A standard changing more than accounting processes

After years of dis­cus­sion the IASB issued the new stan­dard for insuran­ce con­tracts on the 18th May in 2017. IFRS 17 will replace IFRS 4 as accoun­ting stan­dard for the hand­ling of insuran­ce con­tracts by insu­rers world­wi­de.

The imple­men­ta­ti­on of IFRS 17 will most likely chan­ge many pro­ces­ses, but not only in the accoun­ting but also for the actua­ries and under­ly­ing IT sys­tems. The detail­ed mea­su­re­ment approach under the new stan­dard will also high­ly affect the trans­pa­ren­cy of the insu­rers which will inclu­de the top manage­ment in the imple­men­ta­ti­on pro­cess as well.

So, what’s new?

IFRS 17 requi­res the insu­rers to sepa­ra­te several parts of the insuran­ce con­tracts in order to report each com­po­nent with a dif­fe­rent stan­dard. One examp­le here could be the sepa­ra­ti­on of a pos­si­ble ser­vice com­po­nent, which now will be repor­ted under IFRS 15 and thus actively exclu­ded from the insuran­ce com­po­nent. Also, invest­ment com­pon­ents will be repor­ted under the also new­ly imple­men­ted stan­dard IFRS 9, which had its effec­ti­ve date on the 1st Janu­a­ry in 2018.

The sepa­ra­ted insuran­ce com­po­nent which now will be repor­ted under IFRS 17 is then grou­ped on a more gra­nu­lar level than it has been done under IFRS 4. The three groups of insuran­ce con­tracts will now dis­c­lo­se the mar­gin cha­rac­te­ris­tic of the respec­ti­ve insuran­ce port­fo­lio. The aggre­ga­ti­on level of con­tracts under IFRS 17 will look as fol­lows:

  • Insuran­ce con­tracts, which do not have a signi­fi­cant pos­si­bi­li­ty of beco­m­ing one­rous
  • One­rous con­tracts: Insuran­ce con­tracts, which are one­rous at initi­al reco­gni­tionInsuran­ce con­tracts, which do not have a signi­fi­cant pos­si­bi­li­ty of beco­m­ing one­rous
  • Other con­tract: Grou­ping of remai­ning con­tracts in the port­fo­lio

Implications

Both, the sepa­ra­ti­on of insuran­ce con­tracts and the detail­ed aggre­ga­ti­on level of con­tracts requi­re a sub­stan­ti­al­ly well-struc­tu­red con­tract data­ba­se. Thus, befo­re star­ting the imple­men­ta­ti­on of IFRS 17 insu­rers need to ana­ly­ze their con­tract data­ba­se and make sure ever­ything is in place to fol­low the requi­re­ments of the new stan­dard.

In order to com­ply with the new stan­dard insu­rers might be for­ced to build new insuran­ce port­fo­li­os to keep up with the requi­re­ments of IFRS 17. For examp­le, D&O lia­bi­li­ty con­tracts show a signi­fi­cant­ly dif­fe­rent risk struc­tu­re than com­mon lia­bi­li­ty insuran­ce con­tracts. Under IFRS 17 tho­se con­tracts need to be aggre­ga­ted to dif­fe­rent insuran­ce port­fo­li­os. Again, this aggre­ga­ti­on goes back to the con­tract data­ba­se and the pos­si­bi­li­ty to detect and cate­go­ri­ze the spe­ci­fic cha­rac­te­ris­tics of insuran­ce con­tracts.

The most sub­stan­ti­al chan­ge, howe­ver, is the mea­su­re­ment model, cal­led Buil­ding Block Approach, which is used under IFRS 17 to assess insuran­ce con­tracts. The buil­ding block approach is divi­ded into four buil­ding blocks:

First Buil­ding Block: Esti­ma­ted Figu­re of the con­trac­tu­al ful­film­ent cash-flows
Second Buil­ding Block:: Dis­coun­ting in order to take the time value of money into account
Third Buil­ding Block: Com­pen­sa­ti­on in form of a risk mar­gin for the non-finan­cial risks of the con­tract
Fourth Buil­ding Block: Resi­du­al figu­re which repres­ents the Con­trac­tu­al Ser­vice Mar­gin (CSM) for the insu­rer

Under spe­ci­fic cir­cum­s­tan­ces (e.g. the con­tract dura­ti­on is below one year) insu­rers are allo­wed to use a more sim­pli­fied mea­su­re­ment model, cal­led the Pre­mi­um Allo­ca­ti­on Approach. This approach is simi­lar to the assess­ment of con­tracts under the repla­ced stan­dard IFRS 4. Howe­ver, even though many con­tracts will fall under this con­di­ti­on, insu­rers need to be awa­re that due to the abo­ve-men­tio­ned gra­nu­la­ri­ty of requi­re­ments, it is likely that pro­ces­ses and roles will chan­ge in cor­po­ra­ti­ons which will requi­re a signi­fi­cant focus on the imple­men­ta­ti­on of IFRS 17 of the sta­ke­hol­ders.

