WTW global IFRS 17 study – part 2: Analyst survey

Many of our clients who are CFOs or investor relations team at insurance companies routinely ask, "So what could we do differently and what could we do to better?" And hearing directly from the host's mouth, the users themselves is very, very helpful. You're listening to Rethinking Insurance, a podcast series from WTW where we discuss the issues facing P&C, life and composite insurers around the globe as well as exploring the latest tools, techniques and innovations that will help you rethink insurance. Hello and welcome to Rethinking Insurance. I'm your host, Kojma Heshwari. And today I'm delighted to be joined by my guest, Anshul Garf and Kamran Farouki. Welcome both and thank you for joining me. Thanks, Kaj. Thanks for having me here, Kajma. This is the second of a two-part podcast series on IFR-17. As a reminder to those guests who are not so familiar with IFR-17, it is the first global attempt at a concise, coherent and consistent global accounting standard for insurers, worked on by the IASB for more than 20 years and has taken upwards of five and sometimes even 10 years for insurers to implement. Changing fundamentally the accounting and financial reporting for the insurance sector as a whole. As per our survey that WTW has done for insurers who are preparing for IFR-17, we have estimated that globally IFR-17 implementations have costed the sector upwards of 20 billion USD dollars till date. In this episode, we will be discussing the results of another survey we have carried out for the analysts who are using these financial statements. We've concluded this recently and key actions for organizations and recommendations come out interestingly from this survey. Insurance consulting and technology business at WTW has been supporting insurers globally who are reporting under IFR-17, helping them to navigate this new global standard. In addition, we continue to provide consulting technology and outsourcing services. All in all, we have worked with close to 200 insurers on IFR-17 aspects already and over 80 insurers have bought our IFR-17 technology to help deliver the IFR-17 results. I know Cameron that in the last few years we have at WTW carried out very successful surveys of the preparers of IFR-17 statements. The insurance companies themselves where we've had participation annually by close to 300 insurers each year when we've done these surveys. Now that the insurers have started publishing IFR-17 results, many jurisdictions are on the world. What has motivated a new survey of the analysts and the users of these financial statements? Yes, thanks, Kooj. You're right. We've done the preparers surveys for a number of years. We've got very rich data after that, including our 20 billion-past estimate. But if you take a step back with all that work companies have done, the key question is always with external financial reporting is doesn't meet the needs of users. We do have very good connections with the investor community. Very keen to actually touch base with them this year in June. Companies had published a lot all the way up to April in certain cases early May. It took a while to digest all that information. So, touching base with the investors and analysts representing investors about what their thoughts of IFR-17, I thought was a very important step in sort of judging early stages views of whether IFR-17 has been in success or not. Right. No, thank you from my perspective, Cameron, for leading this initiative on doing an analyst survey of users because many of our clients who are CFOs or investor relations team at insurance companies, routinely asked, "So what could we do differently and what could we do to better?" And hearing directly from the host's mouth, the users themselves is very, very helpful. And I'm not aware of any similar initiative being undertaken where IFR-17 statements users are given the opportunity or platform to provide comments and recommendations directly to the insurers. So this is a great initiative. So, Anshel, I know you've been at the epicenter of looking at all the data and all the results and all of these survey responses. Can you tell us a little bit about what's the nature of responses, how many responses have you got and what's been the profile of respondents, what kind of analysts have responded? Right. So we reached out to several analysts and we have responses from about 14 analysts and we have covered a wide spectrum of analysts ranging from equity side to debt side and ranging from buy side as well as sell side. So that just helps get more perspective, more varied perspective. So we'll try to keep that wide. Now in terms of what did we ask the analysts? So we approach them with four questions, four very specific questions. The first one of them being, what's the biggest improvement that they saw in the disclosures of the insurers? The second being, what's the most negative effect this or on the insurers disclosures? And then we asked them for one recommendation to improve the disclosures. And finally, if there's any material change that they've made to their analysis in analyzing the insurance sector as a whole. So those were the four questions that we post to them and we got some really great insights coming out of that. So that's very interesting. So when you say debt analysts, you mean the credit trading agencies. Is that right? Yeah, that's correct. Okay, that's great. So we've covered both by and sell side equity as well as credit trading agencies. So what have been the most interesting takeaways from these four questions? The positive, the negative, how have the analysis changed and what are the recommendations? Well, for me, I would say that the most important takeaway has been that the impact on the industry has been varied for for life side. The impact has been more sort of mixed in nature with some positive reviews and some negative ones on the non-life side. It has largely been viewed as being negatively impacted. So when I'm talking about the impact on the life side, so analysts are really liking the concept of CSM. So it's sort of giving them a measure of economic value and helping them gain bit of visibility into the life profits. So they're really happy with that. However, they feel that the disclosures for CSM particularly for the new business are not sufficiently granular and there's scope for increasing the granularity there. On the non-life side, the analysts have complained that the standard has sort of made things more complex. So they were used to more simpler things and the standard has just introduced a whole lot of complexity into the disclosures and into the analysis. And some of them are also unhappy with the effects of discounting and the resulting volatility that it introduces. So that's the sort of impact that's seen across the sector from life to non-life from positive to the negatives. And in terms of the recommendations that the analysts have made. I would say the biggest one of them would be that analysts feel that there needs to be greater consistency and greater granularity in disclosures. So when we're talking