IFRS 17 Implementation: Key Design Considerations
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Introduction
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IFRS 17
Implementation
work flow
Designing
Execution
Testing
Roll-out
Plan & Assessment
20%
20%
3
3
0%
0%
3
3
0%
0%
1
1
0%
0%
1
1
0%
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Introduction
•
Implementation of IFRS 17 brings significant changes
to entity’s systems, processes and data management
•
It may impact business operations and financial
systems of the entities unless it is carefully planned in
structured way in designing phase itself
•
A lack of understanding and coherent approach in
design stage may further derail the implementation
plan and may consume more money, time and
resources
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Level of Aggregation
•
Group of Contracts – basic unit of account
for CSM accounting
–
Portfolio
–
Cohort
–
Profitability
–
Measurement model
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Group of Contracts
–
Portfolio
–
Cohort
–
Profitability
–
Measurement model
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Portfolio
•
Portfolio
–
component of entity at which the statement of
financial position is expected to be provided
–
Interpretation of “similar Risks” and “managed
together”
•
Contracts in different product lines would not be expected to have
similar risks
•
LOBs are natural portfolios
–
Decision on “managed together”
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Portfolio
•
Portfolio
–
Guidance by IFRS 8 – Whose operating results are
reviewed to make decisions about the resources to
allocate and assess its performance
–
May need further factors to assess performances –
Distribution channel or major partner, or a product
line
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Group of Contracts
–
Portfolio
–
Cohort
–
Profitability
–
Measurement model
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Cohort
•
Annual vs Quarterly
–
Quarterly performance can be tracked (group biz)
–
Need to weigh this against too many groups and the
associated complexity
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Group of Contracts
–
Portfolio
–
Cohort
–
Profitability
–
Measurement model
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Profitability
•
Testing of Onerousness
•
Where do you test the onerousness?
–
Actuarial software
–
IFRS17 solution system
–
ETL
–
Other means
•
What other means are possible?
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Profitability
•
Prior tagging of profitability is required
–
Cash flows and Risk adjustment tagged at GOC is used for
CSM
–
Unless tagged, separate GOC can’t be created for onerous
contracts
–
Can be based on ‘reasonable and supportable information’
–
A few choices can be followed
•
VNB / VNB at risk
•
CSM at risk for range of policies covering portfolio
•
Create a rule engine to decide the tagging for every contract
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Group of Contracts
–
Portfolio
–
Cohort
–
Profitability
–
Measurement model
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Measurement Model
•
Default model is GMM
•
VFA eligibility testing
–
Testing required to be done at contract level.
–
But may accept one assessment for homogeneous contracts in same
market conditions and priced on same basis
–
First condition is to be fulfilled at fund level, but other two conditions
need to be tested at lower level.
•
A set of KPIs need to be defined at inception
–
Is profit sharing based on investment returns
–
Is profit sharing including minimum guarantee deemed substantial?
–
Are the fixed cash flows significant?
–
Is the financial guarantees embedded out-of-money deemed substantial?
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Measurement Model - VFA
•
Substantial
–
Need to be defined with formula specified with a range to
decide the eligibility.
–
For example: Yes if >55%, no if <50% and need further
analysis otherwise
–
Further analysis may involve several scenarios or stochastic
simulations to assess the average or variability in the sharing
•
Contracts within a product ideally shall be eligible/not
eligible
•
Eligibility is expected to be consistent year-on-year
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Measurement Model - MGMM
•
If VFA test is not passed
–
“indirect participation”
•
Indirect Participation – Modified GMM
–
The cashflow model needs to incorporate the basis for
determination of benefit at inception
–
The process for capturing the adjustment to CSM should be
clearly outlined in the model
•
Mutualization – System to accommodate the
mutualization adjustments to FCF & CSM on
subsequent measurement at higher level than GOC
and then allocate back to GOCs
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Measurement Model - PAA
•
PAA Eligibility test required for contracts with more than one
year term
–
Contracts of life insurers can be easily modelled using GMM
–
Testing may be useful for Non-life contracts
–
Clear KPI’s on base LR and sensitivity to assess the eligibility
–
Sensitivity on discount rates also required to judge the
variability
•
Products eligible for PAA expected to demonstrate consistently
year-on-year
•
Reinsurance Annual treaties are expected to be eligible for PAA
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Group of Contracts
•
Once you establish Group of Contracts,
you need to align the other cash flows to
arrive at desired financial results – either
at group level or further down
–
Sub Groups
–
Risk Adjustment
–
Reinsurance
–
Allocation of expenses
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Group of Contracts
–
Sub Groups
–
Risk Adjustment
–
Reinsurance
–
Allocation of expenses
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Sub groups
•
GOC may contain more than one product sharing similar risks
•
