In January 2023, the new accounting standard for insurance contracts, IFRS 17, replaced IFRS 4, which had been in effect since 2004. IFRS 17 has since led to greater volatility in life insurers' income statements.

The implementation of IFRS 17 in Canada did not go smoothly. Initially scheduled for 2018, it was postponed more than once due to pressure from the Canadian industry. Initiated several years ago by the International Accounting Standards Board (IASB) in London, the IFRS project is global in scope. Some countries, including the United States, have not adopted it.

In Canada, insurers began to feel its effects as early as the 2023 fiscal year, since they had already adjusted their 2022 figures to make them comparable. For example, Beneva saw its net income skyrocket by 149% in 2023. In an article published on April 26, 2024, on the Insurance Portal, Jean-François Chalifoux, President and CEO of Beneva, explained the increase in net income by several factors, citing IFRS 17 first.

For its part, iA Financial Group also saw its net income increase by 149% in 2023. The insurer urged caution when interpreting these figures, given the adjustments to IFRS standards.

In 2023, Humania Assurance reported net income of $6.2 million, compared to $25.0 million in 2022, according to figures adjusted to IFRS 17, representing a decrease of 75%. Under the old standard, Humania Assurance's net income would have been $9.9 million in 2022.

Another effect of IFRS is that iA Financial Group has seen its liquidity increase as a result of the new standard. In a discussion with analyst Mario Mendonca of TD Securities, Denis Ricard, President and CEO of iA, pointed out that the company's capital to deploy increased from approximately $300 million to $1.5 billion in the first quarter of 2024. 

“We had extra margin in our reserves never recognized in capital. All of a sudden, under IFRS-17 we couldn’t keep that extra margin, it had to be released,” Mr. Ricard explained during the discussion.

Significant changes to the presentation of results  

At the invitation of the Insurance Portal, Hélène Pouliot, who regularly analyzes insurers' financial reports, outlined how IFRS 17 has changed the disclosure of financial results for life and health insurers in Canada. An actuary and life insurance advisor for many years and recognized as a leader in the industry, Pouliot recently served as President of the Canadian Institute of Actuaries. She said she took care to simplify her remarks to facilitate understanding and better grasp the scope of the changes brought about by IFRS 17.

Premiums are included in the results  

Pouliot notes, first of all, that certain items no longer appear in the net result. These include premiums, claims, and changes in insurers' reserves.

She notes that with IFRS 17, only the results of insurance activities and the financial result are now shown. “These represent the difference between what was expected and the actual result. We therefore disclose performance relative to expectations rather than the current level of premiums and claims,” she explains.

She adds that insurers who collect premiums in excess of their expectations will see a positive impact on their insurance results. Conversely, if they receive more claims than expected, the impact on their insurance results will be negative.

Similarly, financial results will be based on the difference between the insurer's expected return on investments and the actual return it has achieved, notes Pouliot.

New concept of contractual service margin  

The concept of contractual service margin introduced by IFRS 17 is another major change that affects insurers' results, according to Hélène Pouliot.

To simplify the presentation, Pouliot refers to the reserve, which she describes as the calculation of the present value of claims minus the present value of premiums. "Under IFRS 4, we could have a negative reserve. If the expected value of premiums was higher than that of expected claims, the reserve was negative, which allowed us to realize the expected profits as soon as the policies were issued. Under IFRS 17, if the same situation arises, the insurer must instead establish a contractual service margin that represents future profits to be realized. These profits can only be realized according to the margin amortization schedule, as services are rendered," she explains. 

In a hypothetical example, Pouliot assumes a negative reserve of $10 million recorded at the time of sale of an insurance policy. Under IFRS 17, this amount becomes a contractual service margin of $10 million. “No gain or loss is recognized at the time the policy is issued,” she comments. “Instead, I defer it over the period during which the insurer provides services under the policy, which can be very long."

More volatile results  

Pouliot mentions that, prior to IFRS 17, the industry used a discount rate based on a method unique to Canada, namely the Canadian Asset Liability Method, to determine actuarial reserves. “Under this method, the insurer determined the value of its reserves using the book value of the assets required to meet its obligations, taking reinvestment into account,” she says.

“Assets were selected to replicate liability flows as closely as possible. A change in the value of assets caused by a change in interest rates was therefore accompanied by an almost equivalent change in reserves, which stabilized results,” says Pouliot. 

 There is a disconnect between the rate of return on real assets and that of our reserves, which leads to additional volatility – Hélène Pouliot

On Jan. 1, 2023, IFRS 17 eliminated this approach. Pouliot says that this is one of the main changes between IFRS 17 and IFRS 4.

“The discount rate used to determine reserves is now based on a benchmark asset portfolio rather than the actual asset portfolio. The benchmark portfolio must have characteristics similar to those of insurance contract liabilities, particularly in terms of liquidity. This portfolio consists solely of fixed-income assets,” explains Pouliot.

“Under this method, there is a disconnect between the rate of return on real assets and that of our reserves, which leads to additional volatility in insurers' results.”

For life and health insurance companies, whose obligations are long-term, returns on assets are an important factor in their results, Pouliot points out. “The impact of a change in interest rates can now be more significant because of the method used to determine reserves,” she says.