IFRS17 System Implementation in Korea

Transcription

1 September 2018 IFRS17 System Implementation in Korea RNA Analytics Ltd All rights reserved. 1

2 TABLE OF CONTENTS Section A: General Section B: IFRS17 System Implementation in Korea Section C: Conclusion Q&A RNA Analytics Ltd All rights reserved. 2

3 Section A : General RNA Analytics Ltd All rights reserved. 3

4 New Era of Reporting in the Insurance Industry Unprecedented changes in accounting standards and regulatory requirements of the global insurance industry (1) New accounting standards: IFRS 17 Insurance Contracts (Currently, IFRS is used in about 170 jurisdictions). (2) New solvency requirements: Solvency II, ICS, PBR, C-ROSS, etc. IFRS 17 PBR Solvency II C-ROSS ICS Source: IASB (2018) - Countries where IFRS Standards are required for domestic public companies (cf. US IFRS standards are required or permitted for listings by foreign companies, Japan IFRS Standards are permitted but not required for domestic public companies) RNA Analytics Ltd All rights reserved. 4

5 Accounting & Regulatory Changes in the Korean Insurance Industry Two major changes: IFRS 17 1) and K-ICS IFRS 9 Deferred for Insurance company until Global IFRS insurance contracts project starts EU Solvency II effective Final standards IFRS 17 IFRS 9 effective IFRS 17 effective Korea Financial crisis IFRS Full adoption (2011) IFRS17 & K-ICS (2021) 1 IFRS 17 Announcement of IFRS 17 standards in 2017 and effective in Using current estimates and assumptions that are consistent with market information - New components (ex. RA 2) and CSM 3) ) - Changes in income statements / Disclosure IFRS 17 Preparation Committee (March 2017, FSC/FSS 4) ) - Preparing for IFRS 17 implementation of insurance companies 2 New solvency scheme Solvency II went live in the EU in 2016 Korean regulation authorities plan to strengthen and/or change the current RBC 5) system to the ICS 6) - FSS is working on the project of K-ICS. 1) IFRS17(International Financial Reporting Standard - Insurance Contracts) 2) RA(Risk Adjustment) 3) CSM(Contractual Service Margin) 4) FSC (Financial Services Commission), FSS (Financial Supervisory Service) 5) RBC (Risk Based Capital) 6) ICS(Insurance Capital Standard) RNA Analytics Ltd All rights reserved. 5

6 Difference between Korea and EU Unlike EU insurers that have already implemented Solvency II, Korean insurers are facing a challenge in preparing for IFRS 17 without prior experiences in implementation of the corporate model. Current GAAP & practice Solvency scheme New GAAP EU insurers (1) MV and/or historical costs (2) MCEV/EEV Solvency II IFRS 17 But, There will be difficulties in preparing for P/L? 2021 Korean insurers (1) Historical costs (2) TEV/EEV? No Solvency II/ICS? IFRS 17 & K-ICS RNA Analytics Ltd All rights reserved. 6

7 Considerable Burden Korean insurance companies are expected to prepare for various types of new accounting standards and solvency requirements: IFRS 17, K-ICS, new statutory accounting principles, current statutory accounting principles and tax accounting. Not enough capacity to prepare for all the changes IFRS 17 K-ICS ( 新支給餘力制度 ) Insurer New SAP ( 新監督會計 ) Current SAP / RBC ( 現監督會計 / 制度 ) Tax Accounting? ( 稅務會計 ) RNA Analytics Ltd All rights reserved. 7

8 Summary of IFRS 17 Preparation by Korean Insurers in 2016 and 2018 Actively conducting IFRS 17 implementation projects since Companies have been under pressure to prepare for IFRS 17 by regulatory authorities. - Companies have recognized the importance and enormous impact of IFRS 17. (1) Companies have separate teams for IFRS 17. (2) However, some small companies have not started IFRS 17 projects due to various reasons. ~ 2016/ ~ Current (2018) - Financial Supervisory Service (FSS) requested Korean insurers to prepare for IFRS 17 by Few Korean insurance companies started IFRS 17 projects around 2015/ Most companies were inactive in starting preparations for IFRS Many companies were complacent about the capability of existing actuarial and finance system. - This has resulted in a lack of IFRS 17 experts in the market. - FSC/FSS created IFRS 17 Preparation Committee in 2017 and their role is to monitor the readiness of each company and its project progress. - Most companies have launched IFRS 17 projects. However, project progress depends on many factors (e.g. starting time, actuarial software, work scope, consulting firm, etc.) - Most companies are active in preparing for IFRS 17 but face a number of difficulties. (e.g. extremely high demands for consultancy but there are a limited number of consulting firms to meet the demand) - Recognized the comprehensiveness of the IFRS 17 projects. (a company-wide project including not only accounting and actuarial areas but also IT) RNA Analytics Ltd All rights reserved. 8

