IFRS 17 Blueprint: Apply Theory to Practice
IFRS 17 Guide: Key Considerations for Implementation
IFRS 17 proposes considerable accounting changes and adoption of IFRS 17 will require close collaboration among the actuarial, risk, finance and IT functions within an insurance company. Here are a few key considerations for implementing IFRS 17:
Reassessment and regrouping of existing insurance contracts: IFRS 17 has proposed three methods – Building book approach or General measurement model, Premium allocation approach, Variable fee approach – of valuing insurance contracts from inception. The insurance companies need to review their existing books of business and ascertain the contracts-reclassification required for choosing the right measurement method. The additional IFRS 17 requirements for grouping contracts within a risk-portfolio are profitability (onerous/non-onerous/others) and contracts that are incepted not more than a year apart.
Data management: The contract grouping requirement as discussed above will present a huge data challenge for the insurance companies both while transitioning to IFRS 17 and in future. Huge amount of historical data needs to be analyzed and then aggregated to arrive at the transition-day requirements. Historical assumptions and experiences starting from the transition date will then need to be captured going forwards. The granularity at which the data is captured in the future and the sources of these data need to be clearly identified. There will be a need for increased data storage. Of particular importance will be the quality of data and its availability in a timely manner thus requiring controls and workflows to be in place.
Actuarial modelling: Projected cash flows and risk adjustment are the critical inputs from actuarial models for arriving at IFRS 17 measurements. The cash flow models may need to be updated to cater to the grouping requirements, especially the 1-year grouping requirement. Insurance companies are free to choose their own risk adjustment model as suitable (but at a cohort level) and parallels could be drawn to Solvency II risk margin model, however a wider review of the differences between IFRS 17 and Solvency II from a modelling standpoint is required prior to this.
Accounting integration and Allocations: IFRS 17 being an accounting change would require considerable changes to reporting and disclosures that are driven by data (e.g. actual cash flows) and modelling inputs (e.g. expected future cash flows and risk adjustment). Additionally, the directly attributable costs and the actuarial calculations (say, at a group/portfolio level) would be required to be broken down to more granular level (say, at a policy or model point level). A revamp of the existing ledger is required in order to cater to the IFRS 17 requirements. Integration of source systems and actuarial modelling with ‘updated’ accounting (ledger) coupled with finance control, audit and reconciliation along with allocation capability are critical for IFRS 17 implementation.
Oracle’s Recommended Approach and Checklist for IFRS 17 Compliance
Compliance with IFRS 17 would be an enterprise-wide initiative that cuts across actuarial, risk, finance, IT and lines of businesses. It is therefore important to have a clear strategy with a well-defined governance structure to ensure a smooth rollout.
The following is a suggested IFRS 17 guide and checklist for a successful rollout.
IFRS 17 objectives: IFRS 17 is a complete overhaul of accounting for insurance contracts requiring changes to an organization’s processes, policies and systems. Insurers would need to assess the impacts of IFRS 17 on their existing processes, policies and systems not just to make changes to comply with IFRS 17 but also looking at this as an opportunity to improve and refine the status quo. Therefore, it is imperative that the IFRS 17 objectives are clearly formulated and agreed upon by all the stakeholders.
IFRS 17 preparation: Once the objectives are formulated, the technicalities of the changes required for IFRS 17 need to be finalized and communicated within the organization. The key elements that need to be considered here are the data architecture and data flow, actuarial modeling changes, discount rate determination, risk adjustment approach, changes to the chart of accounts, GL integration and reconciliation and final disclosures. Additionally, the crucial decision on technology enablement, whether a completely new solution sitting between actuarial and accounting systems or an enhancement to either the actuarial system or the accounting system, needs to be made.
IFRS 17 rollout: Prior to the rollout of IFRS 17 solution, gap analysis with respect to policies, processes and systems should have been completed and the gaps clearly documented along with the supporting technical documentation. The business requirements should also have been documented. It is imperative that a strong cross-functional team comprising people from Actuarial, Risk, Finance and IT functions along with IFRS 17 and accounting subject matter experts is formed for IFRS 17 implementation. The cross-functional team needs to work very closely during the project lifecycle along with the vendor and partner teams for a successful rollout. User training is also paramount to a successful rollout. User trainings should be properly planned based on the role being played by different teams and each team should clearly understand their accountability towards meeting compliance goals.
Post implementation, the systems and processes should be continuously assessed for further improvement.
Oracle’s Solution for IFRS 17
Oracle provides a framework for ingestion of data from source systems, setting up of business rules for portfolio setup and disaggregation into groups, rate and risk adjustments, performing calculations, attribution and reporting, and sub ledger accounting needed to ensure compliance with the standard.
The Oracle Insurance IFRS 17 Analyzer solution is designed to take data from a staging area that is common across all Oracle Financial Services Analytical Applications (OFSAA) installations and enable its reuse for analytical needs. The calculation engine in the solution can either consume the present value of future cash flows directly or it can consume the estimated future cash flows and discount them to the present value, which are then used for computation of insurance liabilities disaggregated into the required components. The calculation engine also calculates some of the key metrics like Contractual Service Margin (and its projection), Insurance Revenue, Insurance Service Result, Insurance Finance Expense and Other Comprehensive Income (due to change in financial risk).
The solution provides prebuilt calculation templates for General Measurement Model (GMM), Variable Fee Approach (VFA) and Premium Allocation Approach (PAA) liability measurement methods and provides workflows for calculation template definition, calculation run, accounting rule definition, generation of accounting entries, manual adjustment for accounting postings etc. Additionally, the solution allows users to configure business rules for portfolio setup and disaggregating the portfolio into groups and cohorts.
The solution enables disclosure reporting of liability analysis for all the three measurement methods and comparison between GMM and PAA methods. It also enables management reporting of CSM projection trend, summary of profitable vs onerous contracts in portfolio, comparative analysis of CSM and insurance liability between periods.