Transitioning to IFRS 17 results production

Insurance companies across the world are starting to report financial statements in accordance with International Financial Reporting Standard 17 (IFRS 17), which becomes effective across several markets in the year 2023. Globally, insurance companies are at different phases on their journey towards the adoption of IFRS 17, having spent a considerable amount of time and effort on:

• Understanding the requirements and performing gap analyses
• Planning and implementation
• Performing parallel runs and impact analyses

As implementation transitions into production many companies, collaborating with cross-functional teams, are now focussed on developing processes and capabilities to efficiently produce and report results on an IFRS 17 basis. While companies have invested significantly in technology and systems to create efficient IFRS 17 reporting processes, it is arguably too soon to conclude that such investment in technology would reduce the human effort required in developing IFRS 17 results. It is well accepted that there will be significantly more human effort required in understanding and explaining IFRS 17 results, at least in the near future.

In this article, we discuss a few areas where the requirement to deploy skilled resources, to produce IFRS 17 production results, will likely increase. We have further explored how outsourcing can provide a solution for the potential resourcing challenges faced by companies to cater for this demand.

Increased complexity associated with IFRS 17 results production

Data analysis

Companies are required to aggregate contracts into groups, for which the insurance contract liability will be separately measured. The level of aggregation required by IFRS 17 potentially leads to the creation of a sizable number of groups of contracts. The contract grouping would be performed, at a minimum level, considering the following factors:

• Portfolios of contracts that have similar risks and are managed together
• Non-onerous, onerous, and likely to become onerous
• Contracts that were issued less than 12 months apart

These grouping requirements may create a large number of contract groups, especially for those companies that have significant legacy business and/or varied existing and new business portfolios. Managing the substantial number of contract groups creates significant work for actuarial teams. The additional tasks involved in assigning contract groups on an ongoing basis, such as onerous contract testing and measurement model eligibility, adds to the ongoing workload.

Some companies are investing considerable time and effort in implementing large-scale, automated data management systems. While these systems should help automate large parts of the data cleaning and transformation parts, companies still require actuarial staff to conduct audits, analyse roll-forward of policy data, explain variances and sensitivities, make updates to the process when required and perform user acceptance testing.

Assumptions setting

Actuarial teams would be required to set assumptions for different contract groups. A more granular assumption-setting process, with the additional complexity in setting assumptions such as for discount rates, requires expert judgement and effort. This may also necessitate experience analysis on a more granular basis. Actual historical cash flows, for example benefit payments and expenses, will also need to be allocated at more granular levels. Actuarial teams tasked with the assumption-setting process will need to be resourced and potentially restructured depending on the number of contract groups.

Results preparation and analysis

Actuarial models would already have been enhanced to deal with the larger number of contract groups. For each reporting cycle, actuarial teams would be tasked with setting up these models and running them to create actuarial results, which would then be used along with financial data to produce IFRS 17 financial statements. Actuarial teams would also need to analyse and explain both the actuarial results and the IFRS 17 financial statements, working with accounting teams in the case of the latter. Depending upon the number and variability of contract groups, the analysis may need to be performed at a more granular level than is performed for existing reporting.

Further, IFRS 17 disclosures are more detailed than required by most existing reporting standards. The requirement to perform a granular analysis of movement in all liability balances and disclosing the future profit release pattern would require highly skilled actuarial resources. Actuarial teams would need to work closely with accounting teams to understand and explain IFRS 17 results. In addition, companies may have to reconcile IFRS 17 results with other reporting bases, such as statutory and embedded value reporting.

Management

While insurers in some markets are used to determining financial results by contract groups or cohorts (e.g., those reporting under US GAAP), this approach would be new for many companies operating in other markets. As IFRS 17 moves into production and starts impacting business decisions, it is highly likely that life insurers will start to manage their business based on contract groupings, channeling management’s attention to strategically important contract groups (e.g., cohorts open to new business, onerous cohorts, large legacy cohorts etc.), far more than has been the case historically. The more granular grouping will also help management identify cohorts that are of less strategic importance (e.g., smaller blocks of legacy business or small groups of onerous contracts, which were previously obscure as they were grouped with profitable contracts). Companies would nevertheless need to manage these cohorts and retain actuarial personnel to value the cohorts.

Communication

There is likely to be significant interaction with internal and external auditors, who are likely to scrutinise IFRS 17 results in detail, at least following the initial years of implementation. It is therefore important for companies to have excellent documentation to facilitate the ability to answer requests and questions from auditors.

Given that one of the primary purposes of IFRS 17 reporting is shareholder reporting, IFRS 17 results are likely to be scrutinised in detail by investors and financial analysts. There may also be pressure on the management to publish results within a short timeframe. These issues increase the need for actuarial resources.

Outsourcing to specialised providers will benefit insurers

In response to the resourcing challenge posed by IFRS 17, the management of life insurance firms may find outsourcing of parts of the production process a pragmatic solution. Depending upon how life insurers set up their actuarial teams, they may consider looking at outsourcing in two ways, both of which would help a company become more efficient and cost-effective:

• Process-based outsourcing: If a life insurer looks at IFRS 17 results production as an assembly line, i.e., separate teams and processes for policy data, assumptions, model runs and management, results analysis and reporting and audit, then the insurer may consider outsourcing those processes that are resource-intensive or have well defined or documented process flows that are easily transferable. This reduces resourcing and resource management pressure on the company’s management.
• Contract grouping-based outsourcing: Life insurers that currently manage their business based on lines of business or contract groupings, or plan to in the future, may consider outsourcing certain lines of business. This allows companies to retain the production of results and to focus management resources on strategically more important lines of business, relieving management of the responsibility of managing smaller or less important lines of business.

In both cases, it is imperative for insurers to find an outsourcing partner that can provide experienced actuarial staff familiar with the requirements of IFRS 17, and can provide value-added services, rather than purely seeking lower cost at the expense of quality. An insurer must be able to have confidence in the results and analyses produced by its outsourcing partners. Experienced actuarial practitioners, who are familiar with local products, financial markets, models, regulations and reporting requirements, are critical to the success of an outsourcing arrangement. Experienced personnel can provide significant value on top of providing resource support. They can assist an insurer in understanding and explaining results, identify areas for improvement (both technical and efficiency-related) and help a company to implement these improvements. These are all important considerations for any outsourcing exercise. However, these considerations become even more important as companies look to outsource more complex processes such as IFRS 17.

Conclusion

Given the complexity associated with IFRS 17 results production, it will take time for companies to achieve a fully functional and frictionless business-as-usual (BAU) IFRS 17 process. Even under a BAU IFRS 17 process, the reliance on actuarial resources would increase compared to the existing BAU processes. Outsourcing to specialist teams provides a viable solution to help address resourcing needs and provides the flexibility to scale up or down as processes mature.