The International Accounting Standards Council (Council) issued IFRS Standard 17 in May 2017. This standard establishes the requirements that must be obeyed by the insurance company in reporting information about the insurance contract issued, the reinsurance contract, and the investment contract with the discretionary participation feature. Effective 1, January 2022 Many regulators have begun to direct the insurance company to apply the requirements given in the standard with the ongoing gap analysis phase and impact.
1. Fulfillment of Cash Flow: The estimated amount of the current number expected by the company can be collected from premiums and payments for claims, allowances, and expenses, including adjusting the time and risk of the amount;
2. The margin of Contract Services: Profit expected to provide insurance protection. The expected profit to provide insurance protection is recognized in profit or loss from time to time because insurance protection is provided.IFRS 17 requires the company to distinguish between contract groups that are expected to generate profits and contract groups that are expected to make losses. Every expected loss arising from the contract that makes a loss, or is severe, is calculated in profit and loss immediately after the company determines that the loss is expected.
Before considering the impact of new standards on strategic and operational dimensions, let's look at the important changes brought by IFRS 17:
Profit calculation
- Cash flow discount: The insurer currently has various practices; Non-living companies with a 1-year-old contract that does not make discounts on other insurance companies use risk-free rates or the rate of return of other uses on the underlying assets to discount cash flow. IFRS 17 requires an insurance company to use a discount rate that reflects the risk of cash flow from the contract rather than from the tariff based on the characteristics of assets that support the insurance contract.
- Risk adjustment: Adjustment of implicit risk, and as a result, it is disclosed incorrectly or applied selectively while the standard makes it explicit with transparent calculations.
- Acquisition Costs: Recognition of acquisition costs because suspended assets will no longer be permitted. The cost of acquisition that can be directly attributed will be recognized as cash outflows when calculating CSM.
- Assumption: To provide transparent and timely information about insurance risks, and changes in these risks, IFRS 17 requires the use of the current estimation based on the latest available information and the disclosure of relevant assumptions for cash flow calculations at each reporting date is different from the assumptions made on the beginning continued.
Disclosures:
This standard carries a set of reporting and disclosure requirements that are more transparent and more transparent. Financial statements need to provide detailed component breakdowns such as fulfilling cash flow, insurance service results, risk adjustments, CSM, asset movements, and insurance contract obligations. In all jurisdictions, similar insurance contracts or non-insurance components will be taken into uniform. The changes introduced by IFRS 17 will make the current financial position of insurance companies and future profitability more easily understood and will allow a meaningful comparison to be carried out in all companies, contracts, and industries.
Strategic Impact
Existing insurance products and future product development
- Life insurance companies will be the most affected by IFRS 17 because of the long-term nature of life insurance contracts. Contract measurements to reflect economic changes can cause volatility in the income of insurance companies. Life insurance companies may prefer to improve long-term insurance offers. However, to a certain extent, this volatility can be reduced by reaching the change in the measurement of the contract through the OCI option. Harmonizing with IFRS 9 is thus important.
- The financial benefits of insurance contracts supported by certain types of assets may not be attractive. The contract is measured based on the characteristics of the obligation rather than the asset. Therefore, this contract can cause volatility
- IFRS 17 is expected to have a neutral impact on the property insurance segment and victims of short-term contracts. However, long-term contracts will increase the complexity of making their accounting treatments more difficult than today.
- Products with heavy contracts when they start may need to be increased or stopped
Performance measurement
- The performance of various distribution channels (measured by the written premium collected) needs to be changed as well as the definition of income. The new performance measurement matrix must be done. All sales channel hierarchies need to understand this new matrix that will require additional training programs
- The aggressive sales approach in pursuing top-line will not have a goal below new standards because the order of heavy contracts will be seen negatively than as an achievement
Product price
- IFRS 17 is expected to change the current pricing methodology because it will have an impact on the features of insurance products, profitability, duration, etc.
- Risk premiums can witness revisions and above with tighter and transparent computing requirements such as discount factors driven by the market and renewed economic assumptions that support the current cash flow
- The use of mutualization among insurance products to include loss-making products will no longer be possible with heavy contracts that are recognized separately to force the insurance company to review the product price
Capital Efficiency
IFRS 17 will reflect the capital efficiency of insurance companies in a more transparent and balanced way. Because the standard does not require reserve requirements that are too conservative and because the cost swelling will be charged to CSM, capital efficiency will improve for insurance companies. At the same time loading the front profit, is not permitted below IFRS 17 because the profit will be adjusted to the CSM and will be released over a certain period. This will lead to a more balanced and transparent view of capital efficiency.
Operational Impact
IFRS 17 will introduce significant operational complexity for insurance companies. The following operational areas will be greatly affected:
Data management
- IFRS 17 will require the organization to maintain the broad spectrum of historical data, at present, and the future at the granular level that will be used to group the contract, calculate the risk adjustment, the discount rate, the probabilistic cash flow, and the CSM calculation produced, and the assessment of the insurance contract
- Insurance companies need to have a comprehensive data management mechanism with storage, taking, slicing, and eating ability with specified data flow and governance control to achieve application requirements not only based on retrospective at the time of transition but also on an ongoing basis
- Integration of data at various levels will be needed to support financial reporting for internal management and more stringent external reporting & disclosures
System
- When planning IFRS 17 Insurance companies must resign and plan to build greater integration between finance, risk, and actuarial through a joint platform
- We believe that the best way to approach this is through an integrated IFRS 17 solution that connects the financial and actuarial system and issues the disclosure requirements below the standard
- Insurance companies can also take advantage of existing systems with:
- Increase the current actuarial system to produce CSM calculations, risk adjustments, and related data
- Improve the existing financial system and IT solutions to include IFRS 17 Specific Accounting and Reporting Requirements
Process
- The measurement and reporting process can experience more special changes in connection with:
- Mapping Account Chart
- Consolidation, Reconciliation, and Accounting Close
- Actuarial computing process to produce granular and CSM risk adjustments
- It processes under a new system regime associated with data mapping and control
- Disclosure process
Policy framework and governance
- The new framework must be made and the existing policies can change, namely
- IFRS Framework Document 17
- Accounting policy
- Disclosure policy
- Investment policy
- Product programs
People and Culture
Standard adoption brings a series of complexity itself. Conceptual understanding of the standards and aspects of implementation (both initially and on an ongoing basis) requires an increase in financial skills, data, and functioning. In addition, from the perspective of insurance company culture, it needs to be prepared and flexible enough for a more transparent regime where performance will be measured and reported based on economic considerations. Better governance and control framework will help insurance companies after the standard is applied.
IFRS 17 gives a great emphasis on data management strategies, end-to-end system architecture, and policy modification and processes around financial, actuarial, and business functions.
Insurance companies need to spend significant time analysis of gaps and impact analysis activities before developing a strategy on how to implement processes and operational changes to adopt standards.
We are at Sutra, an advisory company driven by analytics, that has worked with many insurance companies in the GCC region in the field of risk management and analytic of the company and is fully directed to help companies carry out smooth transitions to IFRS17 with advisory implementation services and solutions to solutions with solutions and solutions to solutions and solutions solutions solutions and solutions with solutions and solutions. On the actuarial side, we have also helped many companies in the fields of pricing, product design, reporting, liability assessment, solvency monitoring, asset liability management, and business planning. To find out more about our experience, don't hesitate to contact us on the ConVista website. www.convista.in
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