Consistency in financial reporting is essential for informed decision-making, accountability and promoting long-term trust. It’s why industries establish standardized metrics and benchmarks. They ensure that financial results can be clearly understood, fairly compared and reliably used. For internal teams, the consistent use of key performance indicators (KPIs) supports accurate evaluation and strategic planning. For external stakeholders, KPIs provide a clear, transparent view of a company’s financial health and performance.
As the property and casualty (P&C) insurance sector continues to adapt to International Financial Reporting Standard 17 (IFRS 17), the new global accounting standard for insurance contracts, companies and stakeholders are interpreting and applying the new framework inconsistently. For example, certain insurers may have different interpretations for the movement of line items, such as expenses and financing income.
IFRS 17 affects how profitability and performance are measured, understood and compared. It allows P&C insurers, regulators, governments and other stakeholders access to consistent, reliable metrics to evaluate insurer performance. Compared to IFRS 4, the previous standard, it provides a more transparent view of insurers’ underwriting and investment activities, and more insight into an insurer’s financial health. However, without a common set of KPIs, there’s a risk of confusion, inconsistency and misinterpretation.
To help address these inconsistencies, Insurance Bureau of Canada (IBC), along with its member-led working group, has published a paper with eight KPIs specific to IFRS 17 that provide simple-to-use P&C insurance industry performance measures. These KPI ratios are a step toward harmonized reporting, making it easier for regulators, governments and market observers to compare and understand financial results. Individual insurance companies may use different KPIs based on their data; however, over time, companies will have a better view of KPI trends for their particular organization and the P&C insurance industry as a whole.
One advantage to using these ratios is that, based on IFRS 17 income statement items, there is no need for additional tables or forms to calculate the ratios. As well, the ratios are designed for clarity and comparability. For example, comprehensive combined ratio (CCR) is the best proxy for the ratios formerly used under IFRS 4 and all use “insurance revenue” as the consistent denominator. Also, some of them make provincial and business line-level insights possible, such as insurance service ratio (ISR).
Here is how the eight new KPIs are calculated. For a full description of these KPIs, please see page 10 and 11 of the IFRS 17 Metrics Discussion Paper.
The selection of metrics depends on the availability of industry-wide data and the user’s perspective of and purpose for the analysis. For example, IBC uses industry-wide metrics to advocate to governments and regulators at the provincial and federal levels. In contrast, its members may require their company’s metrics for benchmarking. In addition, metrics need to be straightforward for stakeholders.
Most metrics under IFRS 4 can’t be compared with those in IFRS 17. For example, insurance companies under IFRS 17 no longer report earned premiums or incurred and undiscounted claims. In addition, IFRS 17 includes new financial concepts, such as net insurance finance income and expenses, insurance service results (a new underwriting profit measure).
The new IFRS 17 KPIs do have some important caveats to consider. For instance, expenses are now allocated between insurance related expenses and non-insurance related expenses, which affects underwriting profit and investment results. Also, equity may have transition adjustments, impacting the return on equity.
IBC’s paper introduces the key metrics under IFRS 17, giving the necessary background for the financial ratios. It also includes definitions of the IFRS 17 ratios and an explanation of each ratio’s advantages and disadvantages.
Click here to read IBC’s IFRS 17 Metrics Discussion Paper.
Because the IFRS 17 KPI landscape is still evolving, it will be a few years before consistent metrics emerge, and year-over-year comparisons can be accurate. However, improving consistency across companies during this time of transition will help improve benchmarking as the system matures. IBC encourages feedback and collaboration from all stakeholders within the sector to help further refine and align the metrics.
