Beyond IFRS 17 - What's Next?

by Angie Ng - Head of Insurance Risk Solutions, Asia Pacific, SAS

Besides meeting the reporting requirements of the new IFRS 17 accounting standard, how can insurers better make use of the numbers and explore further analysis to add value to their business? Insurers have been investing significant budget, resources and time in IFRS 17 solutions, IT transformation, process transformation, data management and system integration. Now, you may probably have questions like these in mind: “What is the return on investment for this big project? And what else can it do for me, besides compliance?”

Before zooming into IFRS 17, let’s look at the basics. IFRS 17 requirements trigger questions around several technical topics, i.e. data management strategy, including data gathering, data quality, data storage and archiving, the end-to-end systems architecture design and integrating actuarial and accounting processes that will support the future reporting processes. This is known as Data, Systems, Processes (DSP).

Many insurers are planning or have ongoing DSP projects for:

  • building a centralized data-mart;
  • designing a unified, secured, scalable, functional platform for systems integration; and
  • process transformation to automate and integrate various operational processes overlaid with a governance framework.

These projects lead to less manual intervention, more transparency, a more efficient total operating model, better operational risk management and more effective communication among stakeholders, such as actuaries, accountants and data/system architects. What does that mean in more detail for a centralized data-mart?

With a centralized data-mart, you can gather all data in the same pool, so that all business and IT users use the same data dictionary and speak the same language. This supports consistent analysis and results, and promotes efficiency, by adopting the same analytical and reporting solution to share analytical reports across management and business users. Senior management can save time by avoiding the need to scrutinize why different departments produce different numbers for the same Key Performance Indices. Do these situations sound familiar to you?

By having a centralized data-mart and a unified analytical and reporting solution you can then turn a world of data into actionable intelligence. It supports experience study for validating actuarial assumptions (key inputs for generating expected cashflows), predictive modeling for pricing, portfolio optimization, and advanced analytics. It also supports policyholders’ behavior analysis and seizing cross/up-selling opportunities. What else can quality data and advanced analytics do to support your business?
The sky is the limit!

IFRS 17 is about profit recognition over the insurance policy term based on emerging profit patterns related to services provided to policyholders. In an ideal world, if valuation actuaries would have a crystal ball to predict the future, the expected CSM release would then be the same as the actual profit release. However, in reality, the actual profit release is certainly different due to operating variance, experience variance, assumptions change, etc. The actual profit release can be higher or lower than expected. Therefore, insurers will need to understand the deviation and perform analysis of change to understand the sources of profits/losses. This is not new to actuaries who have been conducting analyses of profits and market consistent embedded value (MCEV) reporting, but at a different level of data granularity, using different methodologies and assumptions. However, the fundamental principles are similar.

IFRS 17 is a catalyst. It helps to integrate stakeholders from different departments to jointly dive into product development and business strategy. Many Asian insurers have been writing a significant amount of short- to medium-term savings policies with a marginal profit margin. Risk adjusted profit is recognized at inception now under IFRS 4. However, under IFRS 17, profits will be amortized over the policy term. In a low interest environment, with potentially more stringent risk-based capital requirements, some key questions pop up: “Is it the best use of capital to write such low profit margin business?” and “What is the appropriate business strategy that drives product development?” Let the IFRS 17 numbers talk and tell the story…

When profitable new business is written, the respective risk adjusted profit is recognized on day 1 when it is incepted in the book under IFRS 4. However, under IFRS 17, the establishment of the CSM means that the IFRS profit will be set to zero at inception, even though positive economic value has been created. The CSM acts as a balancing item, and, for a profitable contract, is set to an amount that is equal, but with an opposite sign, to the present value of the amount of expected fulfilment cash flows at the inception of an insurance contract. Given these features of the CSM, those who favor a market consistent approach may therefore seek additional KPIs to help further understand the performance of their business. KPIs that can capture this change in the expected future IFRS 17 profits and the change in the CSM should help address such concerns.

