KUNJ MAHESHWARI: Hello, and welcome to (Re)thinking Insurance. I'm your host, Kunj Maheshwari. And today, I'm delighted to be joined by my guests, Anshul Garg and Kamran Foroughi. Welcome both, and thank you for joining me.
KAMRAN FOROUGHI: Thanks, Kunj.
ANSHUL GARG: Thanks for having me here, Kunj.
KUNJ MAHESHWARI: This is the second of a two-part podcast series on IFRS 17. As a reminder to those guests who are not so familiar with IFRS 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 5 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 IFRS 17, we have estimated that, globally, IFRS 17 implementations have costed the sector upwards of $20 billion 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. The Insurance Consulting and Technology business at WTW has been supporting insurers globally who are reporting under IFRS 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 IFRS 17 aspects already, and over 80 insurers have bought our IFRS 17 technology to help deliver the IFRS 17 results.
I know, Kamran, that in the last few years, we have, at WTW, carried out very successful surveys of the preparers of IFRS 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 IFRS 17 results in many jurisdictions around the world, what has motivated a new survey of the analysts and the user of these financial statements?
KAMRAN FOROUGHI: Thanks, Kunj. I mean, you're right. We've done preparer surveys for a number of years, we've got very rich data out of that, including our, so 20 billion-plus estimate. But if you take a step back with all that work companies have done, I mean, the key question is always-- with external financial reporting-- is, does it meet the needs of users? And we do have very good connections with the investor community, and so very keen to actually touch base with them this year in June.
Companies had published a lot all the way up to April and so in cases early May. And it took a while to digest all that information. So touching base with the investors and analysts-- representing the investors about what their thoughts of IFRS 17, I thought, was a very important step in judging early stages views of whether IFRS 17 has been a success or not.
KUNJ MAHESHWARI: Right. No, thank you. From my perspective, Kamran, 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 ask, so what could we do differently and what could we do better? And hearing directly from the horse's mouth, the users themselves is very, very helpful. And I'm not aware of any similar initiative being undertaken where IFRS 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, Anshul, I know you've been at the epicenter of looking at all the data and all the results and all of the 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?
ANSHUL GARG: 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 have tried to keep that wide.
Now, in terms of what did we ask the analysts. So we approached 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 they saw 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 posed to them, and we got some really great insights coming out of that.
KUNJ MAHESHWARI: Well, that's very interesting. So when you say debt analysts, you mean the credit rating agencies. Is that right?
ANSHUL GARG: Yeah, that's correct.
KUNJ MAHESHWARI: OK. That's great. So we've covered both buy and sell side equity as well as credit rating 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?
ANSHUL GARG: Well, for me, I would say that the most important takeaway has been that the impact on the industry has been varied. So say, for life side, the impact has been more 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 giving them a measure of economic value and helping them gain better 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 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 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 creates 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.
KUNJ MAHESHWARI: 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?
ANSHUL GARG: So I would say that 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 may be something which the companies would then have to monitor more closely as we go along.
KUNJ MAHESHWARI: That's very interesting, Anshul. Thank you very much. And Kamran, 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 analysts' responses being different across regions as well as maybe between equity and debt analysts or credit rating analysts?
KAMRAN FOROUGHI: Yeah, sure, Kunj. And Anshul, just to say, I found your comments there very, very insightful and really great to see that coming out of our survey. From a Europe versus Asia perspective-- and I'll talk in general terms. And of course, it's always dangerous to talk in general terms. Specific insurers might be in a very different position of specific countries or markets. But in general terms, bear in mind that for quite many years now, at least, 10, 15, 20 years, Asia-Pacific has been seen as much more of a growth area than the UK, continental Europe.
We have seen in continental Europe and the UK the adoption of Solvency II being a very significant development eight years ago and continues to be, obviously, very recently as we've started to see some changes there, both in UK and continental Europe. And from a point of view of insurers reporting to the market, we've seen many companies in Europe replacing embedded value and value of new business type reporting with something actually very similar but called very different-- called adjusted Solvency II, where they make clear they start with a Solvency II approach, both the valuation of assets, liabilities, or own funds, as it's called in Solvency II, and then making adjustment to be more from a shareholder 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 whom continue to focus on that as a key metric, talking about the so-called cash that's often a very Solvency II linked metric, distributable surplus being generated out of Solvency II, effectively own funds, less some allowance for some proportion of solvency capital ratio. And we've seen the analysts continue to 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 IFRS 17 as they get used to IFRS 17 numbers. I thought that was a very interesting development, almost the reverse of perhaps what the IASB wanted there.
For Asia-Pac, still, in many markets, embedded value and value of new business, particularly the growth market, is very important metric often driven from local statutory or regulatory accounting, and not any IFRS 17 linked account starting point. And again, the Asia-Pacific companies doing that are still continuing with EV and VNB reporting and the analysts almost saying that they're hoping that continues for a while longer while they get used to the IFRS 17 metrics.
So as a general point there, I'd say, in both markets, analysts still wanting to see the other metrics that companies have been reporting the 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, Kunj. I think you had a second question for me about equity versus debt analyst. Is that right?
KUNJ MAHESHWARI: That is correct. That is correct. How do we see maybe credit ratings getting affected because of IFRS 17, if at all.
KAMRAN FOROUGHI: One interesting thing from the credit rating agencies and debt analysts is a very strong message that overall they see no impact whatsoever in the short term of IFRS 17 on the ratings themselves. Now, perhaps that might change over time. We have seen a number of the rating agencies quite publicly talk about how they bring IFRS 17 or IFRS generally, and therefore IFRS 17 into the sum 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 are nothing to do with IFRS, and that might help explain the lack of impact.
