How far are insurers with their IFRS17 implementation journeys?
The past three years have been filled with IFRS17 implementation activities and I think it’s safe to say most of us have been involved with one-of-a-kind and exciting projects. This, I believe, is something that comes only a few times in a lifetime and it’s definitely something to ponder and be excited about.
In this article I’m going to discuss the different parts of IFRS17 implementation and what insurers have been up to.
In order to even think about running a financial impact assessment one first needed to figure out what the data and systems situation was.
Most insurers are past this phase and have a good grip of where there are gaps in current systems and data or missing pieces of the system and data required all together.
Financial impact assessments (FIA’s)
In order for companies to determine what the financial consequences would be of implementing the standard they had to actually get their hands dirty and do some calculations under the new standard. Essentially the goal was, in most cases, to consider how the income statement, balance sheet and projected profits would change under the new standard (in some countries this was / is a requirement and not just a nice to have). This was a nice exercise for the companies to figure out what their working assumptions were under IFRS17 and what data was needed in order to get fairly reasonable results. It also flagged areas needing further investigation when it comes to setting working assumptions and choosing accounting policies. There are after all quite a few options. The Big4 and even some other actuarial consulting firms managed to build fairly robust and easy to follow IFRS17 modelling tools in the process.
Most companies have completed this phase and have learnt a plethora of valuable lessons around systems, data, working assumptions and the general workload of performing IFRS17 calculations.
Once insurance companies completed their gap analyses and FIA’s they were in a good position to understand how to move forward and could plan adequately for the next steps.
This is probably the minimum level of progress insurance companies have made to date
on the scale from least developed to companies who have already integrated new components into their systems for IFRS17 go live (which I would say is most certainly not the norm).
In this workstream the companies would approach vendors and send out requests for proposals (RFP’s). They already had a good understanding of the missing systems components which needed to be built or purchased. The end goal is to figure out exactly what architectural components are covered by the vendor’s IFRS17 solutions and which ones sits best with the insurer.
A very large chunk of insurers are now busy with this process and this is probably the average progress made to date internationally.
Data and staging platforms
This workstream usually consists of
- building or adjusting a staging platform,
- understanding what data the insurers have and what the input requirements of all the systems components are, and
- building transformations into the staging platform in order to get the data into the required formats.
Data has been touched under gap analyses, however it’s only once the vendor solutions have been chosen that you can really dig in and automate data processes. Insurers have probably already given the staging platform a lot of thought and are just waiting to pull the trigger. The part that’s probably less clear is how to transform data.
The norm is probably that data transformations are still being automated or not started at all with some thought and work already going into the staging platforms.
Business requirements and policy and methodology
This is one of the first things the insurers started with in order to inform financial impact assessment and methodology that needs to be followed when building the actuarial and risk adjustment models and performing transition calculations.
Most of the insurers have drafted their understanding of the IFRS17 standard and is probably by now quite comfortable with the new reporting requirements.
However, the part still needing attention is drafting the business requirements.
As the companies figure out what their new systems landscape and software to be used looks like, they are continuously updating and drafting their business requirements documents to be implemented in the systems.
The major impacts, on the actuarial models required to produce the expected cash flows, relate to:
- The level at which projections should be performed. If the actuarial models don’t already cater for aggregation at different levels, this aggregation component needs to be built in as well.
- New analysis of movements which could be significantly different to the current world analysis of movements catered for. There’s now the need to perform certain runs on locked-in yield curves and for certain impacts to unlock or not to unlock the CSM (which should be separated out).
- The modelling of investment components (if they weren’t modelled before).
The above will be touched on in more detail in future articles. Most insurers are looking to upgrade their current actuarial modelling software or to purchase new off the shelf solutions which cater for the IFRS17 requirements.
The development of actuarial models that’s IFRS17 compliant is probably still very much ongoing, if not started at all.
New IFRS17 modelling components
New calculations or adjustment to current components relate to:
- Expense allocations: These need to be allocated to different levels than before and non-attributable expenses should be developed and taken out for the purpose of determining the fulfilment cash flows under a contract.
- Risk adjustment: The risk adjustment is a new component, which can be built as an add-on to the actuarial modelling software that generates the expected cash flows. In most cases the IFRS17 accounting engines also cater for the risk adjustment calculation. The insurer is tasked with deciding whether they will model the risk adjustment themselves or make use of the risk adjustment components offered in the IFRS17 accounting engine.
- Profitability testing: Where an insurer does not have reasonable and supportable information to group contracts into sets of contracts, profitability testing may need to be performed on an individual contract-by-contract basis. This would be an exercise which will need to be automated to tag policies to the groups to which they belong.
- IFRS17 assumptions: These mostly relate to the generation of coverage units which also needs to be built as an add-on to the existing actuarial modelling software.
Insurers with advanced IFRS17 projects have started to automate and delve into some of these topics in a lot of detail, however much work is still needed throughout the industry to finalise these components.
Disclosures, chart of accounts, subledgers and general ledgers
In most cases these are usually left for last (even though disclosures should be the thing we work backwards from under the policy and methodology workstreams), until the insurer has a good understanding of the vendor who would be involved. The vendor usually have their own set of Chart of Accounts which needs to be incorporated and mapped to the company’s own chart of accounts. This is a strenuous once off exercise. The vendors provide significant support in providing IFRS17 disclosures off the shelf, this is after all one of the main advantages of having a vendor (someone who can take this piece of work off your plate).
Only the really advanced IFRS17 implementation projects have made good progress in these areas and fully understand what is needed in the subledgers and general ledgers for parallel runs in the interim.
I won’t be surprised if the vendors implementing their solutions are the ones at the forefront of understanding exactly the requirements for transforming the subledgers and integrating the subledger into the insurer’s general ledgers.
Something that’s worth noting that’s not really been given much thought in general is taxation under IFRS17.
I’m confident that how insurers will be taxed under IFRS17 will have a significant impact on the preferred transition approaches. Something that’s quite topical is the notion of double taxation, where if the CSM at transition is very large, it’s not impossible that profits already released in the past (on which tax has been paid already) is redistributed and taxed again in the future. This should, however, be considered together with how the change in balance sheet at transition will affect the insurer’s tax position.
- Most companies have performed gap analyses and financial impact assessments and know how to proceed and what the next steps should be.
- Some companies are still left with the task of doing vendor assessments and choosing a suitable vendor. Purely based on perception, it seems like a very large chunk of insurers have not yet chosen their vendors and have been focusing more on developing policy and methodology papers and internal models to perform some IFRS17 calculations of their own. These companies do have the advantage of waiting for the vendor’s products to mature and don’t need to sit through multiple versions being released, disrupting their implementation plans.
- Then you get companies who’s more mature in their IFRS17 implementation workstreams and have already purchased a vendor and are now configuring the vendor solution and testing it as they go along.
- On the higher end of the spectrum you get companies who’s completed the configuration and testing of the vendor solutions (at least up to a point where they are comfortable with the results being produced), but still need to figure out how to deal with downstream activities (like transformations of the subledger to general ledger, business as usual processes, shortening reporting timelines, controls to ensure sufficient checks and audit trails are in place, transition calculations and the message to the market).
So, to conclude, there is probably still much to do even for the companies who have progressed the furthest and the next two years will most likely be filled with IFRS17 implementation projects.
Published by Andre Erasmus