IFRS 17: key implementation challenges facing insurers

IFRS 17: key implementation challenges facing insurers

IFRS 17 is a landmark change to accounting requirements which will require insurance companies to either customise, or overhaul, their current financial reporting processes and systems, actuarial models, financial statements, and business planning and forecasting models.

The key to an effective transition lies in early engagement from all stakeholders to facilitate a comprehensive project implementation plan and develop an early understanding of the key challenges impacting your organisation.

Our experience from working with our clients has highlighted the following key challenges facing insurers.
 
Grouping of contracts
The general consensus is an IFRS 17 implementation project will be more cumbersome and disruptive for life (re) insurance companies than for general insurers, as general insurance companies would typically be eligible to apply the simplified premium-allocation approach. This, however, will not be the case universally.
To understand the impact on your firm, you will need to review all of your existing contracts, their terms and conditions, and economic substance. For example, certain participating contracts may fall into the variable-fee approach, but others may be classified as indirect participating contracts and require the building-block approach.

If contracts have separate insurance components (such as embedded derivatives and investment components), then these will need to be unbundled. An accurate assessment of the contract boundaries that complies with the principles of IFRS 17 will be central to the grouping and the measurement of onerousness. The contract grouping in IFRS 17 will need to be significantly more granular and judiciously layered to ensure compliance with the standard, while ensuring efficacy of measurement.
This enhanced contract grouping imposes substantial challenges for both life and general insurance companies in relation to their data processes, actuarial and financial models and management information.
 
Measurement
The issues insurers face will vary depending on the nature of their insurance liabilities, existing accounting, actuarial and reporting systems, models and processes. However, some of the key considerations for both life and general insurers include:
 
  • some form of a transition evaluation needs to be carried out at the onset as a one-time exercise to determine the contractual service margin (CSM) applicable to existing business;
  • CSM roll-forward evaluations would need to be performed separately for each group of contracts, with the likelihood that some groups may become onerous on subsequent measurement cycles;
  • determining the methodology for the estimation of the risk adjustment and the subsequent pattern of risk release in alignment with the entity’s business strategy and risk appetite;
  • determining the discount rate that is consistent with the market prices for financial instruments whose cash flows are consistent to those of the insurance liabilities in terms of timing, currency and liquidity; and
  • differences in measurement approach between insurance and reinsurance contracts.
Process automation
The emphasis on audit and control under IFRS 17 makes it imperative to reduce manual actuarial, finance and risk management processes. Our industry experience suggests that to make IFRS 17 a success, insurers will need to incorporate an enterprise-wide workflow process automating the collation of data from multiple input systems, using a rules-based engine to carry out contract grouping and measurements and leveraging this information to produce both regulatory disclosures and management information.
In summary, the implementation of IFRS 17 should be more than just a compliance exercise. It should help trigger an intrinsic process-enhancement endeavour, ultimately releasing resources from performing valuations to being more engaged in considering strategic outcomes and business implications of the new standard.

How we can help
Our IFRS 17 team draws together risk & capital, actuarial, assurance and financial reporting insurance industry experts to help clients understand the particular challenges their business will face. For a free risks & opportunities meeting with one of our team to discuss how IFRS 17 will impact your business please contact the team here.
 
 
 

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