Thriving Under IFRS 17 as a Smaller Insurer

As a smaller insurer, you must be nimble to compete with the larger players. You do this through focusing on a niche market or a particular value proposition and keeping expenses to a minimum. Spending millions on IFRS 17 implementation is counter to everything that a smaller insurer stands for. A Malaysian insurer has mentioned that it has 70 staff working on IFRS 17 implementation and that two years is insufficient.

Having existing staff multi-task with IFRS 17 implementation (and thus not work on the implementation for large parts of the year) will lead to huge delays, not to mention fines or worse if the system is not implemented in time and the auditors refuse to sign off on the financial statements. Any implementation will require significant interactions between outside parties and internal staff. This presentation will go through the major work normally performed and discuss how to see if this work is useful for your company in particular. We will also discuss ways to maintain your edge as a smaller insurer and thrive under IFRS 17.

There are three major steps or projects involved on the road to IFRS 17: Gap analysis, vendor selection and implementation. Normally the gap analysis is performed first, followed by the vendor selection and then implementation. For a smaller insurer, part of the major work of the gap analysis may not be relevant for you. For instance, if you are fairly certain that due to limited resources and internal expertise you will almost certainly outsource your IFRS 17 work, then you do not need gap analysis performed on:

  • Your readiness to perform the various IFRS 17 calculations
  • Your readiness to put together your financial statements and disclosures in an IFRS 17 manner
  • Your actuarial software’s ability to output the required cash flows
  • Your system’s ability to store the expected volume of data, server requirements and other such system issues

The exhaustive interviews, questionnaires and analysis required for the above would not be necessary. Thus, in order to ensure your gap analysis is catered to exactly what is needed for your own implementation, we suggest an alternate flow, namely select the vendor first followed by the aspects of the gap analysis which are truly needed for you to implement with that vendor and then implementation.

Choosing a Vendor:

Before you choose a vendor you must consider a few factors:

  • Do you have actuarial staff currently? IFRS 17 is inherently actuarial in nature. Irrespective of how automated any system is, actuarial resources will be needed under IFRS 17. If you don’t currently employ actuarial staff and it is difficult to get actuarial staff in your market, then you will need a solution which outsources the IFRS 17 work.
  • If you have actuarial staff, how easy is it to hire additional staff? In some developing markets, actuarial staff is in short supply, meaning it will be expensive to hire additional staff. Here, the cost of hiring and maintaining the additional actuarial staff must be compared to the costs associated with outsourcing IFRS 17 work. An ideal solution is one where outsourcing can be used in the early years and a full solution be implemented over time as actuarial resources are developed in the market.
  • How often do you intend to put IFRS 17 compliant financial statements together? Whenever your financial statements need to be approved by an external auditor, you will need your financial statements and disclosures to be fully IFRS 17 compliant, but at other times for internal management purposes would an estimation approach suffice? If yes, then perhaps an outsourcing approach again is worthwhile to consider. Using an analogy of owning a car, if you need to use a car for just two weeks in a year, it might be more cost efficient to just rent a car for two weeks rather than purchasing the car.

Generally speaking, multinationals will have the resources and the advantage of implementing in many markets to build the intellectual capital to have in-house solutions. Thus, the choice of vendor would be with that in mind. For local insurers though, an outsourced approach may be preferable. Such outsourced vendors include:

  • Industry organizations. In Asia, we are aware of at least three countries where industry organizations are getting together to find a cost-sharing solution for the smaller insurers in their market (one is for the smaller life insurers, another for the smaller general insurers and the third for the smaller Islamic insurers).
  • Private outsource provider. This service can be called a service bureau or other names, and such providers include Actuarial Partners as well as others. More are likely to spring up as insurers become aware of the heavy costs with in-house solutions. Note that there are actually two levels of outsourcing in a service bureau: the provider can perform the actuarial runs as well as the IFRS 17 calculations, or just the IFRS 17 calculations.

Gap Analysis:

Once you have decided on your service provider, you can perform an analysis only of the gaps relevant to implementing IFRS 17 with that provider. The goal of the gap analysis is to have a clear understanding of the roadmap between now and the implementation date of IFRS 17, including the development of a detailed position paper which clearly spells out the methodology and treatment of all products under IFRS 17, including the development of assumptions and the implementation roadmap. The implementation itself will include revamping the data, processes and systems which will require very clear and precise descriptions of methodology and treatment of products.

