IFRS 17 numbers can tell the story
When profitable new business is written, under IFRS 17, the establishment of the CSM means that profit will be set to zero at inception — even though positive economic value has been created. The CSM acts as a balancing item. And for a profitable contract, it is set to an amount that is equal, but with an opposite sign, to the present value of the amount of expected fulfilment cash flows at the inception of an insurance contract.
Given these features of the CSM, those who favour a market-consistent approach may seek additional key performance indicators (KPIs) to get a deeper understanding of business performance. KPIs that can reflect profit margin and capital efficiency can potentially help to address such concerns.
The insurance contract grouping criteria under IFRS 17 will allow KPIs at a more granular level. However for a more meaningful analysis, you can look at the Analysis of Change using different dimensions. So, you can aggregate the results by insurance funds, product classes and in-force periods. When you identify the key sources that contribute to profits or losses, you should question the cause. For example, you should ask:
• Is it due to change in investment environment, customer retention, expense overrun or underrun?
• What about the claims experience? Has that improved or gotten worse (compared to expected)?
• Are the actuarial assumptions used for expected cash flows reasonable?
After you identify the sources of profits or losses over time, you can make informed decisions on product development, pricing, underwriting, claims management and expense management. You will be able to identify which products are good to distribute and which are not. You will also be able to monitor profitability trends over time and compare the actual results to the business plan or forecast.
Business planning and financial analysis from a new perspective
A flexible IFRS 17 solution supports strategic business planning through forward-looking profit and loss (P&L) projection. It does so by rolling forward the closing positions of the last reporting period into the future, together with new business projections. You can also understand how current IFRS results and forward-looking business plans would change under different sensitivities or adverse scenarios related to economic and insurance risks and methodology choices, such as the choice of profit-emerging patterns.
If you perform regular sensitivity analysis or stress testing — instead of doing this as an annual exercise — you will get quick insights. Such an approach helps you anticipate key risk factors along with the magnitude of IFRS 17 impact on your key portfolios under key adverse scenarios.
With a scalable IFRS 17 solution, actuarial solution and automated processes, sensitivity analysis and stress testing can be a breeze.
Asset liability management
Valuations of assets and liabilities under the new accounting standards will be on market-consistent value. This means balance sheets could fluctuate more due to ongoing changes in interest rates and market conditions.
Under IFRS 17, coupled with IFRS 9, it is important to understand insurers’ asset liability management (ALM). The aim is to reflect changes in insurance liabilities and the respective underlying assets in the same place, either in the P&L or in other comprehensive incomes (OCI). Insurers need to be aware of the fair value through profit or loss (FVTPL) and how financial assets are accounted for, as it might change, for example, the way impairments are considered in actuarial models.
Moving forward, market value-based accounting will make ALM more important to managing P&L and balance sheet volatility. Insurers will need to scale up their ALM capabilities to better manage ALM mismatches. Insurers should continuously assess their open positions to see if they are sustainable and then assess the P&L impact of de-risking these positions. Strategic asset allocation (SAA) will receive more attention in the future.
Looking beyond IFRS 17 — supporting your strategic vision
IFRS 17 is not just a new accounting standard. Its fundamental objective is to provide transparency and insight to the insurance business while identifying strengths and areas for improvement. These are in terms of insurance product offerings, pricing, client retention management, expense management, claims management and investment. It helps insurers to develop their business strategy using various approaches, such as setting new KPIs for profitability management, regular experience studies, business planning, sensitivity analysis, stress testing and ALM.
IFRS 17 implementation shall have a longterm plan in place, including a holistic endto-end system architecture. More importantly, the IFRS 17 system solution is scalable, flexible and expandable, and can add more value to your business at different stages.
Designing your IFRS 17 solution carefully, seeing how it can best support your longterm IFRS 17 journey, will enable you to go far beyond.
Angie Ng is Head of Insurance Risk Solutions, Asia Pacific, at SAS.
