By Sola Alabadan
AM Best has identified stemming from the IFRS 17, as well as some of the key performance indicators (KPIs) it believes will be critical for both (re)insurers’ financial stakeholders and (re)insurers.
These include the calculation of net of reinsurance combined ratios, claims ratios and expense ratios, Non-life deferred acquisition costs (DAC) in capital models, Use of the contractual service margin (CSM), Capital in participating life funds and Return on equity (ROE).
As IFRS 17 moves from the standard setting to implementation stage,
a new chapter has opened, bringing with
it fresh uncertainties.
Stakeholders are starting to debate what users of (re)insurance company financial reporting will do with the new data and what the likely KPIs will be under IFRS 17.
AM Best does not expect IFRS 17 to have
a direct impact on credit ratings, as the economic reality assessed by credit ratings will remain unchanged. Nevertheless the content of analysis,
the KPIs used, the terminology and the conversations with insurers will all change, and rating committees will be making their assessments utilising the new data.
Increased market discipline, resulting from greater transparency, should mean that insurers will be less likely to write uneconomic policies, the rating agency noted.
Perhaps less obviously, more business may be written for products where insurers currently struggle to communicate performance effectively to financial stakeholders despite good
potential for profit. Participating life business with low guarantees could fall into this category under favourable conditions, the organisation added.
AM Best further stated that it believes that greater transparency around profitability will in general promote product innovation.