Below we show some of the main issues in the gap analysis, broadly split as process related, data, accounting and disclosure, and product pricing which are relevant to an insurer which is outsourcing its IFRS 17 work.

Process related issues:

  • Level of Aggregation – you will need a process for grouping policies into cohorts. More cohorts generally means more time to perform the calculations and more storage required, but with more cohort splits such as agency business versus bancassurance, more detailed management reporting of the business is possible, which will allow management and the board to understand the technical side of the business such as profitability at a level more in line with larger insurers. Also, if you have various manual calculations you require to determine the profitability of a subset of the business, such as brokerage business, this is your chance to set the level of aggregation to automatically do this.
  • Simplified approach – you will need a process to assess if a simplified approach (PAA) can be used. A simplified approach greatly reduces the work required, especially for the various disclosures required under IFRS 17.
  • Reinsurance – you will need a process on calculation of IFRS 17 items for reinsurance.
  • Onerous contracts – a process needs to be put in place where new business policies are flagged as onerous, non-onerous or potentially onerous. This process would also include a methodology at the financial reporting date to confirm the policies are onerous or otherwise.
  • Risk adjustment – a process needs to be in place to determine the confidence level in the risk adjustment (75th percentile…) and methodology for calculation. For a multinational, there will likely be considerations of consistency by jurisdiction. For a local insurer, there is more flexibility but if there are various sister companies, again consistency will need to be discussed.
  • Expense Allocation – a process needs to be in place to determine the attributable expenses.
  • Discounting – you will need a process to determine the discount rates to be used, starting with a determination of whether a top down or bottom up approach will be used to calculating the discount rates.
  • Contract definition – you will need a process to assess for each new product, which model will be used and how the methodology for calculations under IFRS 17. This would include the process for assessing if the product needs to be unbundled to account for some pieces under IFRS 9 or IFRS 15.
  • De-recognition – you will need to set the process for de-recognizing contracts under such things as surrenders.
  • Modifications – you will need a process to test if any modifications to a contract are substantial, since if it is substantial, then the future cash flows will need to be recalculated accordingly.

These are issues which you will need to consider possibly in relation to how they will be implemented in the system of the vendor you have chosen.

Data related issues:

  • Your IT system will be assessed in terms of its ability to identify the various cash flow items by cohort, including acquisition expenses, claims handling expenses, policy administration and maintenance costs and allocation of fixed and variable overhead. Other than expenses, IT system would also need to identify premium collected, claims paid, fair value of assets, investment components by cohort.
  • Sufficient data will be needed for reinsurance to calculate the various fulfillment cash flows, risk adjustment and contractual service margin. Our experience is that this is a likely source of difficulty for many insurers.
  • Sufficient data will be required to calculate historic best estimate assumptions and risk adjustment.

Accounting and Disclosure issues:

The gap assessment will assess the extent your chart of accounts and disclosures need to be changed under IFRS 17 and what your plans are for this. Depending on whether you intend to integrate IFRS 17 into your existing accounting system or produce the IFRS 17 calculations outside of your system, this may or may not need to be done.

Product pricing issues:

You will need to be able to price products under an IFRS 17 basis as soon as possible. The ability of the actuarial department to perform pricing under an IFRS 17 basis should be assessed. If the cost of capital requirement is the same as the investment return assumption, then this is less important. If the pricing function is outsourced, then the party being outsourced to would need to be assessed.

IFRS 17 does not change the total amount of profits to shareholders, but it does change the timing of the profits. If profits are locked in the insurance fund longer than they are currently, then they will earn investment income, but when we calculate the profitability to the shareholders, we discount these profits including investment income at the required return on capital. As an example, if the insurance fund can earn an investment return of 5%p.a., but shareholders expect a 9%p.a. return on capital, then the longer surplus is locked in the fund, the lower profitability will be.

Position Paper:

The above will be organized into the position paper, which will guide the implementation. Questions such as the following will also need to be answered:

  • Do all products fall under IFRS 17 or will some fall under different standards? An example would be service contracts which would fall under IFRS 15.
  • Do some products need to be unbundled (split into two separate pieces) as only some portions fall under IFRS 17?
  • How to determine non-distinct investment component for savings products?
  • Building block approach, variable fee approach or can we use the premium allocation approach for each plan?
  • For general insurance products, can we show that PAA is a reasonable approximation to building block approach? Engineering and extended warranty which is 2-3 years should be okay but engineering and fire policies greater than 3 years will be tougher to justify.

