Mar 2018

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Are you IFRS 17-ready?

Source: Asia Insurance Review | Mar 2018

Asia Regulation

Your existing IT system may not be enough to meet IFRS 17 regulations. Mr Kenneth Koh of SAS explains.
Growing revenue, minimising cost and creating sustainable profits are the hallmarks of every organisation. With the release of the new International Financial Reporting Standard IFRS 17 by IASB for insurance organisations, this change in accounting standards will require insurers to re-strategise their portfolio across their product management and business teams.
New regulation, new rules and system required for compliance
Insurers are embarking on workshops to understand the financial impact these accounting changes have on their profitability and market–wide performance metrics. Assessment on the operational and IT systems to cater for these changes are been evaluated to identify gaps and areas where improvements need to be done. 
   There will be closer collaboration between actuaries, risk management and finance divisions as calculations must be based on comparison of expected and actual cash flows. Compliance will require insurers to manage the increasing granularity and complexity around accounting for insurance liability contracts as well as the task of preparing for monthly models and runs, consolidation and reporting.
   Over the years, insurers have upgraded their IT systems such as policy administration systems and data warehouses to cater for Big Data. However, despite these system upgrades, there are still implementation challenges when it comes to IFRS 17 system architecture.
A single IT system platform 
Having a single IT system platform that can run the entire process from data sources to liability accounting models using the three approaches of General Model, Premium Allocation Approach and Variable Fee Approach, generating posting based on the results of calculation and managing the reporting standards for external and internal may help alleviate some of the technical implementation challenges faced.
   The SAS Regulatory Content for IFRS 17 enables insurers to manage the IFRS 17 reporting standards using a single platform, which can be divided into five key work streams:
Work Stream 1: Process management
IFRS 17 is not just an actuarial nor a finance responsibility but one that encompassed a wider group of divisions from IT to distribution to product management. The process manager must be able to manage each job flow run (liability calculation logic) as a project flow for each reporting period. Separate projects may be prepared for different assumptions provided if entities or scenarios are to be separated.
   Having a single process management platform to manage the workflow and coordinate the task and people interaction, approve results and adjustment will be important to steer through the steps (and shows which steps are done and with what their statuses are), suggests task actions that can be undertaken, enables commenting and adding attachments to the steps.
   Several iterations may be created that enables one to repeat the flow from any point. Such efforts to run the IFRS 17 calculation process cannot be handled manually and using spreadsheets to manage will not be sufficient to handle such task. A single process management platform will allow multi-departments to ensure consistency and timeliness of process flow completion for each reporting period.
Work Stream 2: Data management
Insurers will need to ensure data lineage from the source data to the calculation of liabilities cash flows (CFs) and generation of postings for the general ledger system occur seamlessly with high levels of accuracy.
   One can never under-estimate the volume of data collected given the level of accuracy that needs to be performed at the calculation of liabilities from a cohort level. Given the various data points that may impact a particular policy contract and cash flows, we are easily looking at billions of data points to perform such calculations.
   A pre-defined insurance data model with data management technology inclusive will support the collection, storage, processing of data. Data validation rules will give the assurance in terms of the data quality that will be inputted into the liability accounting calculating engine.
Work Stream 3: Accounting liability calculations
At the heart of the IFRS 17 accounting standards are the valuation of liabilities which are calculated using the three approaches of General Model, Premium Allocation and Variable Fee Approach. Segmenting the individual policies, separating onerous contracts at the moment of initial recognition and more will require high performance calculation engine to run in parallel with each other.
   There are defined templates of calculation flows available in the SAS Regulatory Content for IFRS 17 to enable scenario based calculations at different levels of granularity from contract levels to entity levels. Actuaries can define and run processes based on several configurations, each representing a different set of assumptions and using them to verify how various scenarios would influence the financial conditions of their organisation (primary insurance or/and reinsurance).
   It also provides the transparency and auditability of calculation in the event of double checking the authenticity of the results whether it is by cohort or individual policy levels and doing a benchmark test if actuaries choose to run an accuracy check on a selected group of cohorts for validation.
Work Stream 4: Postings
Posting rules define how the results of calculations should be assigned to accounts in Structure of Accounts following IFRS17 disclosure requirements. There is a need to also consider having the flexibility of defining set rules for local GAAPs during implementation projects for users. 
   Dedicated finance division users can define the rules sets as combination of conditions and actions. By using entity or reporting date in condition terms, one may define different rule sets for entities in different countries or changes in rules in context of time. These rule sets are collected into rule flows which may be published and from that on, is used for generation of postings performer by other users.
   Other than posting rules, the availability of reconciliation rules enables the reconciliation of some data. Reconciliation may be regarded as a validation of generated postings (trial Balance Sheet) or verification of proper disclosure in Income Statement and Movement Analysis and also reconciliation between different accounting standards or controlling reporting.
   These postings and reconciliation enables the finance team to define the various set of rules, allocating the results of calculations to different elements in the structure of accounts disclosed in the financial reports. 
Work Stream 5: Reporting
With additional requirements regarding calculation and disclosure of various financial measures, key stakeholders must be able to access financial reports that enables drill down capabilities for accessing details and source data behind the final values.
   Users can compare the results of calculations to the different scenarios such as sensitivity analysis or the impact the different approaches have on the financial profitability of the organisation.
   Internal reports with self-service and alert capabilities will provide project status analysis to the project management officer and his team of managers to track any pending delays in each job flow run. 
Making IFRS 17 “intelligent” by predicting future trends of portfolio profitability
With money and resources been thrown into becoming IFRS 17 compliant, insurers can recognise this opportunity to provide a catalyst for operational and management excellence.
   Beyond IFRS 17, actuarial and finance teams are assessing new areas where analytics can play a supportive role in their divisions. Analytics is key to deriving insights and value from the vast amount of data that resides in the organisation. Insurers can make IFRS 17 “intelligent” by predicting future trends of their portfolio profitability through forecasting and analysis of current and future performances.
   By adopting an open and holistic approach towards IFRS 17, insurers can lay the groundwork for future regulatory changes which could be IFRS 9 for insurance asset valuation.
   What separates an insurer from following the compliance requirement to one who seizes this opportunity to spearhead new analytics involvement with their actuarial and finance team will bring the value of a better management decision towards their product and pricing strategy which will ensure investor’s confidence, sustainable profits and revenue performances over time. A 
Mr Kenneth Koh is Director of Insurance for SAS’ Global Industry Practice.
Reach us at if you’d like to speak to an expert. 
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