1. Fulfilment cash flows: the current estimates of amounts that the company expects to collect from premiums and pay out for claims, benefits and expenses, including an adjustment for the timing and risk of those amounts;
2. Contractual service margin: the expected profit for providing insurance coverage. The expected profit for providing insurance coverage is recognised in profit or loss over time as the insurance coverage is provided. 

Computation of Insurance Revenues:

Reinsurance as a risk mitigant:

Disclosures:

 

STRATEGIC IMPACT

• Life insurance companies will be most affected by IFRS 17 due to the long term nature of the life insurance contracts. Measurement of contracts to reflect economic changes may lead to volatility in earnings of insurers. Life insurance companies might prefer revamping long-term insurance offerings. However, to some extent, this volatility can be reduced by routing such changes in measurement of contracts through OCI option. Aligning with IFRS 9 is thus important.
• Financial benefits of insurance contracts backed by certain type of assets might not be attractive. The contracts are measured based on the characteristics of the liability rather than on those of the assets. Hence, these contracts can lead to volatility 
• IFRS 17 is expected to have neutral impact on the property and casualty insurance segment for short term contracts. However, long term contracts will have increased complexity making their accounting treatment more difficult than as of today. 
• Products with contracts onerous at inception may need to be relooked at or discontinued

• The performance of various distribution channels (measured by the written premium collected) will need to undergo a change as will the revenue definition. The new performance measurement matrix will have to be worked out. The entire hierarchy of the sales channel will need to understand this new matrix which will necessitate additional training programs
• Aggressive sales approach in the pursuit of top-line will serve no purpose under the new standard as booking onerous contracts will be viewed negatively than as an achievement 

• IFRS 17 is expected to change the current pricing methodology since it will have an impact on insurance product features, profitability, duration etc.  
• Risk premiums may witness an upward revision with more stringent and transparent computational requirements such as market driven discounting factors and updated economic assumptions backing the cash flows
• Use of mutualization among insurance products to cover for loss making products will no longer be possible with onerous contracts being recognized separately thus forcing insurance companies to revisit product pricing 

• IFRS 17 will require organizations to maintain wide spectrum of historical, current and future data at a granular level that will be used for grouping of contracts, calculating risk adjustment, discount rates, probabilistic cash flows and resultant CSM calculations and valuation of insurance contracts
• Insurers will need to have comprehensive data management mechanism in place with storage, retrieval, slicing and dicing capabilities with defined data flows and governance controls to achieve the application requirements not only on a retrospective basis upon transition but also on an ongoing basis
• Data integration at various levels will be required to support financial reporting for internal management and more rigorous external reporting & disclosures 

• While planning for IFRS 17 insurers should step back and plan for building greater integration between finance, risk and actuarial through a common platform
• We believe that best way to approach this is through an integrated IFRS 17 solution that connects finance and actuarial systems and publishes the disclosure requirements under the standard
• Insurers can also leverage existing systems by:
  • Enhancing current actuarial system to produce CSM calculations, risk adjustments and related data
  • Enhancing existing finance systems and IT solutions to cover IFRS 17 specific accounting and reporting requirements

• Measurement and reporting processes may undergo a change more specifically with respect to:
  • Mapping of chart of accounts
  • Consolidation, reconciliation and accounting close
  • Actuarial computational processes to produce granular level risk adjustments and CSMs
  • IT processes under the new system regime related to data mapping and controls
  • Disclosure processes

• New frameworks will have to be created and existing policies may undergo a change namely
  • IFRS 17 framework document
  • Accounting policy
  • Disclosure policy
  • Investment policy
  • Product programs

We at Sutra, an analytics driven advisory firm, have worked with many insurance companies in GCC region in areas of enterprise risk management and analytics, and are fully geared to help companies do a smooth transition to IFRS17 with both advisory and solution implementation services. On the actuarial side, we have also helped many firms in the areas of pricing, product design, reporting, liability valuation, solvency monitoring, asset liability management, business planning amongst others. To know more about our experience, feel free to contact us at Sutra Management website.

About the Authors

 

Sarthak Agarwal 
Sarthak works as an associate with Sutra. He has specialized in organizational performance improvement, operations analytics and Forensics.

Shravan Potnis
Shravan leads risk management practice at Sutra. He is a risk management expert with an experience of more than 17 years in banking and risk consulting. 

Sai Srivinas

Mr. Sai Srinivas is a certified actuary having a distinguished career of over 25 years in the insurance industry with more than 10 years in the regulatory role as Appointed Actuary. He is an eminent member of multiple regulatory committees and advisory groups and is a regular speaker in the industry forums.