To meet the reporting requirements of IFRS 17, insurers have invested significant budget, resources and time in new solutions, IT and process transformation, data management and system integration. Now, many are looking for ways to extend the value of these investments beyond their immediate goals so they can achieve a higher overall return for the business.
At a basic level, IFRS 17 requirements trigger questions around several technology areas. These include data management strategies – for data access and integration, data quality and data storage – as well as systems architecture design and the integration of actuarial and accounting processes to support future reporting. Collectively, these are known as data, systems and processes (DSPs).
Many insurers are planning or have ongoing DSP projects for:
- Building a centralized data warehouse.
- Designing a unified, secure and scalable platform for systems integration.
- Transforming processes – automating and integrating various operational processes overlaid with a governance framework.
These types of projects have multiple advantages for the business. They lead to less manual intervention, increased transparency, a more efficient operating model and better operational risk management. They also promote effective communication among stakeholders, such as actuaries, accountants and data or systems architects.
How a centralized data warehouse can help
With a centralized data warehouse, all business and IT users have access to the same data dictionary – leading to more consistent analysis and results. By sharing common reports across the business, everyone is on the same page – from business users to senior managers. This solves the issues that arise when different departments use different data sources and solutions to produce different numbers for the same key performance indicators.
With a common data warehouse and analytics platform, you can:
- Validate actuarial assumptions (key inputs for generating expected cashflows).
- Perform predictive modeling for pricing.
- Optimize the portfolio through advanced analytics.
- Analyze behavior and seize cross-selling and upselling opportunities for policyholders.
The sky is the limit – how quality data and advanced analytics support your business
IFRS 17 is about recognizing profit over the term of the insurance policy based on emerging profit patterns related to policyholder services. In an ideal world, the expected contractual service margin (CSM) release would be the same as the actual profit release. But in reality, the profit can be higher or lower than expected due to operating and experience variance, assumptions change, etc.
Insurers will need to understand the deviation and conduct change analysis to see the sources of profits and losses. These fundamentals are similar to what actuaries use when conducting analyses of profits and market consistent embedded value (MCEV) reporting. But now this will need to be done at a different level of granularity, using different methodologies and assumptions.
IFRS 17 is a catalyst for a broader strategy
When it’s time to dive into product development and business strategy, it helps to integrate stakeholders from different departments. Many Asian insurers, for example, 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 under IFRS 4.
But profits will be amortized over the policy term under IFRS 17. In a low interest environment, with potentially more stringent risk-based capital requirements, this triggers key questions, such as:
- Is it our best use of capital to write such low profit-margin business?
- What is the appropriate business strategy to drive product development?
The IFRS 17 numbers can 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, it’s set to an amount that is equal, but with an opposite sign, to the present value of the amount of expected fulfillment cash flows at the inception of an insurance contract.
Given these features of the CSM, those who favor a market-consistent approach may seek additional KPIs to get a deeper understanding of business performance. KPIs that can capture this change in the expected future IFRS 17 profits and the change in the CSM should help address such concerns.
The insurance contract grouping criteria under IFRS 17 will allow KPIs at a more granular level. For a more meaningful analysis, you can look at the analysis of change using different dimensions. So, you can aggregate the analysis of change results by insurance funds, product classes and in-force periods instead of analyzing change at the cohort level.
When you identify the key sources that contribute to profits or losses, you should question the cause. For example, you should ask:
- Is it due to expense overrun or underrun?
- What about the claims experience? Has that improved or gotten worse (compared to what was expected)?
- Were the actuarial assumptions used for expected cashflows reasonable?
Starting from the fund level, you can then drill down – if needed – to portfolios, lines of business and product classes by different in-force periods. After you identify the sources of profits or losses over time, you can make informed decisions on product development or re-pricing, underwriting, claims management and expense management. You’ll be able to identify which products are good to distribute and which are not. You’ll also be able to monitor profitability trends over time and compare the actual results to the business plan or forecast.
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. This includes insurance product offerings, pricing, client retention management, expense management, claims management and investment. Thorsten Hein Principal Product Marketing Manager, Risk Research and Quantitative Solutions SAS
Looking forward for better planning
A flexible IFRS 17 solution supports strategic business planning through forward-looking profit and loss (P&L) projection. It does so by rolling forward the closing positions of the last reporting period into the future, together with new business projections. You can also understand how current IFRS results and forward-looking business plans would change under different sensitivities or adverse scenarios related to economic and insurance risks and methodology choices, such as the choice of profit-emerging patterns.
If you perform regular, ongoing sensitivity or stress testing – instead of using this as an annual exercise – you’ll get additional insights. Such an approach helps you anticipate key risk factors along with the magnitude of IFRS 17 impacts on your key portfolios under key adverse scenarios.
With a scalable IFRS 17 solution, actuarial solution and automated processes, sensitivity analysis and stress testing can be a breeze. It’s possible to maintain subtle differences between IFRS 17 implementation across jurisdictions while applying consistency at a group level. This ensures apple-to-apple comparisons 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. This means balance sheets could fluctuate more due to ongoing changes in interest rates and market conditions.
Asset liability management – part of the strategy
Under IFRS 17, coupled with IFRS 9, it’s important to understand insurers’ asset liability management (ALM). Your 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 may 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. This knowledge might change, for example, the way 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 then assess the P&L impact of de-risking these positions. Strategic asset allocation (SAA) will receive more attention in the future.
IFRS 17 – supporting your strategic vision
Business results are best when insurers develop a comprehensive business strategy based on various approaches – such as setting new KPIs for profitability management, regular experience studies, business planning, sensitivity analysis, stress testing and ALM. It’s important to have a long-term vision when planning for and implementing IFRS 17. That includes a comprehensive plan and a holistic, end-to-end system architecture.
To go beyond the immediate demands of IFRS 17 and achieve broader business value, design your IFRS 17 solution carefully. Choose a solution that’s scalable, flexible and built on a single, unified platform. This will enable you to incorporate other business applications at different stages, as they’re needed. And it will support you over time, as you conduct additional types of analyses to further enhance the value to your business.
- Are you good at scoring?Credit scoring is the foundation for evaluating clients who apply for a loan (or other types of exposure for the bank). It is not unusual for it to take up to 12 months to build and deploy a new credit scoring model. Reforming the process will help minimize losses, increase earnings and reduce operational risk.
- The 5 new rules of retailThere is good news for retailers. Analytics can help overcome some of the effects of disruption, allowing retailers to move from long-term seasonal forecasting to more agile planning.
- Optimizing well placement to eliminate water poverty How data visualization is helping Water for Good bring fresh water to the Central African Republic.