by David Gambrill | Canadian Underwriter | April 27, 2023<\/p>\n
IFRS 17 will change the presentation of company results in 2023 Q1, eliminating one standard property and casualty insurance financial metric completely, and subtly affecting how combined operating ratios are presented.<\/p>\n
The most obvious and straightforward change will be doing away with the time-honoured metric of direct premiums written (DPW), as explained at an IFRS \u201cTeach-in\u201d provided by Intact Financial Corporation\u2019s CFO Louis Marcotte Thursday.<\/p>\n
\u201cDirect premiums written, or DPW, which is our key metric for measuring growth, will no longer be an IFRS metric presented in the financial statements,\u201d Marcotte observed. \u201cThat said, DPW, which is a more forward-looking measure than earned premiums, will continue to be our main growth indicator and as such we will continue to present it in our MD&A (management, discussion and analysis statement).\u201d<\/p>\n
One change to how unpaid claims are recorded under IFRS 17 will alter the traditional understanding of P&C companies\u2019 combined operating ratios (COR).<\/p>\n
Stated simply, COR is calculated by adding together the insurance company\u2019s incurred claims losses and expenses (including operating expenses), and then dividing the total by earned premium. A number below 100% indicates a profit, while a number above 100% equals a loss.<\/p>\n
IFRS 17 will change the way insurers record their unpaid claims expenses, which in turn will change the meaning of the insurers\u2019 COR results.<\/p>\n
\u201cThe most significant change is the re-classification of the [claims reserve] discount unwind between the combined ratio and net investment results,\u201d as Marcotte summed it up.<\/p>\n
When insurance companies create a claim, they record a risk adjustment, which is a new concept under IFRS 17 that essentially describes a new reserve that compensates insurers for uncertainty.<\/p>\n
Insurers also create a \u201cdiscount build,\u201d another type of reserve in which projected future claims payments are discounted to present value using discount rate assumptions. Among other things, a discount reflects the time value of money and liquidity of insurance contracts (i.e., how quickly and easily they can be converted into cash at present market rates).<\/p>\n
A discount build is favourable and mostly benefits the current accident year, as Marcotte described. A discount unwind is unfavourable, mostly impacting the prior accident year.<\/p>\n
\u201cAs time goes by, assuming no change to the ultimate claim\u2019s expected value, we will release the risk adjustment and discount to bring the claim back to its expected payment value,\u201d as Marcotte explains.<\/p>\n
\u201cThe claim\u2019s payment value does not change with IFRS 17. What does change is where the different elements are presented in the P&L (profit and loss statement).<\/p>\n
\u201cUnder IFRS 4, both the favourable build and the unfavourable unwind of the discount were presented within the combined ratio.<\/p>\n
\u201cUnder IFRS 17, the new standard is clear that the unwind of discounting should now be considered an insurance financing activity, recorded outside of insurance results. This is a major change because it improves the lifetime combined ratio permanently.<\/p>\n
\u201cWe will therefore move the unwind of discount within our investment results.\u201d<\/p>\n
Intact\u2019s combined ratios going forward will reflect the undiscounted combined ratios for all of its business segments, Marcotte said. The question then arises: How will other insurers present their combined ratios? Will they present undiscounted combined ratios, or will they have discounted combined ratios, excluding the unwind of the discount?<\/p>\n
\u201cWhen comparing our [combined] ratios to those of our peers, it will be important to ensure that combined ratios are on a comparable basis,\u201d Marcotte cautioned. \u201cThat is either discounted but excluding the unwind of discount, or undiscounted.\u201d<\/p>\n","protected":false},"excerpt":{"rendered":"
by David Gambrill | Canadian Underwriter | April 27, 2023 IFRS 17 will change the presentation of company results in 2023 Q1, eliminating one standard property and casualty insurance financial metric completely, and subtly affecting how combined operating ratios are presented.<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"nf_dc_page":"","neve_meta_sidebar":"","neve_meta_container":"","neve_meta_enable_content_width":"off","neve_meta_content_width":70,"neve_meta_title_alignment":"","neve_meta_author_avatar":"","neve_post_elements_order":"","neve_meta_disable_header":"","neve_meta_disable_footer":"","neve_meta_disable_title":"","_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[5,3],"tags":[],"class_list":["post-1184","post","type-post","status-publish","format-standard","hentry","category-global","category-news"],"jetpack_featured_media_url":"","jetpack_sharing_enabled":true,"_links":{"self":[{"href":"https:\/\/insurance.vincent-chen.com\/en\/wp-json\/wp\/v2\/posts\/1184","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/insurance.vincent-chen.com\/en\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/insurance.vincent-chen.com\/en\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/insurance.vincent-chen.com\/en\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/insurance.vincent-chen.com\/en\/wp-json\/wp\/v2\/comments?post=1184"}],"version-history":[{"count":1,"href":"https:\/\/insurance.vincent-chen.com\/en\/wp-json\/wp\/v2\/posts\/1184\/revisions"}],"predecessor-version":[{"id":1185,"href":"https:\/\/insurance.vincent-chen.com\/en\/wp-json\/wp\/v2\/posts\/1184\/revisions\/1185"}],"wp:attachment":[{"href":"https:\/\/insurance.vincent-chen.com\/en\/wp-json\/wp\/v2\/media?parent=1184"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/insurance.vincent-chen.com\/en\/wp-json\/wp\/v2\/categories?post=1184"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/insurance.vincent-chen.com\/en\/wp-json\/wp\/v2\/tags?post=1184"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}