Managing a life insurance company often involves a level of prediction and estimation that borders on prophecy. Prophecies of life, death and profitability must be made before the contract is even signed by the policyholder. On January 1, 2023, IFRS 17 will come into effect for all life insurers in Canada and will change how profitability is understood and managed.
IFRS 17 will significantly impact:
- the timing of profits and;
- how profits are presented and disclosed.
This will have a significant impact on the Key Performance Indicators (KPI’s) used to steer the business.
It’s important to remember that the overall profitability of an insurance contract will not be impacted under IFRS 17, but the timing of the release of profits will significantly change.
Under IFRS 17, when an insurance contract is sold, the expected profitability of the contract is calculated and deferred on the balance sheet as the contractual service margin (CSM). CSM will be recognized into revenues when the actual insurance services are provided.
And of course, the CSM will impact profitability and business volume KPIs.
The benefit of IFRS 17 is that the presentation and disclosure of the statement of comprehensive income, the insurance contract liability roll forwards and the CSM run-off schedule will provide rich information about the performance of the business.
The statement of comprehensive income will present the insurance result and the investment results separately. This will provide more transparency on the drivers of profitability.
The insurance contract liability roll forward is an additional disclosure under IFRS 17 that will show the detailed changes to the insurance contract liability during the reporting period. Changes to the insurance contract liability are related to changes in:
- financial assumptions
- past or current services
- future services
The CSM run-off schedule is a required disclosure which demonstrates the expected amortization of CSM. This disclosure can provide an understanding of expected future profits, as well as what part of the business is driving future profitability.
Table 1 - Measurement
| IFRS 4 | IFRS 17 | |
|---|---|---|
Timing of profit recognition |
|
|
Insurance contract liability |
|
|
| IFRS 4 | IFRS 17 | |
|---|---|---|
Timing of profit recognition |
|
|
| IFRS 4 | IFRS 17 | |
|---|---|---|
Insurance contract liability |
|
|
Table 2 - Presentation
| IFRS 4 | IFRS 17 | |
|---|---|---|
Statement of comprehensive income |
|
|
Insurance contract liability roll forward | – |
|
CSM Run-off schedule | – |
|
| IFRS 4 | IFRS 17 | |
|---|---|---|
Statement of comprehensive income |
|
|
| IFRS 4 | IFRS 17 | |
|---|---|---|
Insurance contract liability roll forward | – |
|
| IFRS 4 | IFRS 17 | |
|---|---|---|
CSM Run-off schedule | – |
|
Table 3 - Earnings Strength KPI’s
| Earnings Strength KPI’s | Impact |
|---|---|
Volume |
|
Profitability | CSM sustainability index
CSM run-off
Insurance service margin1
Investment return margin
|
Earnings Strength KPI’s
Volume:
- The business volume KPIs based on premiums may no longer be a good indicator of growth however, IFRS 17 disclosures will continue to show premiums received
- The CSM generated by new business may be used to understand growth
Profitability:
CSM sustainability index
- A CSM sustainability index can be used to understand the longer-term outlook for the company
- The CSM sustainability index is calculated as: CSM generated from new business / CSM recognized in the statement of comprehensive income
- An index number of 1 or greater may indicate growth of the company as it is generating sufficient new business profitability to replace the business that is in force
CSM run-off
- The CSM run-off schedule can be used as part of the reporting to forecast future expected profitability
- The CSM run-off schedule can assist in understanding:
- what part of CSM being released is as a result of CSM created on transition vs. new business CSM that was generated after IFRS 17 came into effect
- how different business lines or operating segments contribute to CSM release
Insurance service margin1
- The insurance service margin will indicate the profit margins on the insurance business
- The insurance service margin can be compared by line of business or by operating segment to understand if profit margins are aligned with the business strategy
Investment return margin
- The investment return margin will indicate whether the invested asset returns are sufficient to offset insurance finance expenses.
- Insurance finance expenses are:
- Unwinding of the discount rate for the insurance contract liability
- The change in discount rates for the reporting period to reflect current market conditions
Illustration – Insurance Contract Liability Roll Forward – Measurement Component View
1 The insurance service margin can be calculated from the statement of comprehensive income or the insurance contract liability rollforward – liability for remaining coverage view.
