Key features of IFRS 17
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Transcript of Key features of IFRS 17
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IFRS 17 Insurance Contracts: the countdown to 2021 has begun!
May 2017
© 2017 Willis Towers Watson. All rights reserved.
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IFRS 17 Insurance Contracts: the countdown to 2021 has begun!
2© 2017 Willis Towers Watson. All rights reserved. Proprietary and Confidential. For Willis Towers Watson and Willis Towers Watson client use only.
On 18 May 2017, the International Accounting Standards
Board (IASB) published IFRS 17 Insurance Contracts,
twenty years after the IASB’s predecessor initiated the
insurance contracts project. The new standard, which will
replace IFRS 4 for accounting periods beginning on or after
1 January 2021, is a major milestone for the insurance
industry as it represents the first ever near global
accounting standard for insurance contracts.
The standard sets out a comprehensive methodology
applicable to all insurance and reinsurance contracts, both
long- and short-term, as well as investment contracts with
discretionary participation features. IFRS 17 represents a
major departure from current insurance accounting
practices in many jurisdictions, which will fundamentally
change both how and what insurance companies report to
shareholders, policyholders and other stakeholders.
This is more than “just” an accounting change: IFRS 17 will
have a wide and significant impact on insurers’ operations
and implementation will be a major challenge.
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Key features of IFRS 17
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The main feature of IFRS 17 is the building block approach,
or General Measurement Model, for the insurance
contract liability that includes (1) discounted cash flows, (2)
a risk adjustment to reflect the uncertainty in the cash flows
and (3) a contractual service margin to eliminate any gain at
issue.
The Insurance Contract Liability will consist of a fulfilment
cash flow element and an unearned profit element (the
Contractual Service Margin, or CSM, which cannot be
negative). The value of the fulfilment cash flows will be a
current amount at any point in time, reflecting economic
conditions at and expectations of future experience from the
time of the valuation.
A simplified measurement, the Premium-Allocation
Approach, is permitted for short-duration pre-claims
liabilities and is similar to existing unearned premium
approaches (i.e. using the premium less acquisition costs
as the liability on day one, subject to an onerous contracts
test, then running it off simply over time). This provides a
simpler alternative for many A&H and P&C contracts and
some Life contracts.
Cash flows
Time value of
money
Risk adjustment
Contractual service
margin
Total
Insurance
Contract
Liability Fulfilment cash flows:
Component
representing the risk-
adjusted present value
of future cash flows
needed to fulfil the
contract
Component representing
unearned profit the
insurer expects to earn
as it fulfils the contract
IFRS 17 – The General Measurement Model
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Key Features of IFRS 17 (continued)
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A Variable Fee Approach will be applicable to contracts with
direct participation features. The Variable Fee Approach
has the same components as the General Measurement
Model.
The difference is that the CSM can be adjusted in response
to variations in underlying items, most particularly
investment returns, such that investment return and other
relevant variations will not immediately affect profit or loss.
This will be applicable to a range of product types, including
UK style participating contracts and investment
linked/variable life insurance and annuities.
CSM
T=0
Present
Value of
Cash
Outflows
Assets
Risk
adjustment
T=1
Present
Value of
Cash
Outflows
Risk
adjustment
CSM
Initial
measurement
CSM/
Variable
Fee
Subsequent
measurement
Example: CSM responds to movement in asset values,
aligning the insurance contract liability with the value of
assets underlying the participation feature.
Con
trib
ution
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Key considerations for both life and general insurers
Issue Why is it an issue?
Disclosure There will be new line items for the income statement presentation and reconciliations which
will take time to get used to, and also significant additional disclosure requirements,
particularly to cover areas of significant judgement and the nature and extent of risk.
Difference to approaches
for other purposes, such
as capital requirements
Differences between IFRS 17 and approaches which are applied concurrently for other
purposes, such as the determination of capital requirements under Solvency II and other
regimes, are likely. For example, which contracts and which cash flows are to be included.
Reinsurance There are potential differences in measurement approach between primary insurance and
reinsurance, including that any net cost or net gain on origination of reinsurance contracts
held is to be recognised as a CSM and the Variable Fee Approach may not be applied.
Discount rates Discount rates are not prescribed, and either bottom-up or top-down approaches may be
utilised. The extent to which the illiquidity of cash flows should be reflected in discount rates
requires consideration.
Risk adjustment Unlike the specified risk margin of Solvency II, for example, IFRS 17 is principles-based,
allowing companies to set their own approach to determine the risk adjustment allowing for
management’s views on the compensation required for bearing risk.
Interaction with IFRS 9 How the insurance contract liability interacts with asset measurement will be key to
understanding and managing volatility of profits.
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Key considerations primarily for life insurers
Issue Why is it an issue?
Contractual Service
Margin
The CSM can significantly change the recognition of accounting profit:
Consistent with other industries there will be no day 1 profit from the writing of a new
contract.
The impact of changes in demographic and expense assumptions will be spread over
the lifetime of the contracts rather than posted immediately to profit in the income
statement.
Transition There will be a one-time transition exercise to the new standard, notably to determine the
CSM applicable to existing business as at 1 January 2020 (as at least one year of
comparatives is required).