Where to start?

In order to under­stand the com­plex imple­men­ta­ti­on logic of IFRS 17 one must under­stand the new pro­ces­ses of the new stan­dard and the invol­ved sta­ke­hol­ders. Basi­cal­ly, you can divi­de the pro­cess into three main parts, which also means the­re are three (or even more) cor­ner­stones of a pro­cess whe­re you could start set­ting up a pro­ject.

  • Pre­pa­ra­ti­on of qua­li­fied data
  • IFRS Mea­su­re­ment
  • Pos­ting

We at SOICON deve­lo­ped a com­ple­xi­ty map in com­bi­na­ti­on with a detail­ed pro­cess archi­tec­tu­re under IFRS 17 to under­stand the impor­t­ance of star­ting the imple­men­ta­ti­on based on a qua­li­fied con­tract data­ba­se. Once a data-matrix is deve­lo­ped, insu­rers have the basis for important decisi­on along the way (e.g.: Which mea­su­re­ment model can be used to assess the group of con­tracts – Buil­ding Block Approach or Pre­mi­um Allo­ca­ti­on Approach?).

It is thus high­ly recom­men­ded that befo­re pro­gramming new repor­ting logics (Pos­ting), and befo­re start mea­su­ring insuran­ce con­tract based on cur­rent port­fo­li­os (IFRS Mea­su­re­ment) insu­rers need to build a solid data matrix, which com­pi­les all con­tract infor­ma­ti­on nee­ded under the new stan­dard IFRS 17.

Scenario calculation and IFRS 17 levers

Due to the new repor­ting logic of insuran­ce com­pon­ents the dis­clo­sure of the ratio bet­ween tech­ni­cal and non-tech­ni­cal insuran­ce results will chan­ge with the imple­men­ta­ti­on of IFRS 17. With that being said, the con­tract sepa­ra­ti­on of dif­fe­rent con­tract parts also allows insu­rers to use several levers to dis­tri­bu­te e.g. acqui­si­ti­on cos­ts, or ser­vice cos­ts, during the repor­ting pro­cess.

The risk mar­gin of non-finan­cial risks, as the third buil­ding block of the new mea­su­re­ment model, repres­ents also a use­ful lever under IFRS 17 to con­trol the dis­c­lo­sed con­trac­tu­al ser­vice mar­gin for the group of insuran­ce con­tracts.

With the deve­lo­ped sce­n­a­rio cal­cu­la­ti­on, we can use exem­pla­ry con­tract data of, for examp­le, lia­bi­li­ty con­tracts in order to show how the dis­clo­sure of the tech­ni­cal and non-tech­ni­cal insuran­ce result will look like under IFRS 17 as oppo­se to the dis­clo­sure under IFRS 4. By high­ligh­t­ing the important levers of the repor­ting pro­cess, it is reco­gniz­ab­le (even befo­re star­ting the imple­men­ta­ti­on) whe­re to focus on during the con­cep­t­ing pha­se of the IFRS 17 imple­men­ta­ti­on.

Process integration and new roles

The imple­men­ta­ti­on map shown abo­ve indi­ca­tes that during the pro­cess of the imple­men­ta­ti­on the invol­ved par­ties need to work clo­se­ly to achie­ve a suc­cess­ful tran­si­ti­on to the new IFRS 17 stan­dard. Accoun­ting experts, actua­ries, IT busi­ness ana­lysts need to be mana­ged clo­se­ly throughout the who­le pro­ject as the sin­gle steps of the imple­men­ta­ti­on are high­ly inter­de­pen­dent. Also, as men­tio­ned abo­ve, the ear­ly invol­ve­ment of the manage­ment is cru­cial for important and pionee­ring decisi­ons.

For an IFRS 17 pro­ject, insu­rers not only need a pro­ject mana­ger to steer the sta­ke­hol­der towards a com­mon goal, they also need an inter­me­di­a­ry role bet­ween the three invol­ved par­ties along the new pro­cess archi­tec­tu­re: Accoun­ting, actua­ries, and IT. This inter­me­di­a­ry role is as important as the invol­ve­ment of a chan­ge mana­ger as not only pro­ces­ses but also roles are likely to chan­ge. The high invol­ve­ment of the actua­ry in the manage­ment decisi­ons, puts the actua­ry in a new role during the repor­ting pro­cess. IFRS 17 requi­res the insu­rers to dis­c­lo­se the cal­cu­la­ti­on of the risk mar­gin, which also high­ly affects the out­co­me of the resi­du­al con­trac­tu­al ser­vice mar­gin.

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