Santiago Fiallos, Senior Manager, Actuarial & Quantitative Services, at Sia Partners; and Nazir Valani, President and Co-Founder, Valani Global share their thoughts on IFRS 17 implementation at non-life insurers.
What concerns and challenges have non-life insurers expressed with their IFRS 17 implementation?
Santiago Fiallos: A major challenge concerns data preparation and grouping. For example, under IFRS 17, contracts issued more than one year apart cannot be grouped together. This has very important consequences for non- life insurers as the classic reserving methods are based on claim incurred dates rather than contract inception dates.
Insurers need to find pragmatic approaches when deriving data at the required level and reuse as much as possible what is already in place to save precious time and resources for analysis.
The second major challenge is to choose the right approach when calculating the liability for remaining coverage (LRC). Non-life insurers might want to apply the PAA as extensively as possible since its implementation costs are reduced and is closer to the “unearned premiums” reserve in IFRS 4.
Some lines of business may, however, fail the eligibility test and non-life insurers would need to handle both GMM and PAA approaches and explain their revenue based on two different approaches.
Another challenge the industry is facing relates to the use of probable future cash flows and interest rates. IFRS 17 introduces present value calculations for both LRC and liability for incurred claims (LIC).
Whereas life insurers are familiar with this topic, the vast majority of non-life booked reserves do not allow for discounting effects. Regarding this topic, EU insurers have a comparative advantage as Solvency II introduced a “Best Estimate” approach based on discounted probable cash flows.
Nazir Valani: The concerns and challenges expressed can be grouped in three broad categories.
1. The standard itself: IFRS 17 is principles-based and offers limited guidance, which leads to some concerns about whether this will be acceptable and how regulators will react. In particular, the new requirements related to discount rate(s) and risk adjustment are seen as challenges to some non-life insurers.
Furthermore, some non-life insurers express concerns about how to calculate and disclose the level of confidence related to the risk adjustment.
2. Preparation of financial statements: the standard will require the development of new long-term controls and audit requirements, which many insurers have not yet developed. Also, the new division of roles and responsibilities is not yet clear in everyone’s mind.
Finally, the implementation and execution of IFRS 17 will likely require new working dynamics involving teams across functions including actuarial, accounting, and IT.
3. Data issues: these are often related to availability as well as the granularity held in IT systems. In many instances, data issues are exacerbated by the presence of legacy systems that make any change more complicated.
With regards to granularity, the standard requires data at the IFRS 17 group level, which may be more granular than how insurers currently maintain data.
How do you rate the non- life industry’s progress with implementation? What major tasks are remaining, generally?
Santiago Fiallos: The non-life industry has made significant progress over the past 12 months. As usual for such projects, we see a great dispersion in the market on where insurers stand now in their projects.
Most insurers have now split their business into portfolios and groups of contracts as requested per IFRS 17 and they have chosen their calculation methods (GMM or PAA). Data preparation is underway, and several insurers are expecting to complete dry runs on direct business at the end of 2020 using “real” data.
However, there is still a lot of work to be done before 2023. Reinsurance contracts held need special attention as they might need a different treatment than the direct business, regarding the valuation model, the contract boundaries, and the timing of cash flows.
As the transition date gets closer, non-life insurers need to define new KPIs and identify possible levers to manage their financial communication under the new standard.
Nazir Valani: Progress seems to be related to the size of the insurer and whether or not it is part of an international group. Smaller insurers operating in a single country or region appear to still be near the start of the process, conducting analyses on data gaps and operating models.
We see more progress in larger, global insurers, with more development around accounting policy papers and some development work around the implementation of solutions. Some have completed much of the technical work.
The major tasks remaining are numerous. Those who elected to build their solution need to complete the development of their solution. This often means completing the testing of any extended proof of concept currently underway, building the remaining functionality, integrating
it in their environment, and testing to ensure proper results. This remains a sizeable task. Those opting for vendor solutions have to evaluate their options, select a partner, and proceed to the implementation.
Insurers operating in Canada need more insight around Osfi’s final non-life financial reporting requirements as well as the requirements for the Appointed Actuary’s valuation report on policy liabilities. These could affect what they must do around the technology and data aspects of their project.
Those who are most advanced are still dealing with significant challenges such as including reinsurance in their modeling of LIC and LRC and deciding about the treatment of Risk Sharing Pools and Facility Association.
The IASB issued the final version of IFRS 17 in June 2020. Which changes do you think are most significant for non-life insurers? Which ones do you think are most disappointing for them?
Santiago Fiallos: The final version of the standard included two great pieces of news for non-life insurers: the recovery of losses for reinsurance contracts held and the ability to allocate part of the acquisition costs to contract renewals.
These two amendments are supposed to limit P&L volatility over time: an insurer can recognise now a reinsurance gain when an underlying group of contracts is onerous – irrespective of the reinsurance contract type – and a part of acquisition costs incurred can be deferred to be amortised by future contract renewals.
The one-year deferral of the effective date might be good news for most non-life insurers as they will have more time to finalise their projects, and better understand the new standards in terms of performance steering and financial communication. It is important, however, to have strong project management to avoid an excessive increase in the overall implementation costs.
Nazir Valani: The two changes considered to be the most important to non-life insurers were related to issues of reinsurance mismatch (i.e., the recognition of a gain on reinsurance related to onerous contracts) and the recoverability of acquisition cash flow.
There was lobbying for changes to the definition of recognition that would have simplified data and processes, and to some, the absence of change was considered a disappointment.
On the positive side, the delay of the effective date of the standard was considered a good outcome.