Adjust your IFRS 17 implementation to consider Adjusted Operating Profit (AOP)
05 November 2019
With many insurers well progressed with their technical IFRS 17 accounting decisions and entering detailed design phases, attention is now being focused on how they will be viewed and judged externally once IFRS 17 goes live. Our first report on key performance indicators (KPIs) ‘New Measures, New Perspective’ analysed the current suite of KPIs insurers report to the market and assessed how these metrics were likely to be affected by IFRS 17. In our latest report, we explore the challenges and options insurers have when calculating Adjusted Operating Profit (AOP) under IFRS 17.
What is AOP?
AOP is an important KPI within life insurance - adjusting the total accounting profit to give an insurer’s view of their underlying profitability. Although it will remain key under IFRS 17, there will be significant new challenges in determining what adjustments to make.
Analysing the current adjustments applied to IFRS 4 profit when determining AOP by five major European insurance companies, we observed that the adjustments fell into three categories:
- Removal of short-term market volatility
- Exclusion of deal activity
- Exclusion of items that are one-off in nature.
We think adjustments for these items will continue once IFRS 17 is live.
Challenges under IFRS 17
As the nature and timing of profits under IFRS 17 will be different to current IFRS 4, further adjustments may be needed to explain the performance story and provide further meaningful insights for analysts and investors. We think insurers will consider making additional adjustments for (i) the timing of profit release, (ii) mismatches, and (iii) volatility.
Creating credible and comparable AOP measures requires insurers to have a clear understanding of the advantages and disadvantages of various adjustment options, which we explore in the report. It could also demand significant investment in models, data, systems and processes.
What this means for implementation
Deriving AOP under IFRS 17 is likely to need additional assumptions, data input requirements, and modelling capability. Assessing the requirements early and incorporating the use case and data requirements into your IFRS 17 solution design will limit any additional expenditure and workarounds further down the line.
Our report ‘Adjusted operating profit in an IFRS 17 world – telling your story with confidence' is available to download now and includes detailed analysis on some of the adjustment options available.