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14.05.2020

IFRS 17 – Good Things Come to Those Who Wait

I am sure with all the upheaval and uncertainty in the world now you are all, like us, itching to get back to something that you know and can control. To that purpose, we are back for yet another riveting discourse on IFRS 17 aimed primarily at those looking for the high-level overview of where IFRS 17 projects should be around about now. For those of you involved in the detail, you may be more interested in our in-depth analysis of the IASBs draft amendments issued last June:
https://aprllp.com/ifrs-17-the-second-amendment/

So, what is the IFRS 17 news then?

Well, in terms of news there is really one big piece that I am sure you are all already aware of. The IASB tentatively decided (tentatively is how the IASB is describing their decision until they formally publish the amendment, although publication is imminent) to defer the effective date once again to annual reporting periods beginning on or after 1st January 2023[1]. That’s another year on the deferral they announced in 2019 and brings the total deferment to two years from the initial implementation date proposed when the standard was published in 2017.

This delay is in addition to the draft amendments issued in June 2019 and we expect the IASB to formally confirm the delay in the second quarter of 2020 – although Covid-19 may cause some minor delays.

So, I have another year of breathing room – time to put my feet up…

No! Don’t fall into this trap – you need to use this time wisely. Instead, what we would advise is to continue with your existing implementation workstreams, but for project leads and sponsors to take a moment to take stock, assess where their project is at, and decide if the key implementation workstreams are on track. Crucially, this time can be used to challenge methodology teams whether all their due diligence is complete and whether they have engaged auditors for advice on key interpretations.

To help, we have had a think here at APR and our view is that progress should be well underway in the following six key areas to ensure you are good to go live in 2023. In the following sections we will delve a little deeper into the key points where we think you need to be up to speed in each of these areas. However, note that this article is designed as a high-level resource so we won’t get into the real nitty-gritty technical detail on these points (if you’re interested we have done this in some of our previous articles, which you can find summarised here).

  1. Data
  2. Actuarial Calculations
  3. Accounting Ledger and Charter of Accounts
  4. Transition Impacts
  5. Stakeholder Knowledge Sharing
  6. Key Process Software Decisions

Data

IFRS 17 defines several new data items that probably won’t exist in your existing data feeds. One of the main new data items is the Unit of Account (UoA). In fact the UoA categorisation is in itself a major business decision which will have enormous impacts on most of your IFRS 17 workstreams, but it does also have a big impact on your policyholder data. We have covered this concept in many of our previous articles but basically this is how you group your contracts for calculation and reporting purposes in IFRS 17. There are two main issues with UoAs:

For most of our clients we realise that these decisions will already have been made and auditors engaged to ensure their approach is a valid interpretation. We see the delay as a perfect opportunity to finish the necessary due diligence on these decisions and ensure the longer-term implications are fully understood.

Actuarial Calculations

The big new actuarial calculation is the Contractual Service Margin (CSM), which in its simplest terms is a liability representing unreleased profit for a given group of contracts. As well as making sure your calculation engines are developed so they can calculate this liability, you will also need to consider data storage, as the CSM is different from most other liabilities in one crucial way. Most liability measures are prospective calculations, ie you only need your current data and assumptions to calculate them. The CSM is retrospective – that is, it requires the previous value combined with what has happened in the reporting period to be calculated. This presents new storage and process needs over those of your existing calculations, which needs to be considered to make sure systems are ready.

The risk adjustment is also a new calculation and has been left fairly open from a methodology point of view. Ideally, methodology and process discussions should be underway here, although a lot of companies are hoping Solvency II calcs can be leveraged to a degree. Be wary if you are planning to take this approach though, as the purposes of IFRS 17 and SII are different, so reutilising calculations should be done with this difference at the forefront of your mind. That said, piggybacking SII calcs where you can makes good business sense from an efficiency perspective and so should be considered where relevant.

