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June 21, 2021

When introduced in May 2017, the IFRS 17 changed how insurance contract liabilities were evaluated. Applicable for various types of insurance contracts such as life, non-life, reinsurance, and others with direct participation features, it rebuilt performance measurement from the ground across many areas. Being a principles-based standard, it lays down the principles upon which insurance contracts are to be recognized, grouped, measured, and disclosed in the financial statements.

With the compliance deadline just over 18 months away, a huge demand has risen for appropriate changes to be made to the traditional KPIs by incorporating IFRS-17-specific dimensions into them. Understanding the implications and explaining the new KPIs to analysts, investors, and the business are critical in providing an effective basis for decision-making and ensuring that the market valuation reflects the genuine performance and potential of said business.

An analysis of the currently reported KPIs across the top 10 insurance entities based on publicly available financial statements gives an indication of the most critical disclosed KPIs in the industry. Post IFRS 17 compliance, these KPIs are set to undergo changes to keep pace with the new measurement yardsticks for measuring the financial performance of an insurance entity as well as its comparison with other insurance companies. Broadly, the impact of IFRS 17 on KPIs can be categorized as outlined below:

Recalibration of current KPIs

A fair amount of recalibration has to be carried out of current KPIs like acquisition ratio, operating expense ratio, and loss ratio to meet IFRS 17 requirements. The acquisition cost ratio will include only directly attributable acquisition costs and not indirect costs. The operating expense ratio will also undergo a change as the total revenue will now be segregated into “insurance service result” and “insurance finance result.” The premium received and claims paid will not be directly reflected in the “income statement”; instead will be routed through the insurance contract liability. This will lead to the modification of the “combine ratio or loss ratio.”

Least impacted KPIs

Free cash flows, return on equity/investments, and earning per share constitute some of the least impacted KPIs. While free cashflows will continue to be calculated based on the current approach, the definition of return on equity will also remain the same but amounts that constitute return and equity would be different. The existing measurement approach for earnings per share/dividend payout would continue. However, amounts would change significantly vis-à-vis the current reported values.

Redundant KPIs

Some metrics will continue to be headline KPIs, albeit with the information needed to explain any changes. However, others could be less relevant such as “gross written premium,” “premium received,” etc. Considering that periodic allocations from the contractual service margin would get reflected under insurance revenue, the “premium received” would no longer appear in the income statement as a source of revenue.

Conclusion

Some of the critical KPIs in the insurance industry have been explored in general. But, an in-depth evaluation needs to be done on a case-to-case basis by each entity to understand the extent of change required in reporting their KPIs.

In conforming to the changing disclosure dynamics under IFRS 17, the various management dashboards depicting KPIs must be revisited to reflect the underlying business metrics accurately. This will ensure the requisite level of data and information granularity to support a meaningful drill-down and analysis of the critical KPIs is maintained. Centralizing accurate data storage on the cloud also allows for automation of the whole reporting ecosystem through “senior management dashboards” and “self-service MIS.”

To conclude, key business metrics will undergo a significant change once IFRS 17 gets implemented. Traditional KPIs and new KPIs need to be suitably aligned and integrated to understand and compare the financial statements through the same organization and the industry in general. Nevertheless, traditional KPIs and new KPIs would continue to be used parallelly for three to five years to fully understand the impact of IFRS 17 on insurance entities.

Rahul Gandhi is a Consulting Partner with the Banking and Financial Services (BFS) business unit at TCS. A qualified Chartered Accountant, he has over 20 years of industry experience, especially in banking and financial services. Currently, he is the LATAM Geography lead for Finance Strategic Initiatives as well as SME on IFRS 17 Offering.

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