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Over the next month many insurance companies will be reporting their half-year 2023 (‘HY23’) results under IFRS 17 for the first time. We’ve talked about disclosures and external communications in the past but with so much activity in recent months now is a good time to reflect on what we’ve seen in reporting so far, outline expectations for HY23, and look forward to what we may expect at year-end.
Evolving practice and the challenge of KPIs
At Q1, we saw some insurance companies, particularly in Europe and Canada, publicly release comparative balance sheets and income statements. While the comparatives typically included primary financial statements and some information on KPIs, they did not include all the notes to the financial statements.
In terms of the disclosure items themselves, we saw insurers outline that there is no impact from the introduction of the new standard on cash, dividends, solvency and business strategy areas. Some areas had greater quantitative disclosures than seen in earlier IFRS 17 announcements, such as more accurate impacts on shareholder equity (‘SHE’), size of the contractual service margin (‘CSM’) and risk adjustment (‘RA’).
Many existing KPIs have continued to be reported including value of new business (‘VNB’) for life insurers, and combined operating ratio (‘COR’) and gross written premium (‘GWP’) for general insurers. But, new common KPIs are also emerging such as adjusted SHE (inclusive of CSM) and CSM stock value for life insurers.
For insurance companies, the challenge with KPIs lies in the inconsistency with which they are calculated. For COR, some insurers opt for an approach with a net of reinsurance numerator and a gross of reinsurance denominator, while others use a net value for both. Other inconsistencies include some insurers putting non-directly attributable expenses in their COR while others exclude them. We are also seeing some insurers using insurance revenue as the denominator and others using earned premiums. These differences are typically driven by how insurers manage their business - focusing on either gross or net results - and whether or not there is a desire to align to current practice. Other inconsistencies include some insurers additionally disclosing an undiscounted COR.
From a life perspective we are seeing different definitions of VNB (based on the new business CSM in period), with varied practice in terms of the treatment of reinsurance, loss components, the risk adjustment and non-directly attributable expenses.
Expectations for HY23
HY23 will be the first time that many insurers will be required to provide a level of comparative information and we expect some insurers may do so prior to reporting. Each insurer will decide the extent of disclosures to be reported at HY23 as IAS 34 does not prescribe this. As a result, some insurers may opt for relatively limited disclosure compared to the full IFRS 17 requirements at year-end. We could perhaps see some greater alignment in KPIs following Q1, but in practice some choices and variances in methodologies are likely to persist and will lead to differences in reporting in the market.
Looking beyond HY23
Year-end 2023 will be the first time that all IFRS 17 notes and KPIs are communicated to the market, and will therefore be the first time that investors and analysts are able to make a full comparison of the impact of IFRS 17 on an insurer's financial statements. Beyond this, there may be a period of greater alignment among insurers or at least further explanation, reconciliation and provision of additional information to enable greater comparability. We also expect activity from wider stakeholders, such as credit rating agencies who may look to refine their rating methodologies or calibrations once they have access to IFRS 17 data from across the global insurance market.
Current focus
Insurers are finalising their KPIs to be reported at HY23 and making their final preparations for HY reporting. Observe what others are doing, what analysts are focused on, and if you are interested to hear what we’re seeing in more detail please speak to your local PwC contact. We are in the final delivery phase so a clear working day timetable, and contracting internally on who does what and when, will derisk the reporting process and ensure your disclosures and KPIs are produced on schedule.
Finally, this next phase is critical in communicating the performance of your business under IFRS 17 to the market. The new standard represents a huge change for analysts and investors, therefore getting the narrative right explaining what the new accounting basis means to the business is really important. See KPIs and your external reporting as an opportunity to control the narrative of your organisation's performance with the external market.
