IFRS 17: Finally Here, But Challenges Remain

In Malaysia, IFRS 17 is a hot topic currently, especially for life insurers and family Takaful. IFRS 17 will start on 1 January 2021. This sounds like a long way away, but considering that the opening position will be as at 31 December 2020 and the need to show the current and prior year financial positions this means the position as at 31 December 2019 is also needed.

At the heart of IFRS 17 is the desire for nancial statements which are consistent globally and easy for investors and analysts to understand. This is quite distinct from the goals of regulatory reporting and just by the measure of how long it took to develop the standard, is easier said than done. As regulatory reporting will still need to exist distinct from this and the accounting standards of many countries such as GAAP in the US will remain- this means that there will continue to be many nancial reporting standards worldwide.

IFRS 17 gives guidance as to how pro t is recognized. For instance with participating products in Malaysia shareholders and policyholders share surplus in the ratio 10:90. This means that since high terminal bonuses are payable at maturity, a large portion of pro ts to shareholders are recognized at maturity. Under IFRS 17 this will be smoothed over the lifetime of the contract. An important way of looking at this is that this is an ACCOUNTING standard, not an ACTUARIAL standard, thus since revenue in other industries such as banking and mutual funds accrue as services are rendered the same will apply here.

A gross premium valuation (GPV) takes the present value of all outgoes less the present value of all income at a best estimate plus padding using a risk free discount rate. Thus if the plan is pro table at the padded assumptions the GPV will be negative. Under the current standards, IFRS4, this negative amount will be released immediately into pro ts. Under IFRS17 we will use a contractual service margin (CSM) to release the pro ts over the lifetime of the contract.

There are a number of challenges being faced by Malaysian insurers. We must determine this CSM on a cohort basis which is no more than one year of business. Thus for an older insurer, there will be many calculations of initial CSM and release over time. Even the calculation of the initial CSM is not as straightforward as it sounds as we have some exibility in calculating the GPV assumptions, called ful llment cash ows in IFRS 17 including the choice of discounting rate.

Beyond the large number of calculations even the format of the financial statements will change. Premium income as revenue will be a thing of the past for many life plans. This means that in order for an accountant to put together accounts they will need an actuary! As the accounts will continue to be signed off by the accountant there is an immediate need for accountants to understand the actuarial science behind the calculations and this applies as well to the risk managers and auditors. There is also an urgent need for all products being sold from today to be “pro t” friendly under IFRS 17 or at least the products’ pro t and loss “footprint” understood. IFRS 17 will (eventually) result in financial statements which are representative of the pro t drivers of the insurance business and therefore are true and fair, but in the short-term life is about to get complicated!

Insurers should not wait for the numbers to be prepared under the new standards to assess their approach in managing their current block of business and importantly the way forward in their new business strategy. To manage future IFRS pro ts, the insurer would need to immediately review:

  1. The approach in grouping/aggregating the existing in-force policies for the purpose of determining CSM
  2. Which transition methodology to adopt for each group of policies
  3. How much unearned CSM to impute on the existing in-force policies
  4. What to use as a “pro t carrier”
  5. The design and pricing of all existing products.

In Malaysia, we have identi ed challenges in the following areas:

  • Managing CSM for the nonparticipating plans written in the past where IFRS17 “unearned pro ts” have been inadvertently prematurely distributed. Are the current shareholders now required to reconstitute the CSM?
  • The problem will be more acute for businesses with heavy exposure to single premium policies (MRTA) Releasing CSM for limited pay endowment products-which pro t carrier would be more advantageous to the insurer?
  • How estate is managed within participating funds under IFRS17. Should the current generation of policyholders receive a share of the estate?

We would be happy to assist insurers and takaful operators navigate these unchartered waters.

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