the IFRS 17 model where it comes out, these things aren’t fast-moving projects.
There’s a lot of thought and a lot of work that has to go into this when you think about all the different stakeholders and entities that are responsible for this financial reporting. The point about the KPIs and how that’s important. And then also taking into account the lead of the different insurance companies and their involvement and the insights they’re going to have. I think what’s really refreshing, Curt, is there’s an agreement on what needs to be done and that there is a level of collaboration within the industry on this to go forward. And that’s like bringing in people, like consultants like Nevina and Benny who can help standardize things along with apparently a number of other accounting firms.
Curt Wyatt:
And in addition to that, what you didn’t hear at the end of the podcast was how they’re actually going international in the sense that they do meet with organizations outside of Canada, and how Canada is actually being seen as a leader here in this space, creating those benchmarks and creating that system as we’ve just described. And I think that’s something that needs to be pointed out because I think, as Canadians, you want to pat yourself on the back for doing a good job when it comes to the commerce and the world of insurance in Canada. And I think it’s just a positive to know that we have those type of resources coming out of Canada and affecting positive change around the world when it comes to building a healthy insurance economy.
Pete Tessier:
Yeah, look, strength in our financial institutions in Canada is a pillar of the economy, and I think we’re in good hands given what we’re hearing from Nevina and Benny. Hey everyone, thanks again for listening to another episode of What’s On Dec?, and we’ll be back with you in the New Year.
Outro: Thanks for listening to What’s On Dec?, the Canadian Underwriter podcast.
