# IFRS 17: In transition Author: Pal Sinha, Barnali Author URL: https://financedigest.com/author/pal-sinha-barnali Published: 2022-07-06 Category: INSURANCE Category URL: https://financedigest.com/category/insurance Meta Title: Prepare for IFRS 17: Impact on KPIs and Ratings Meta Description: Get ahead for the 1 January 2023 deadline with expert guidance on new KPIs, investor reporting, and more. Ensure compliance and understanding today. URL: https://financedigest.com/ifrs-17-in-transitionhtml ![undefined](https://prod.superblogcdn.com/site_cuid_cm5qst7v3003gwirgwqtxn8i8/images/istock-908674838-1736815599750-compressed.jpg) _![](https://prod.superblogcdn.com/site_cuid_cm5qst7v3003gwirgwqtxn8i8/images/211-1736815599768-compressed.jpg)_ _By **Javier Alvarez,** EMEA Managing Director, RNA Analytics_ After some 20 years in development, the implementation deadline for IFRS 17 is now less than six months away. Facing an effective date of 1 January 2023, insurers are at varying stages in their preparation for the accounting standard. Under the new rules, presentation and disclosure requirements will [change the way](https://www.financedigest.com/three-ways-that-2022-is-going-to-change-how-you-think-about-money.html "Three ways that 2022 is going to change how you think about money") performance is communicated – compelling carriers to develop or redesign key performance indicators, and educate internal and external users around the new conventions. At the very outset, it was a [need for transparency and comparability of insurers’](https://www.financedigest.com/reasons-you-need-a-car-insurance-when-driving-in-thailand.html "Reasons You Need a Car Insurance When Driving in Thailand") financial positions, performance and statements that drove the International Accounting Standards Board to develop the new standard, and it is anticipated that the rules will have a significant impact on the numbers reported as well as the new information contained in disclosures. **KPIs** According to a [global survey](https://www.financedigest.com/spacex-rocket-sends-first-global-water-survey-mission-into-orbit.html "SpaceX rocket sends first global water survey mission into orbit") of insurers exploring the impact on KPIs and investor reporting under the standard, companies were still working on their “investor story” in the first quarter of 2022. In its analysis of the survey’s findings, Ernst and Young’s view is that for [life insurance](https://www.financedigest.com/types-of-life-insurance.html "Types of Life Insurance") companies, which focus on operating profit or regulatory capital as an Alternative Performance Measure (APM, or non-Generally Accepted Accounting Principles (GAAP) measure), such APMs will still be important under IFRS 17, as companies look to eliminate short-term fluctuations in the results and provide information about their ability to pay future dividends. And while there are well-established KPIs in the non-life segment, the [challenge for companies](https://www.financedigest.com/mldw-technology-market-size-share-top-leading-companies-consumption-drivers-trends-forces-analysis-revenue-challenges-and-global-forecast-2028.html "MLDW Technology Market: Size, Share, Top Leading Companies, Consumption, Drivers, Trends, Forces Analysis, Revenue, Challenges And Global Forecast 2028") under the new rules is how those ratios are calculated and whether they remain relevant. Some of those ratios will need to be redefined under IFRS 17, and some insurers may continue to report ratios on a pre-IFRS 17 basis in the short to [medium term](https://www.financedigest.com/ubisoft-vows-to-get-back-to-operating-margin-above-20-in-medium-term.html "Ubisoft vows to get back to operating margin above 20% in medium term"). According to Ernst & Young’s research, insurers that have carried out dry runs on the numbers under the new rules have found that they don’t always add up – and that in a number of cases, the larger [life insurance](https://www.financedigest.com/life-insurance-why-is-it-so-important.html "LIFE INSURANCE: WHY IS IT SO IMPORTANT?") companies have made three attempts before understanding the numbers being produced. In AM Best’s view, standardisation of KPIs might not emerge until two or three [years after the effective](https://www.financedigest.com/effective-integration-will-improve-mobility-in-the-tl-sector-over-the-next-five-years.html "Effective Integration Will Improve Mobility in the T&L Sector Over the Next Five Years") date. As the only credit rating agency specialising specifically in the global [insurance industry](https://www.financedigest.com/how-can-the-insurance-industry-avoid-having-a-kodak-moment.html "How can the insurance industry avoid having a ‘Kodak Moment?’"), the view of AM Best on the direction of travel is pertinent. **Ratings** Whilst, in general, the ratings agency does not [expect](https://www.financedigest.com/ecbs-makhlouf-expects-50-bps-rate-hike-in-december.html "ECB’s Makhlouf expects 50 bps rate hike in December") the introduction of IFRS 17 to have a direct impact on ratings (as it targets the