about IFRS 17, one of the biggest merits of the standard, which has been talked about is that it sort of creates us. The same platform it introduces that comparability across companies, however, the choices that have been provided by the standard and their different application by different companies has led to disconnect between different companies and has made the comparability a little difficult. So some consistency in the formats and some more granularity in the results that the insurers provide would be helpful as viewed by the analysts. So until you talked about some interesting changes to the analyst analysis of value from insurance companies, what has been the most important change there. I would say that the most important change would be that ratios like price to earnings and return on equity. These have become more important with a very clearer description of equity, which for say life insurance would be the IFRS equity plus CSM. So these ratios are being tracked by the analysts much more closely now and maybe something which the companies would then have to monitor more closely as we go along. That's very interesting until thank you very much and Cameron from your experience and what we've learned from this analysis. How do you see the responses being varied or different across geographies between Europe and Asia that being touted as one of the greatest benefits of IFRS 17 that one can now compare across geographies. So how do you see the analyst responses being different across regions, as well as maybe between equity and debt analysts or trading analysts? Sure, Kinsh. And, and, and as I just to say, I found your comments there very, very insightful and really great to see that coming out of our survey. From a sort of Europe versus Asia perspective and I'll talk in general terms and of course it's always dangerous talking general terms specific insurers might be in a very different position of specific countries or markets. But in general terms bear mine that for quite a many years now at least sort of 10, 15, 20 years Asia Pacific has been seen as much more of a growth area than the UK content Europe. We have seen in content Europe and UK the adoption of solesy to being a very significant development eight years ago and continues to be obviously very recent ease. We've started to see some changes there both in UK content Europe and from a sort of point of view of insurers reporting to the market. We've seen many companies in Europe replacing embedded value and value new business type of reporting with something actually very similar but called very different called adjusted so on to two where they make clear they start with a so on to approach both as sort of valuation of assets, that's liabilities or own funds as it's called so on to two and then making adjustment to be more from a shelter perspective. And then doing something similar in terms of the impact on new business sold in the year and there it's quite interesting we see companies many of them continue to focus on that as a key metric talking about the so called cash that's often a very salty to linked metric distributed all surplus being generated out of. So on to two effectively own funds less some allowance from proportion of so on to capital ratio and we've seen the analysts continue to sort of focus on that information in fact we've seen a number of analysts talk about how they are focusing more on that in the early days of our 17 as they get used to our 17 numbers I thought that was a very interesting development almost that the reverse of perhaps what the ISP wanted there. For Asia pack still in many markets embed a value value of business particularly the growth market is very important metric often driven from local statutory or regulatory accounting and not any I for a 17 linked account that sort of starting point and again the age specific companies doing that are still continuing with the even be reporting. And the analysts almost saying that they're hoping that continues for a while longer while they get used to our for some team metrics so as a general point there I'd say in both markets and this still wanting to see the other metrics that companies have been avoiding last few years continue for the next few years is just the types of those metrics are quite different. So I think that answers your first question. I think you have a second question for me about X to versus debt and this is that right. Let us correct how do we see maybe credit ratings getting affected because of our 17 if at all. Yeah one one interesting thing from the credit rate you see is and death analyst is a very strong message that overall they see no impact whatsoever in the short term of our for 17 on the ratings themselves. And now perhaps that might change over time we have seen a number of the rate you see is quite publicly talk about how they bring I for seven or I for a generally and therefore I for 17 into the some of the numbers they use for the ratings and I think they also make the point that there's lots of other numbers they bring in that nothing to do with I for us. So I think that's the way I explain the lack of impact also they always emphasize a lot of their rating processes qualitatively driven rather than quantitatively driven and I think that also helps explain the lack of impact. So I think that's quite vocal about being willing under certain circumstances to add all or a significant proportion of the so called contractual service margin and you talking about earlier into the equity when they are assessing their you know bringing their information into their own ratings including for example working out leverage ratios. So I think that's a very important element on on that side I say the equity analysts it does seem that I for 17 has triggered in certain areas more questions or more understanding or more uncertainty particularly where the nature of our 17 means as a greater light shown on particular points in in the market and we have seen some impacts for example great question. And so in certain parts of Asia great questions for certain products such as UK and U. T. So we have seen more driven by the equity analysts those sorts of impacts. But these these are very interesting insights Cameron thank you thank you very much and overall message what I hear from you is while the wrapper around financial reporting does change and while the level of detail or information available changes. The business fundamental stone which is which is helpful to know one of the things that is interesting in this narrative is that although many jurisdictions and many in sure across the world have gone live with I for a 17 effective first of January 2023 and I started reporting. So there are a number of the first time earlier this year there are jurisdictions particularly in Asia and and more emerging economies such as India Sri Lanka and elsewhere in Southeast Asia that will adopt later and given these lessons learned given the inputs from users and analysts. So in certain ways the later doctors can leap frog in their implementation journey and hopefully not having to spend another 20 