Also, they always emphasize a lot of their rating process is qualitatively driven rather than quantitatively driven. And I think that also helps explain the lack of impact. But they have been quite vocal about being willing under certain circumstances to add all or a significant proportion of the so-called contractual service margin that Anshul you were talking about earlier into the equity when they are assessing their-- bringing their information into their own ratings, including, for example, working out leverage ratios. So that's quite an interesting development on that side.
I'd say the equity analysts, it does seem that IFRS 17 has triggered in certain areas more questions or more understanding or more uncertainty, particularly where the nature of IFRS 17 means there's a greater light shone on particular points in the market. And we have seen some impacts, for example, greater questions in certain parts of Asia, greater questions for certain products such as UK annuities. So we have seen more driven by the equity analysts those sorts of impacts.
KUNJ MAHESHWARI: These are very interesting insights, Kamran. 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 fundamentals don't, which is helpful to know.
One of the things that is interesting in this narrative is that, although many jurisdictions and many insurers across the world have gone live with IFRS 17, effective 1st of January 2023, and have started reporting even full-year numbers for the first time earlier this year, there are jurisdictions, particularly in Asia 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, what do you think are the most important ways the late adopters can leapfrog in their implementation journey and hopefully not having to spend another $20 billion for the Asia-Pac in doing this implementation?
KAMRAN FOROUGHI: Very good question. It's always, I think, an advantage 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. I mean, a couple of thoughts there. One is around disclosures.
I think the adopters last year had to make a lot of decisions about how they're going to present things and the best way of showing things without having a large template of existing examples. We now have many insurers, so something of the order of 100 insurers publishing and some of them with subsidiary accounting as well. So the real number is probably a lot higher. And we have heard from analysts, including in our survey results, some of the insurers' disclosures that they really like. So I think that's a good lesson to be learned by the future adopters.
Another one that comes to mind relates to how the programs went in practice. I think in the early days, insurers were very ambitious and wanted to do both a 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 insurers had to defer long-term strategic solutions and instead bring in short-term tactical solutions just to get the programs over the line.
And I could say if the new insurers adopting over 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 are still with a lot of work to do to get their reporting processes in good shape for post-IFRS 17 and the next few years. So that's, I think, one lesson for those markets where companies haven't adopted yet.
KUNJ MAHESHWARI: That's really great lessons and learnings. Thanks a lot for sharing that. And I'm sure that will be very helpful for more than 10 insurers in India and Sri Lanka who have purchased WTW's technology for IFRS 17 recently. And we continue to talk to several more in the region as well as in the markets on adopting WTW technology. And the lessons that you've mentioned will come in really, really handy for the implementation journey.
KAMRAN FOROUGHI: I'm glad you mentioned that, Kunj because I forgot to mention that. And clearly that is the most important thing insurers should be doing.
KUNJ MAHESHWARI: And this has been really insightful from both Anshul and Kamran. Thank you very much. So maybe before we go, perhaps one parting thoughts from both of you. If you were going to suggest one key takeaway or key action organizations and insurers should be taking now with regard to IFRS 17 implementation as a result of what we've heard from the analysts, then what would it be?
ANSHUL GARG: I would say that insurers need to focus on-- so rather than just focusing on churning out more disclosures, I think there needs to be a focus on making the disclosures more insightful. So several analysts 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 our analysts are requesting early into the project rather than pondering over that later in the project as to what sort of KPIs should we look at or how can we make 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 some companies are putting the various information about the various financial metrics at one place, and that's been really appreciated by the analysts versus some companies which have some information in one place and some other information at another place. So that's been really frustrating for some of the 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 analyses.
KUNJ MAHESHWARI: Right. And easier for us to because we've been benchmarking all of these disclosures as well. So it helps to have them in one place.
ANSHUL GARG: Yeah, definitely. That'll be helpful.
KUNJ MAHESHWARI: And Kamran, what about from yourself? What would be the key action or takeaway that you would recommend for organizations and insurers around the world?
KAMRAN FOROUGHI: Well, the danger is always going second is that-- Anshul, that was a great response. And also thanks to the analysts who made those points. I mean, I've got one thought and something we've spotted in our own analysis is the different ways insurers have presented key results, and particularly things like analysis and movement and sensitivities. And those different templates are somewhat a source of frustration because it creates noise in the system. It 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, I remember they published one as part of their MCEV 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 very small number of templates that insurers could use for their investor presentations to help communicate the key IFRS results.
And as part of that, I think there's always a need to help explain how those IFRS results link to other key metrics. So to bear that in mind as well. So that would be my wish for the sector. If the CFO Forum could do that. That's great, and we're happy to advise and support on that as anyone would wish, as we have done in the past. So that is the thing we've done over the years. And I think there is a need for that now having looked at a number of companies' publications at year-end 2023.
KUNJ MAHESHWARI: That would indeed be wonderful. Thanks, Kamran. And I think we're coming up to a close, so thank you, Kamran and Anshul 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 wish to discuss any of this content in more depth with any of our IFRS 17 experts, including the speakers here today, please get in touch with your usual WTW consultant.
And if you heard something about the surveys we've done that interested you or the IFRS 17 literature that we've published or technology capabilities that we have, you can visit wtwco.com/ifrs17 or write to us directly on ICT at the rate wtwco.com. Finally, if you've enjoyed this episode, make sure to subscribe, and we'll see you again on the next episode of (Re)thinking Insurance.
SPEAKER: Thank you for joining us for this WTW podcast featuring the latest perspectives on the intersection of people, capital, and risk. For more information, visit the Insights section of wtwco.com. This podcast is for general discussion and/or information only, is not intended to be relied upon, and action based on or in connection with anything contained herein should not be taken without first obtaining specific advice from a suitably qualified professional.