For new and existing business, a possible measure of profitability could be:

  • Ratio of CSM / Required capital

Another alternative is to use gross profits, rather than risk adjusted profits:

  • Ratio of (CSM + Risk Adjustment) / Required capital

For new business, a profit margin measure could be considered:

  • Ratio of CSM / PV (Premium)

The insurance contract grouping criteria under IFRS 17 will allow KPIs at a more granular level. However, for a more meaningful analysis, instead of performing analysis of change at the cohort level, you can aggregate the analysis of change results by insurance funds, product classes and in-force periods. This allows you to look at analysis of change using different dimensions. When you identify the key sources that contribute to the profits or losses you should question whether it is due to expense overrun or underrun, improvement or worsening of claims experience as compared to that expected, or reasonableness of actuarial assumptions used for expected cashflows, and so on. Starting from the fund level, you can then drill down to portfolios/ lines of business/ product classes, by different in-force periods, where required. After identifying the sources of profits or losses over time, you can then make informed decisions on product development or re-pricing, underwriting, claims management and expense management, to identify which products are good to distribute and which are not, monitor the profitability trends over time, and compare the actual results to business plan/forecast.

A flexible IFRS 17 system solution can also support strategic business planning through forward-looking Profit and Loss (P&L) projection, to roll forward the closing positions of the last reporting period into the future, together with new business projections. Insurers may also wish to understand how current IFRS results and forward-looking business plans would change under different sensitivities / adverse scenarios related to economic and insurance risks, and methodology choices, such as the choice of profit emerging patterns. Regular sensitivity / stress testing can add further insights, instead of simply using this as an annual exercise. This helps to anticipate what are the key risk factors to pay attention to, and the magnitude of IFRS 17 impact for the key portfolios under the key adverse scenarios. With a scalable IFRS 17 solution, including actuarial solutions and automated processes, sensitivity analysis and stress testing can be a breeze. Subtle differences between IFRS 17 implementation across jurisdictions can be maintained, while applying consistency at a group level to ensure a real apple-to-apple comparison in strategic investment circumstances.

Valuations of assets and liabilities under the new accounting standards will be on market-consistent value, rather than on historic or book value, meaning balance sheets could fluctuate more with interest rate fluctuation and ever-changing market conditions. Under IFRS 17, coupled with IFRS 9, it is important to understand the asset liability management (ALM) of insurers. The new accounting practices should reflect this strategy. The aim is to reflect changes in insurance liabilities and the respective underlying assets in the same place, either in the P&L or in Other Comprehensive Incomes (OCI). If the related changes are reported in different places, performance reporting will potentially not provide useful information. Insurers need to be aware of the Fair Value Through Profit or Loss (FVTPL) and how financial assets are accounted for, as it might change the way, for example, impairments are considered in actuarial models.

Currently, ALM mainly focuses on market-consistent balance sheets and seeks to optimize ALM under risk-based solvency frameworks. Moving forward, market value-based accounting will make ALM more important to managing P&L and balance sheet volatility. Insurers will need to scale up their ALM capabilities to better manage ALM mismatches. Insurers should continuously assess their open positions to see if they are sustainable, and assess the P&L impact of de-risking these positions. Strategic Asset Allocation (SAA) shall catch more attention in the near future.

IFRS 17 is not just a new accounting standard. Its fundamental objective is to provide transparency and insight to the insurance business while identifying strengths and areas for improvement, in terms of insurance product offerings, pricing, client retention management, expense management, claims management and investment.

It helps insurers develop their business strategy using various approaches, such as setting new KPIs for profitability management, regular experience studies, business planning, sensitivity analysis, stress testing and ALM. You should have a long-term vision when planning or working on your IFRS 17 implementation – having a comprehensive plan in place, including a holistic end-to-end system architecture. More importantly, an IFRS 17 system solution that is scalable, flexible and expandable, with a single unified platform that can bring in other business applications at different stages later on, can enable further analysis to add even more value to your business.

Designing your IFRS 17 solution carefully, seeing how it can best support your long-term IFRS 17 journey, will enable you to go far beyond.

Belfius Insurance Umbrella

IFRS cross words on Notebook

Let’s Talk!

To find out more about how SAS can support you on your journey beyond the IFRS 17 vision, please contact:

Angie Ng
Head of Insurance Risk Solutions, Asia Pacific

Renzo Traversini
Global Insurance Leader

Kenneth Koh
Principal/ Director of Insurance, Global Financial Services Practice

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