billion dollars for for the Asia back in doing this implementation. So it's always I think a little orange to do things later than others when you can learn the lessons and of course the later adopters have the benefit of being able to tap into experience resources from around the world now who have been through the fire of first time adoption. So one is around disclosures I think the adopters last year had to make a lot of decisions how they're going to present things and and the best way of showing things without having a large template of existing examples. Now have many shores you know something of the order of 100 sure is publishing and some of them with subsidiary counting as well so the real numbers probably a lot higher and we have heard from analysts including in our survey results some of the insurers you know the disclosures that they really like so I think that's a good lesson to be learned by the future adopters. So it comes to mind relates to how the programs went in practice I think in the early days days insurers were very ambitious and wanted to do both a sort of compliance adoption and also make sure that their reporting processes post adoption were in very good shape so that they were leaving a very good long term strategic solution that worked well from a business as usual perspective. And the practice didn't really go to plan for many insurers many shores had to defer long term chief solutions and instead bring in short term tactical solutions just to get programs over the line I can say if the new insurers adopting the next few years could learn a practical lesson it's to make sure that they achieve both as part of the implementation a lot of insurers out there still with a lot of work to do to get their reporting processes in good shape before. And the post I for 17 and the next few years so that's I think one lesson for those markets where companies have the adoption. Right that's really great lessons and learning thanks thanks a lot for sharing that and I'm sure that will be very helpful for more than 10 insurers in Indian Sri Lanka who have purchased WTW technology for I for 17 recently and we continue to talk to several more in the region. As well as in the markets on adopting WTW technology and and the lessons that you've mentioned will come in really really handy for for the implementation journey. I've got you mentioned that because I forgot to mention that and clearly that is the most important thing insurers should be doing. So yeah. Yeah and this has been really insightful from both until and camera thank you very much so maybe before we go perhaps one parting thoughts from from both of you if you are going to suggest one key takeaway or key action organization and ensures should be taking now with regard to I for a 17 implementation as a result of what we've heard from the analysts then what would it be. I would say that so insurers need to focus on rather than just focusing on turning out more disclosures I think there needs to be a focus on making the disclosures more insightful so several analysts talk about talked about that. And personally, I have used that outcome into the projects that I'm myself working on and trying to basically get that information that analysts are requesting early into the project and pondering over that later in the project as to what sort of KPIs should we look at or how can we be the information more insightful. So that's something that I'm trying to incorporate right in the middle of the projects that I'm working on to make them more fruitful. And I think another thing would be that several analysts have pointed out to the fact that there are some companies are putting the various information about the various financial metrics at one place and that's been really appreciated by the analysts was some companies which have some information and what one place and some other information at another place. So that's been really frustrating for some some analysts so probably something for insurers to keep in mind and try and consolidate all the financial information at a single place so that it's easier for the users of financial statements to go through that and do their respective analysis. Right and easier for us to because we've been benchmarking all of these. This was the first one. And come around what about from yourself what would be sort of the key action or take away that you would recommend for organization and insurers around the world. The danger of always going second is that an actual that was a great response and also thanks to the analysts who made made those sort of points. I mean I've got one thought and something we've spotted in our own analysis is the different ways insurers have presented a key results and particular things like analysis and movement and sensitivities. And those different templates are somewhat a source of frustration because it creates noise in the system creates more time to work out what's going on and that does remind me of the CFO forum which in the old days used to do a great job of creating standardized templates. In fact they published one as part of their mcv principles in June 2008 and that one appendix template became probably the most useful thing that I can think of that they ever published. So I wonder if there's an organization like that that is willing to take the lead in agreeing a new or a small number of templates that insurers could use for their investor presentations to help communicate the key. So that's key for us results and and as part of that I think there's always a need to help explain how those are for us results link to other key metrics so to bear that bit in mind as well. So that would be my wish for the sector to see if a forum could do that that's great and we're happy to advise and spawn that as anyone would wish as we have done the past so we have that is the sort of thing we've done over the years. There is a need for that now having I mean looked at a number of companies publications year end 2023. And that would indeed be wonderful thanks thanks Cameron and I think we're coming up to close so thank you Cameron and ensure for joining me today it was great to hear your perspectives and of course to all of our listeners thank you for joining us. Just as a reminder if you work for an insurance company and which to discuss any of this content in more depth with any of our I for 17 experts including the speakers here today please get in touch with your usual WT W consultant. And if you heard something about the service we've done that interested you or the I for a 17 literature that we published or technology capabilities that we have. You can visit WT W Co dot com slash I for a 17 or right to us directly on ICT at the rate WT W Co dot com. Finally if you've enjoyed this episode make sure to subscribe and we'll see you again on the next episode of rethinking insurance. Thank you for joining us for this WT W podcast featuring the latest perspectives on the intersection of people capital and risk. For more information visit the insights section of WT W Co dot com. 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