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IFRS 17

Introduction

International Accounting Standards Board (IASB) after 20 years of work and deliberations; had issued their new accounting standard –  IFRS 17 for the “Insurance Contracts”. This is a major shift in the way currently business is looked at and in fact managed.  The implementation date of these standards has already deferred to January 2023 considering the concerns of the stakeholders and implementation challenges. In the case of India, the Companies are still awaiting directions from the Government.

The objective of the new standards is to overcome the issues pertaining to consistency and transparency of the current standards and it’s depicted below: As IFRS 17 is Principle based accounting it provides an overall framework rather than prescribing the detailed rules. Hence, Companies have to come up with their own calculation methods adhering to the overall framework.

This framework will bring a lot of changes and early preparedness is crucial to ensure proper implementation. Modifications are required in the way insurance companies collect, process, analyze, store, and present data in their financials. IFRS 17 implementation requires different functions of the Company – be it Finance, Actuarial & IT to come and work together to build/revamp their existing systems and models.

Data Requirements

From a General/Health Insurance Companies perspective, one will have to adopt a more granular view for their business. Some of the business which used to make sense on an overall basis will have to be reviewed under the lens of onerous contracts (non-profitable) as it will have an immediate impact on the profitability whereas, profit needs to be booked over the insurance contract period.  This will not only affect the Insurance companies but also will have an implication for the tax authorities.

The additional elements of complexity will be brought about by the discounting of liabilities (which is not currently allowed in the Indian context) and explicit margin for risk – called risk adjustment. This will be supplemented using different approaches for liability valuation (General Vs Premium Allocation Approach and Variable fee approach – applicable for life insurance), separate accounting for the Reinsurance assets held, etc. 

Role of Actuaries

With the implementation of new standards, the Actuaries will play a more vital role in insurance companies. From the initial recognition of a group of contracts till the end of the coverage period there are a lot of decisions to be made based on actuarial models and judgment. To name a few:

  • Grouping of similar risk together
  • Separation of onerous contracts and profitable contracts
  • Estimation of Fulfilment cashflows
  • Determining the appropriate discount rate based on available approaches
  • Estimation of the amount of risk adjustment with an appropriate confidence level
  • Maintaining the CSM balance and monitoring the changes in CSM as a contact becomes onerous or profitable
  • Assessing the applicability of Premium Allocation Approach
  • Accounting for Reinsurance Contracts held
  • Restatement of Insurance Contract Liabilities on the transition date
  • Key Performance Indicators, etc.

So, What’s Ahead

Considering the new standards and the increasing proportion of long-term contracts in the portfolio of general/health insurance companies there is an immediate need to reassess the current situation and identify the gaps. This becomes of utmost importance considering the limited availability of – data and skilled people; which can affect the implementation of these standards. As the date for implementation is closing in, companies are facing challenges to get their employees ready for implementation changes as the employees are already stuck with the day to day work. Shadow run of IFRS 17 models with current models is a must to assess the impact of new regulations and GAAP analysis. Actuaries and Finance teams should study the Standards and conduct brainstorming sessions with their teams to come up with ideas and solutions to upcoming challenges. Companies can also seek expert advice to build new models, recommend system changes, train employees, provide software solutions, etc.

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