Ed Kohlberg, Director at AM Best, recently discussed Canada’s life and annuity insurance sector’s solid performance in 2023-2024, boosted by economic growth and favorable interest rates, according to BestWire.
Sales growth and these rates have helped stabilize the sector, even as companies navigate the new IFRS 17 accounting standards.
IFRS 17 was implemented the first full year of financial reporting that we saw was for year end 2023. It was a big task for insurers to implement that. It took a lot of resources and time to get around those changes. The good thing is Canadian insurers did have plenty of time.
Insurers’ efforts around Finance Transformation have mainly focused on the immediate priority of IFRS 17 compliance. What’s beyond? It’s time for insurers to think about the long term vision for the Finance function and make step changes to get there. And these five areas are where insurers should start.
The IFRS 17 requirements could result in accounting mismatches and volatilities in profit and loss—a direct consequence of the insurer’s reinsurance management strategy and contracts entered into today.
With IFRS 17’s anticipated mandatory effective date of 1 January 2023 moving ever closer, all types of businesses, not just registered insurance businesses, need to start evaluating the impact of the Standard now.
IFRS 17 is the newest IFRS standard for insurance contracts and replaces IFRS 4 on January 1st 2022. It states which insurance contracts items should by on the balance and the profit and loss account of an insurance company, how to measure these items and how to present and disclose this information.
IFRS 17’s Full Implementation in Canada`s Insurance Market
IFRS 17 was implemented the first full year of financial reporting that we saw was for year end 2023. It was a big task for insurers to implement that. It took a lot of resources and time to get around those changes. The good thing is Canadian insurers did have plenty of time. There were many years of preparation leading up to it. The reason for IFRS 17 was to create global consistency between the Canadian insurers and all other non-U.S. insurers.
The financial impact was pretty muted, pretty minimal for the most part, for many companies. When we look at equity, though, if we look at the year-end 2022 restated IFRS 17 amount and the pre-IFRS 17 amount for, again, 2022 equity, it dropped 24%, which does sound like a lot.
That is a big impact to the equity line.
But when we ran BCARS and compared them to pre-IFRS 17 and post-IFRS 17, the impact was not quite severe. The reason for that is within our available capital within the model, we are giving 50% credit to the CSM, the contractual service margin, and 50% credit to the risk adjustment.
That helped to offset some of that impact as those additional cushion, the margins were put up under the IFRS 17 rules.
Asset liability management in Canada
ALM, asset liability management, the matching has improved and companies are managing that very well. I think the interest rate increases do help that. It helps companies further align their assets to their liability duration matching.
Again, locking on the higher interest rates is pretty good too. Operating performance, earnings continue to be strong and robust for Canadian insurers.
Other thing, the Canadian life insurance industry is very diverse. When it comes to the major players, they have many different product lines, many different product types within those product lines, and they’re very geographically diverse as well, some of them being in the U.S., in Asia as well, and in Canada, so that helps.
If one area is not performing well, you have many other areas within those companies that can help offset that.
IFRS 17’s Impact on Canada’s Life & Annuity Insurers
Another interesting thing with the IFRS 17, there’s no longer concept of premiums. It all runs through revenue. That’s a new thing that we’re getting used to, and the industry is getting used to as well.
Canadian insurers invested significant time and resources in the transition, and due to years of preparation, the shift’s financial impact was mostly minimal (see TOP 50 Insurance companies in the US & Canada: Assets & Revenue).
Equity saw a 24% drop at the end of 2022 when restated under IFRS 17. Despite this, AM Best’s BCARS model offset some of the impact by crediting 50% to the contractual service margin (CSM) and 50% to the risk adjustment.
Another key change under IFRS 17 is the elimination of premiums, with all revenue now recognized through a single line item.
I think the industry has done a good job of taking advantage of interest rates and where they are in adjusting products and adjusting their investment portfolio the best that they can and try to lock in on rates where they are right now.
Ed Kohlberg, Director at AM Best
There was of course the impacts of unrealized losses that kind of come through in the fair market adjustment that you see in Canada. Other things that helped our stable outlook capitalization, as I mentioned, it continues to be strong. Liquidity is adequate.
ALM, asset liability management, the matching has improved and companies are managing that very well. “I think the interest rate increases do help that. It helps companies further align their assets to their liability duration matching”, says Ed Kohlberg.
Outlook for Canada’s life insurance & annuity sector
AM Best maintains a stable outlook for Canada’s life/annuity sector in 2023. Kohlberg attributed this to several factors: rising interest rates, which have improved sales and investment returns, strong capitalization, liquidity, and effective asset-liability matching.
Canadian insurers have adjusted their portfolios and products to lock in higher interest rates, further stabilizing the industry.
Moving ahead, one thing that I don’t think is going to go away are the operational challenges for the insurance industry that comes with talent management is a challenge.
“Systems integration, system upgrades, digitization, improving the customer experience, which the industry has done a good job at implementing that, but I think it continues to evolve and change”, says Ed Kohlberg.
However, Kohlberg pointed to challenges for 2025 and beyond. Talent management, system upgrades, and customer experience improvements remain ongoing priorities for the sector. Inflation also presents obstacles, affecting middle-market sales and increasing operational costs.
Other pressures, interest rates. Where do they go from here? We saw them start to come down in the U.S., in Canada.
I’m not going to predict rates, but should they come down, you need to manage that. I think the industry is well-suited in managing it, but you need to pay attention to rates are going and being able to react quickly to that is important.
The future direction of interest rates will play a significant role, with the need for insurers to quickly adapt to any changes. Despite these challenges, Kohlberg expressed confidence in the industry’s resilience and preparedness.
FAQ
Canada’s life and annuity insurers saw solid performance in 2023, driven by economic growth and favorable interest rates, which boosted sales and helped stabilize the sector.
IFRS 17, which became mandatory on January 1, 2023, is the newest standard for insurance contracts, replacing IFRS 4. It defines how insurance contracts should be recognized, measured, and disclosed in financial statements.
While IFRS 17 led to a 24% drop in reported equity in 2022, the overall financial impact has been minimal. The transition was manageable due to Canadian insurers’ years of preparation and adjustments in capital models.
With rising interest rates, asset-liability management has improved significantly, helping insurers align assets with liabilities more effectively and capitalize on higher interest rates.
The stable outlook reflects strong capitalization, adequate liquidity, effective asset-liability matching, and the sector’s adaptability to interest rate fluctuations.
The industry faces operational challenges in talent management, system upgrades, and digital transformation. Inflation pressures and uncertain interest rate directions also pose additional challenges.
Under IFRS 17, premiums are no longer recognized separately; instead, all revenue flows through a single line item, reflecting a shift in the industry’s financial reporting approach.
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AUTHOR: Ed Kohlberg – Director at AM Best