underlying economics of re/insurers for analysis and that will not change) AM Best does see a number of decisions and aspects of IFRS 17 implementation evolving some way past the deadline for implementation. Its Special Report IFRS 17: Transitioning to a Standard with New Concepts and Terminology outlines its current thinking as to the practice that it expects to adopt [moving forward](https://www.financedigest.com/life-is-moving-forward-china-declares-new-covid-phase.html "‘Life is moving forward’: China declares new COVID phase"). Published in April 2022, its report states that the treatment of the Contractual Service Margin (CSM) under IFRS 17 reporting in solvency models will be a key part of the assessment of life [insurance activities in the rating](https://www.financedigest.com/how-insurtech-is-helping-to-lower-car-insurance-rates.html "How InsurTech is Helping to Lower Car Insurance Rates") process. It also anticipates return on equity (RoE) calculated using IFRS [data to be a key](https://www.financedigest.com/sterling-edges-lower-ahead-of-key-data.html "Sterling edges lower ahead of key data") indicator of performance, and that it will be possible to calculate (at least) two versions of RoE. In the life segment, AM Best envisages that revenue ratios will therefore become more meaningful indicators of [performance](https://www.financedigest.com/esg-investing-does-that-mean-sacrificing-performance-is-the-uk-the-right-place-and-how-to-do-it-properly.html "ESG Investing – Does that mean sacrificing performance? Is the UK the right place? And how to do it properly"). On combined ratios for multi-year general measurement model (GMM) [accounted non-life business](https://www.financedigest.com/making-your-accountant-an-invaluable-asset-to-your-business.html "MAKING YOUR ACCOUNTANT AN INVALUABLE ASSET TO YOUR BUSINESS"), where reasonable earnings profiles for premiums are in place under existing accounting, the difference between insurance revenue and earned premiums will primarily arise from the effects of discounting. AM Best’s view is that there are three options for calculating net-of-reinsurance combined ratios. Option 1: Ask all IFRS 17 reporters for non-GAAP [data on premiums](https://www.financedigest.com/big-data-lowers-insurance-premiums-and-optimises-business-performance.html "Big Data Lowers Insurance Premiums and Optimises Business Performance"), expenses and claims to recreate existing ratios – an approach which has advantages on grounds of familiarity and comparability. Option 2: Calculate existing ratios using IFRS 17 data, often referred to as “net/net” ratios. Here it notes that net expenses are the same as gross expenses under IFRS 17, as reinsurance held [commissions are no longer treated as a negative expense](https://www.financedigest.com/xactly-introduces-commission-expense-forecasting-solution-for-finance.html "Xactly Introduces Commission Expense Forecasting Solution for Finance"). Option 3: Incorporate IFRS 17’s treatment of reinsurance held as a [claims management](https://www.financedigest.com/digital-claims-management-five-key-considerations-insurers.html "Digital claims management: Five key considerations for insurers") exercise, with no direct impact on expenses, into combined ratio calculations by using “net/gross” ratios. This means using claims after adding the net cost of [reinsurance as the numerator of a combined ratio, and insurance revenue gross of reinsurance](https://www.financedigest.com/japan-insurers-in-talks-with-reinsurers-to-resume-coverage-in-russian-waters.html "Japan insurers in talks with reinsurers to resume coverage in Russian waters") expenses as the denominator. (Source: AM Best) The net/gross combined ratio usually results in bigger differences from existing ratios than the net/net ratio, according to the ratings agency, although it has conceptual advantages. AM Best envisages monitoring both and does not observe a wide consensus yet emerging as to which will be used. **Prepare to flex** In its earlier report, E&Y notes the appetite among [regulators for globally](https://www.financedigest.com/be-simple-in-bank-capital-bank-of-england-tells-global-regulators.html "Be simple in bank capital, Bank of England tells global regulators") consistent, high-quality implementation of the standard and high-quality audits – with some even expected to consider prescribing that the standard is implemented in a particular way, such as limiting the options available in IFRS 17 within their jurisdiction. It is clear that with just six months to go for some carriers, there is still a degree of uncertainty about the requirements of IFRS 17 and how they should be implemented, with some areas [remaining open](https://www.financedigest.com/eex-markets-to-remain-open-as-power-prices-soar-statement.html "EEX markets to remain open as power prices soar – statement") to interpretation. With this in mind, if preparation was the priority when the standard was issued in 20 17, adaptability may be the ambition now. --- This blog is powered by Superblog. Visit https://superblog.ai to know more. ---