Finally, there are the present value of future cashflow calculations which will give you the liabilities arising directly from your insurance contracts. Of all the new calculations, these should be the easiest, as your models should already carry out projection calculations; so it is mainly a case of making sure they are best estimate in the IFRS 17 sense, as there are some differences from SII on contract boundaries and expenses, and that all assumptions are updated.

Accounting Ledger and Chart of Accounts

As actuaries, we tend to avoid trying to give advice on areas that fall under accounting teams’ jurisdiction, so this section will be fairly brief. For detail we will leave it to those better qualified than us to comment, but IFRS 17 does produce new accounting items for your ledger which should be allowed for. The transition period also raises the need to produce two sets of accounts concurrently, so making sure your systems can handle this for a year is something that should be considered early – the further implementation delay may be the perfect opportunity to do some dry running and iron out any niggles before you get into the transition year.

Transition Impacts

CPD_ConsultationAs mentioned above, the transition period creates issues for the accounts, but it also throws up some decisions that need to be made by your business regarding transition calculations.

For existing contracts, you need to decide how you are going to value these at the transition date, whether using a full retrospective approach, a modified retrospective approach or a fair value approach. This is not purely a decision to be made on process complexity or profitability grounds, as any decisions here must be fully justified against the standards while taking business considerations into account. Not a light piece of work, but the extra year does give a good opportunity to test the decisions made and ensure all the proper impact assessments are still valid!

Stakeholder Knowledge Sharing

You should be looking ahead to the glorious new world and how your reporting processes are going to work once IFRS 17 is live. For almost all of our clients, IFRS 17 is a huge project, and although the BAU reporting teams are involved in decisions the development and build of the new IFRS 17 processes is generally carried out by a separate project team.

A common trap we saw many of our clients fall into during SII implementation was not having robust handovers from project teams building the solutions to the business teams running them. This is something you should be considering now to make sure you have planned workshops, handover sessions and any other upskilling activities your BAU teams will need to own and run your IFRS 17 processes once they are built and handed over to them. This should also include making sure your BAU teams, from accountants and actuaries through to IT, have a common understanding of the new IFRS 17 concepts, such as UoA, including their technical definitions and how they translate to practical processes.

The extra time afforded by the delay provides a perfect opportunity to share knowledge with your existing team, and potentially bring some of the implementation in-house, both reducing costs and the risks of key knowledge walking out the door when your project team finishes.

Key Process Software Decisions

As well as making key decisions on methodology and ensuring your staff and systems are ready for the transition, another important decision is to decide how your IFRS 17 reporting process will be managed end to end and how much automation can be included. The key point here that your team will have been considering is whether to use existing systems and modify them for the additional processes that will be required under IFRS 17, or if they will instead use software designed specifically for IFRS 17 processes, such as those provided by Legerity and Moody’s Analytics. Under either option, making sure to properly plan user acceptance testing and allow for sufficient testing of the new system under dry run conditions is key, and the year’s delay affords a perfect opportunity to do this.

For those who haven’t finalised this decision yet or had planned to keep existing software, the pause may also be a great opportunity to consider in greater depth whether purpose-built IFRS 17 process software is a viable option. Remember – choosing systems that cover less than 100% of the end-to-end process usually leads to a proliferation of Excel spreadsheets to fill in any gaps. Most of our clients are trying hard to contain such proliferation of spreadsheets; now is the perfect time to design robust processes that avoid the need for Excel and other end user computing tools.

OK, these all seem sensible – anything else we should be looking at

Of course, this list was not exhaustive, but we only get so much word count in these articles and every project is different, so we will never be able to cover everything everyone should be doing. However, these are some of the main topics we think you should be pausing to reassess right now. We hope they have been helpful and as ever if you do wish to discuss any of these topics or anything else on IFRS 17 do not hesitate to get in touch with us.

James Nicholl

May 2020

[1] https://www.ifrs.org/projects/work-plan/amendments-to-ifrs-17/