Require sub-groups (Actuarial group) with each product as
group for the actuarial reasons – Cash flows & Assumptions
•
In addition to actuarial cash flows, other business transaction
such as Incurred claims including NDIC, actual premiums &
allocation of expenses to compare the actual vs expected would
be more reasonable at these Actuarial groups
•
Clear mapping with these actuarial groupings to GOC in order
to account the changes to CSM / OCI at GOC level
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Group of Contracts
–
Sub Groups
–
Risk Adjustment
–
Reinsurance
–
Allocation of expenses
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Grouping – Risk Adjustment
•
Risk adjustment (RA) shall be calculated at GOC to account for
CSM
•
However, Risk adjustment require stress testing of cash flows
for each risk and allow for diversification
–
Stress testing / diversification would normally done at entity
level
•
Need process / system to allocate the risk adjustments to the
actuarial groups and to aggregate at GOC level
•
Seamless process to allocate the impact of variances / change in
assumptions on Risk adjustment to actuarial groups and GOC
to account for subsequent measurements
www.actuariesindia.org
Group of Contracts
–
Sub Groups
–
Risk Adjustment
–
Reinsurance
–
Allocation of expenses
www.actuariesindia.org
Grouping – Reinsurance
•
Discussion about reinsurance held
–
Level of aggregation – in addition to LOB, the additional factors would
normally be type of coverage (proportional v/s non-proportional, loss
occurring v/s risk attaching)
–
Grouping – portfolio, net gain/loss, measurement model, cohort
–
For cash flow purposes – actuarial groups lower than GOC
–
Contract boundaries & measurement models are different with
underlying
•
Loss recovery - One-to-one mapping is not possible with
underlying actuarial groups / GOC.
•
Need a process / system to establish the relationship for loss
recovery with corresponding underlying GOC
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Group of Contracts
–
Sub Groups
–
Risk Adjustment
–
Reinsurance
–
Allocation of expenses
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Allocation of expenses - GOC
•
Identification of directly Attributable expenses – by nature of
expense / head of expenses
–
Set process to identify directly attributable expenses – Acquisition,
policy service and claims related
–
Start with expenses identifiable at policy or GOC
–
Process to identify the overheads which are directly attributable –
Acquisition, policy service and claims related
–
Decide on and separate the pre-coverage acquisition
–
Other directly attributable into acquisition / maintenance
•
Establish ETL process to allocate the expense – directly
attributable acquisition (non pre-coverage), directly attributable
maintenance expenses and general expenses
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Conclusion
•
Design is very critical
–
Requires lot of clarity and understanding
–
Its not purely technical decision
•
Its also influenced by the way the business is driven
–
Some of the decisions may be irreversible
•
Or very expensive to reverse
–
Hence its important to be as perfect as possible with
your design
www.actuariesindia.org
Questions
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Implementation of IFRS 17 requires a structured approach in the design phase to avoid disruptions to business operations and financial systems. This article emphasizes the importance of proper planning, assessment, and execution to ensure a smooth transition. Key topics include level of aggregation, group of contracts, portfolio management, and profitability measurement models.
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Presentation Transcript
5th Webinar on IFRS17 16th November 2021 Some Design Considerations Sai Srinivas Dhulipala Consulting Actuary
Introduction 20% Plan & Assessment 30% Designing IFRS 17 Implementation work flow 30% Execution 10% Testing Roll-out 10% www.actuariesindia.org
Introduction Implementation of IFRS 17 brings significant changes to entity s systems, processes and data management It may impact business operations and financial systems of the entities unless it is carefully planned in structured way in designing phase itself A lack of understanding and coherent approach in design stage may further derail the implementation plan and may consume more money, time and resources www.actuariesindia.org
Level of Aggregation Group of Contracts basic unit of account for CSM accounting Portfolio Cohort Profitability Measurement model www.actuariesindia.org
Group of Contracts Portfolio Cohort Profitability Measurement model www.actuariesindia.org
Portfolio Portfolio component of entity at which the statement of financial position is expected to be provided Interpretation of similar Risks and managed together Contracts in different product lines would not be expected to have similar risks LOBs are natural portfolios Decision on managed together www.actuariesindia.org
Portfolio Portfolio Guidance by IFRS 8 Whose operating results are reviewed to make decisions about the resources to allocate and assess its performance May need further factors to assess performances Distribution channel or major partner, or a product line www.actuariesindia.org
Group of Contracts Portfolio Cohort Profitability Measurement model www.actuariesindia.org
Cohort Annual vs Quarterly Quarterly performance can be tracked (group biz) Need to weigh this against too many groups and the associated complexity www.actuariesindia.org
Group of Contracts Portfolio Cohort Profitability Measurement model www.actuariesindia.org
Profitability Testing of Onerousness Where do you test the onerousness? Actuarial software IFRS17 solution system ETL Other means What other means are possible? www.actuariesindia.org