With a completed position paper, the implementers, whether a solution is being developed directly for you or via an outsourcing arrangement, will have the necessary specifications to perform their work. Any of us who have been involved in a change in IT system know that without very clear and detailed specifications the change can be extremely painful and time consuming. Under IFRS 17, we have a fixed deadline, so we must ensure the implementation goes smoothly.

Financial Impact Assessment:

The financial impact assessment is focused more on strategy and will assist the board in understanding several things:

  • Will any capital injections be likely required? An insurer with relatively low capital adequacy position may need to carefully do this exercise, whereas an insurer with very high solvency position may find this unnecessary. Solvency and IFRS 17 are not connected, but a well-capitalized insurer is likely to have fewer concerns over the need to inject capital as opposed to an insurer that has given out significant dividends to shareholders in the past, resulting in lower solvency. Along the same lines, if your shareholders can easily inject capital, then this analysis is less important than if raising capital is more challenging. At the heart of this question is whether the insurer will consider selling or merging as a result of likely capital injections. If this is a possibility, then the likely position needs to be determined as quickly as possible to avoid a ‘fire sale’ later on.
  • Do existing products need to be repriced? In many parts of the developing world, the lapse rates are very high, meaning that products sold over the next few years will be a major part of the block of business under IFRS 17 when IFRS 17 comes into effect. Thus, we can make a large effect on the IFRS 17 position by actively repricing now. For an insurer who is a follower and does not have the ability to reprice products before their competitors, then this might be less necessary. Note that the total profit from an insurance product does not change under IFRS 17 but the timing changes. Thus, the difference between the expected return on capital of shareholders versus the investment assumption is important. If shareholders do not have explicit return on capital expectations or perhaps are taking a long-term view of the market, then this step might be less useful.
  • Does a shift in product mix make sense under IFRS 17? Perhaps it will be much better to sell risk products over savings type products in the future. This is something which can be tested. If the insurer is focused almost exclusively on one product type (such as credit business), then this step might be less useful.
  • How will changes in methodology or assumptions affect the IFRS 17 results? IFRS 17 is a principles-based guideline with significant room for differences in interpretation. The financial impact analysis will test the effects of different methodologies and interpretations on results. If there is little pressure on certain minimum dividend declarations or profit arising from the operations, then this step might be less useful.

Implementation Roadmap:

The end date would be the date IFRS 17 comes into effect. This could be 1 January 2022 but might be later for some countries (or even smaller insurers within a country). The reality is that, data at least would need to be ready much earlier. As an example, the financial statements would have the current year position as well as the prior year, so if the current year position is as of 31 December 2022, then the prior year position would be 31 December 2021. For the prior year position, an opening position is required, which would be at 31 December 2020. Thus, even though we have some time before we officially move to IFRS 17 we must ensure that starting in 2021 we are collecting the data in the correct format and granularity to ensure a smooth implementation process (it’s much easier to collect data in the appropriate format than to go back and revise data later).

Bridging the knowledge gap with larger insurers

A smaller insurer in particular will need to be aware of how much additional cost is being incurred and what is being received for those costs. Decisions such as how many subgroups will be important in bridging the gap with larger insurers. For instance, what is more profitable, agency business or bancassurance? This might be a difficult question to answer, but if we split the data into enough detail, then the IFRS 17 calculations can answer this very easily. This can also be extended to major product types, location of the business or other factors. The IFRS 17 calculations will provide an amazing level of detail which management and the board can use to run the business, but it requires planning right now.


There is no need for a smaller insurer to get bogged down with expensive analysis and implementation when IFRS 17 calculations can be performed by service bureaus. Smaller insurers should instead spend its efforts deciding on what exactly its niche will be in a post-IFRS 17 world and remaining nimble to achieve this. Any IFRS 17 solution should enable the smaller insurer to understand the profitability of its business and sources of surplus at a granular enough level to be able to shift product mix and overall market strategy as fast as or faster than larger insurers.

Practice Areas: