Insurers worldwide are starting the process of implementing IFRS 17 in all its intricate detail. With all this detail though comes the risk of losing sight of the big picture. This article sets out a bird’s eye view of what we are doing with the IFRS 17 implementation.
Currently our accounting systems are set for our current accounting standards, IFRS 4. With this standard we report items such as premiums, claims, investment income and expenses in our accounts. We collect the various items from our back-end transactional IT system. The two systems might be from the same vendor or from different vendors or even put together locally (some of our smallest clients use Excel for both systems!). Whereas this accounting system is only run when accounts are required (once per month normally) the transactional system is always working. As actuaries we calculate the actuarial reserves, and this is manually input into the accounts. Under IFRS 17 we will need to input the various items required under the reporting rules into the accounts. These items are quite complicated and most likely beyond the capabilities of the backend system. Thus, another system is needed to calculate the various items such as fulfillment cash hows, contractual service margins, risk adjustment and whatnot and put into a format which the accounting system can use to generate the accounts. This is where an actuarial system is required, either on its own or in conjunction with a data warehouse type solution.
Thus, there are two main tasks in implementing IFRS 17, adjusting the accounting forms and system to collect the appropriate information and output accordingly, and the implementation of the technical (actuarial) system to provide the necessary information. The first task we label the accounting tasks and the second the actuarial tasks. The first task can be performed internally and reviewed by your internal auditors, or it could be performed by another audit firm or even business consultants. The second task can be performed internally, by an actuarial consultant or with the actuarial team of an audit firm. The decision for the first task will be weighing the internal capabilities to implement the various accounting rules of IFRS 17 versus the need to have an audit firm manage and guide you through the process. At the high end of the scale would be engaging a business consultant to rethink your processes in totality to see how to turn IFRS 17 implementation from a compliance exercise to a way to long term success. The decision for the second task would be who has the most in depth understanding of your products and market (especially the history of the market to understand the setting of historical assumptions) and the availability of resources internally. Even if the actuarial tasks are to be performed internally the calculations will need to be tested versus an independent source so a consultant will still be required.
The following steps are split into three phases, an impact assessment phase, an implementation phase and a review and testing phase. Each of these phases is split between accounting tasks and actuarial tasks. Of course, each company is unique, each country is unique. The below steps are meant to give an understanding of the process and work involved.
Phase 1 actuarial: Financial Impact Assessment to understand the potential effects of IFRS 17 and scope out the major drivers. In particular:
- New business assessment: Assess the profit signature of the major products currently being sold under the current IFRS 4 basis against IFRS 17. This should be related to key metrics such as profit margin, new business value and new business strain and include the cost of provisioning if the products are not repriced.
- Assessment of Contractual Service Margin (CSM): Assess the CSM by product line with the goal of estimating the CSM at point of transition under various approaches such as one CSM versus two as well as differing profit carriers.
- Assessment of future earnings: Highlight and quantify any significant variation that can be expected on future earnings after transition to IFRS 17.
This would be performed for both life insurance (family takaful) as well as long term general insurance products.
Phase 1 accounting: Business Impact Assessment
- Document the “As-Is” position of the existing financial reporting processes, data and systems
- Define and validate the “To-Be” positions that align to your requirements
- Conduct a gap analysis which identifies the gaps which need to be addressed.
This phase might be most effectively conducted by your existing auditors.
Phase 2 actuarial: Actuarial Implementation
- Modify existing systems for the methodology, assumptions, treatment of reinsurance and required output for the accounting system. When Prophet is used this would mean performing a gap analysis specifically for Prophet and enhancement of the prophet model accordingly.
- Modify the actuarial processes for IFRS 17 inclusive of valuation, pricing and profit testing and management reporting such as embedded values and value of new business.
- Develop risk management checks to ensure compliance with IFRS 17 by the actuarial department for use by the internal risk management team.
- Review the reinsurance treaties to ensure they remain useful and relevant under IFRS 17.
Phase 2 accounting: Accounting Implementation
- Modify database and IT how.
- Modify end user computing·
- Modify the general ledger.
- Adjust the ancillary processes such as capital management, tax and business profitability KPI reporting·
- Modify the reporting and disclosure processes.
Phase 3 actuarial: Actuarial Review and Testing
- Perform user acceptance testing (UAT) on the runs, output and processes using a program independent of the insurers internal programs.
- Review compliance with actuarial processes such as valuation, pricing and profit testing and management reporting such as embedded values and value of new business.
- Ensure the risk management department has the tools and ability to monitor the compliance of the actuarial department for IFRS 17.
- Provide user training.
- Review parallel testing results.
Phase 3 accounting: Accounting Review and Testing
- Perform user acceptance testing (UAT) on the data in puts, general ledger output and other final outputs
- Provide user training
- Review parallel testing results.
We would be happy to discuss in more detail with you what implementation would look like for your company and the steps involved.