Profitability Prior tagging of profitability is required Cash flows and Risk adjustment tagged at GOC is used for CSM Unless tagged, separate GOC can t be created for onerous contracts Can be based on reasonable and supportable information A few choices can be followed VNB / VNB at risk CSM at risk for range of policies covering portfolio Create a rule engine to decide the tagging for every contract www.actuariesindia.org
Group of Contracts Portfolio Cohort Profitability Measurement model www.actuariesindia.org
Measurement Model Default model is GMM VFA eligibility testing Testing required to be done at contract level. But may accept one assessment for homogeneous contracts in same market conditions and priced on same basis First condition is to be fulfilled at fund level, but other two conditions need to be tested at lower level. A set of KPIs need to be defined at inception Is profit sharing based on investment returns Is profit sharing including minimum guarantee deemed substantial? Are the fixed cash flows significant? Is the financial guarantees embedded out-of-money deemed substantial? www.actuariesindia.org
Measurement Model - VFA Substantial Need to be defined with formula specified with a range to decide the eligibility. For example: Yes if >55%, no if <50% and need further analysis otherwise Further analysis may involve several scenarios or stochastic simulations to assess the average or variability in the sharing Contracts within a product ideally shall be eligible/not eligible Eligibility is expected to be consistent year-on-year www.actuariesindia.org
Measurement Model - MGMM If VFA test is not passed indirect participation Indirect Participation Modified GMM The cashflow model needs to incorporate the basis for determination of benefit at inception The process for capturing the adjustment to CSM should be clearly outlined in the model Mutualization System to accommodate the mutualization adjustments to FCF & CSM on subsequent measurement at higher level than GOC and then allocate back to GOCs www.actuariesindia.org
Measurement Model - PAA PAA Eligibility test required for contracts with more than one year term Contracts of life insurers can be easily modelled using GMM Testing may be useful for Non-life contracts Clear KPI s on base LR and sensitivity to assess the eligibility Sensitivity on discount rates also required to judge the variability Products eligible for PAA expected to demonstrate consistently year-on-year Reinsurance Annual treaties are expected to be eligible for PAA www.actuariesindia.org
Group of Contracts Once you establish Group of Contracts, you need to align the other cash flows to arrive at desired financial results either at group level or further down Sub Groups Risk Adjustment Reinsurance Allocation of expenses www.actuariesindia.org
Group of Contracts Sub Groups Risk Adjustment Reinsurance Allocation of expenses www.actuariesindia.org
Sub groups GOC may contain more than one product sharing similar risks Require sub-groups (Actuarial group) with each product as group for the actuarial reasons Cash flows & Assumptions In addition to actuarial cash flows, other business transaction such as Incurred claims including NDIC, actual premiums & allocation of expenses to compare the actual vs expected would be more reasonable at these Actuarial groups Clear mapping with these actuarial groupings to GOC in order to account the changes to CSM / OCI at GOC level www.actuariesindia.org
Group of Contracts Sub Groups Risk Adjustment Reinsurance Allocation of expenses www.actuariesindia.org
Grouping Risk Adjustment Risk adjustment (RA) shall be calculated at GOC to account for CSM However, Risk adjustment require stress testing of cash flows for each risk and allow for diversification Stress testing / diversification would normally done at entity level Need process / system to allocate the risk adjustments to the actuarial groups and to aggregate at GOC level Seamless process to allocate the impact of variances / change in assumptions on Risk adjustment to actuarial groups and GOC to account for subsequent measurements www.actuariesindia.org
Group of Contracts Sub Groups Risk Adjustment Reinsurance Allocation of expenses www.actuariesindia.org
Grouping Reinsurance Discussion about reinsurance held Level of aggregation in addition to LOB, the additional factors would normally be type of coverage (proportional v/s non-proportional, loss occurring v/s risk attaching) Grouping portfolio, net gain/loss, measurement model, cohort For cash flow purposes actuarial groups lower than GOC Contract boundaries & measurement models are different with underlying Loss recovery - One-to-one mapping is not possible with underlying actuarial groups / GOC. Need a process / system to establish the relationship for loss recovery with corresponding underlying GOC www.actuariesindia.org
Group of Contracts Sub Groups Risk Adjustment Reinsurance Allocation of expenses www.actuariesindia.org
Allocation of expenses - GOC Identification of directly Attributable expenses by nature of expense / head of expenses Set process to identify directly attributable expenses Acquisition, policy service and claims related Start with expenses identifiable at policy or GOC Process to identify the overheads which are directly attributable Acquisition, policy service and claims related Decide on and separate the pre-coverage acquisition Other directly attributable into acquisition / maintenance Establish ETL process to allocate the expense directly attributable acquisition (non pre-coverage), directly attributable maintenance expenses and general expenses www.actuariesindia.org
Conclusion Design is very critical Requires lot of clarity and understanding Its not purely technical decision Its also influenced by the way the business is driven Some of the decisions may be irreversible Or very expensive to reverse Hence its important to be as perfect as possible with your design www.actuariesindia.org
Questions www.actuariesindia.org