The default position is for full retrospective application to determine what the CSM would
have been at the start and end of 2020 as if IFRS 17 had always applied, with simplified
approaches available if full retrospective application is impracticable.
Options and guarantees Incorporating allowance for any options and guarantees in the valuation of the fulfilment cash
flows will potentially require more complex stochastic models relative to those currently in
use.
Participating business The Variable Fee Approach should allow investment and other gains and losses to be
recognised over time through the CSM. The key considerations for any insurer will be to what
extent and how the Variable Fee Approach can be applied.
Investment components Reported insurance contract revenue is to exclude any investment component of the
premium.
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Key considerations primarily for general insurers
Issue Why is it an issue?
Applying the General
Measurement Model
If companies are not able to apply the Premium Allocation Approach for all their business,
then the General Measurement Model and all its complexity will apply.
Liability for incurred claims Liabilities for incurred claims must reflect a fulfilment cash flow measure, as per the General
Measurement Model, including a risk adjustment.
Onerous contract liability Where a portfolio of contracts is potentially onerous, companies will need to evaluate the
value of the fulfilment cash as per the General Measurement Model, and immediately
recognise a loss to the extent the portfolio is onerous.
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It is now time for action
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Many insurers that are or are going to be subject IFRS accounting will already be somewhere along the road to adopting
IFRS 17, some further than others. Now that the final standard is available, it is more imperative than ever to start
activities to implement IFRS 17:
likely business and reporting impacts. This helps to narrow down the implementation options into a clearly defined
accounting policy – with the benefit of fewer surprises for all post implementation.
Assess information and I.T. systems impact, gaps and solutions
Starting from your current insurance contracts project status and using your existing
actuarial IT reporting landscape, we will guide you through IFRS 17 system
requirements. Throughout the project we will partner with your actuarial, IT, and
reporting experts, to develop an initial, high-level blue print, with planning and budget
estimates for the full IFRS 17 project.
Analyse the business impact
IFRS 17 is principles-based and as such comes with a range of options, each with
different potential impacts on the business, as well as on the profit or loss statement.
In advance of performing large-scale implementation, companies can first assess the
After assessing the impact on your IT systems, we will work with you to identify and implement pragmatic steps to fill
any gaps identified, leveraging any Solvency II synergies we can as effectively as possible.
As the World’s largest supplier of actuarial software, we are able to offer a wide range of modular software solutions to
help in your IFRS 17 implementation
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It is now time for action
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Design, implement and test IT and reporting processes
As a result of the introduction of IFRS 17, there will be a significant change for
insurance groups in the content and structure of data captured from business units to
support group statutory and regulatory reporting. A key challenge will be to ensure
that these different types of data are available and that systems have the flexibility to
accommodate differences between Solvency II and IFRS 17.
We are an integrated consulting and software provider, and our experts provide business advice, solutions and software.
We will work with you to help specify the actuarial IFRS 17 requirements for your specific situation. We can then design,
implement and automate your actuarial reporting processes, taking into account best practice processes, and the latest
IT and software solutions.
For many insurers, the optimisation of existing actuarial processes will already be underway. However, if you haven’t yet
started to optimise your processes, there is still time and we can help you to undertake the necessary steps. And if you
are already working towards optimising your systems, we can provide an independent view to help ensure you are on
track to deliver the right processes, with the right specifications, at the right time – and crucially that it is suitable for
IFRS 17.
Finally, as experts in software development and implementation, we have developed an implementation process and
standards guide that can be adapted to best meet our client’s needs for the IFRS implementation project. And a phased
test process for predefined test cases assures the functionality and quality of the implementation.
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It is now time for action
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Employee and management training
The processes developed to report under the new insurance accounting standard
will need to be auditable. To successfully implement and embed all the changes
required under IFRS 17 insurers will need a proper understanding and buy in
across their teams.
Monitor developments
While IFRS 17 is final, there is still possibility of further development. The IASB is
establishing a Transition Resource Group later this year that will advise the IASB on
implementation issues.
Actuarial staff need to be in a position to specify necessary cash-flow modelling changes and amendments for IFRS 17.
This requires investment of time and resources into educating and training staff and management.
Whether or not this leads to any specific changes to IFRS 17, it is likely that further clarification from and guidance will
result from this feedback process. Companies will need to be aware of and adapt their implementation for such
developments.
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About Willis Towers Watson
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Willis Towers Watson is uniquely placed to help
both Life and P&C insurers interpret and
implement the new standard developed by the
IASB. We:
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Willis Towers Watson and IFRS17
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More on IFRS 17
12© 2017 Willis Towers Watson. All rights reserved. Proprietary and Confidential. For Willis Towers Watson and Willis Towers Watson client use only.
From our website
• IASB issues IFRS 17 Insurance Contracts, starting the countdown to 2021
• International Financial Reporting Standards
• How we can help you turn IFRS 17 into a success story
• Software Solutions for Life Insurers
• Software Solutions for Property & Casualty Insurers
• Solvency II One Year On
For more information about how we can help you turn IFRS 17
into a success story, please contact your Willis Towers Watson
consultant or
Richard Bulmer +44 1737 274135 [email protected]
Kamran Foroughi +44 20 7170 2743 [email protected]
Roger Gascoigne +420 226 294 449 [email protected]
Andreas Schröder +49 221 80003460 [email protected]