9 Section B : IFRS17 System Implementation in Korea RNA Analytics Ltd All rights reserved. 9

10 Approach to IFRS 17 Implementation: (1) Holistic Approach To know is one thing, to put it into practice is another. Holistic approach is to be applied from the perspective of the company as a whole. However, it is very difficult or impossible to perform various projects or tasks simultaneously. IFRS 17 task force team Actuarial/Accounting/RM teams Cross-functional collaboration External consulting resources Training & Retention People System Actuarial s/w and models Data mart / Assumption management Accounting system Governance system Other related IT: HW & SW Company policy Processes Accounting and actuarial policies (e.g. IFRS 17 transition policy, IFRS 17 closing policy, etc.) Various related methodology and/or guideline IFRS 17 closing process Assumption management process Various related processes with R&R: Planning, Pricing, ALM, Risk management, K-ICS, etc. RNA Analytics Ltd All rights reserved. 10

11 Approach to IFRS 17 Implementation: (2) Phased Approach They have recognized that there are too many issues to be solved. - Accounting / actuarial consulting firms cannot provide sufficient solutions for IFRS 17 issues at the Phase 1. - Companies have difficulties in making decisions on accounting/actuarial policies. Therefore, we need to take into consideration the time needed to perform the Phase 2 tasks to complete the IFRS 17 project. Phase 1 Phase 2 + α Tasks Analyze requirements Analysis and Design System Development (Phase 1) Set up processes & policies System modification, etc. Go live Implementation of IFRS 17 & ALM IFRS 17 accounting and actuarial requirements Assumptions study IFRS 17 system analysis and design according to requirements IFRS 17 modeling (BEL/RA/CSM) Other systems (ALM and Assumptions) Set up processes & policies - Accounting - Actuarial - Operation Modify systems Test calculation for IFRS 17 results Start reporting under IFRS 17 Develop other related systems including accounting system RNA Analytics Ltd All rights reserved. 11

12 What They Are Doing in Korea? System Projects FOCUS on system implementation: Currently, Korean insurers are carrying out IFRS 17 and related system projects. Before IFRS 17 release After IFRS 17 release Current Major Tasks Impact analysis (Top insurers) Master plan project (Gap Analysis) Master plan project (Small & medium sized insurers) IFRS 17 accounting and actuarial requirements ALM & K-ICS system Other systems IFRS 17 accounting hub system Liability modeling (Cash flows) IFRS 17 modeling (RA/CSM, Movements) IFRS 17 detailed requirements Study on revised ED IFRS 17 system Asset modeling (MV) / of IFRS 17 (BEL/RA/CSM) ALM system 1 st priority : IFRS 17 & ALM systems Focus on research & plan IFRS 17 (May 2017) K-ICS, Hedging, etc. Governance and workflow automation system Data mart / Assumptions management system Operational processes, R&Rs, etc. Focus on IFRS 17 & ICS System RNA Analytics Ltd All rights reserved. 12

13 Key Issues (Korean Cases): System Projects for IFRS 17 & Others Leading companies in Korea have been developing systems for IFRS 17 and/or other purposes. - To build and stabilize IFRS 17 related systems, a substantial amount of time and investment is needed. Major tasks Issues 1 Scope? IFRS 17 only vs IFRS 17 & Others (ALM, K-ICS) System Development Analysis on IFRS 17 Requirements (Accounting & Actuarial) 2 3 Which system existing actuarial S/W or in-house S/W Too many issues! Need to determine the policies System Methodology Process & Governance (w/ people) Business Process Analysis and Redesign 4 Set up the processes R&Rs Governance, Automation & Security 5 How to prepare? RNA Analytics Ltd All rights reserved. 13

14 Issue 1: Scope of Systems (Korean case with R 3 S 1) suites and LH 2) ) Most leading companies want to develop one consistent system for various purposes including IFRS 17, ALM and K-ICS. They want to prepare for the new accounting and solvency scheme simultaneously, if possible. Development Scope Assumptions Assumptions for 5 Assumptions Using R 3 S Liability model (LAT 3) / EV 4 ) IFRS 17 model IFRS 17 methodology ALM 5) 2 nd Stage or in the future - IFRS 17 accounting HUB, ERM 6) System 8 R³S Process Manager 6 Hedging K-ICS, ORSA 7), etc. 7 Data mart Using LH Streamline work processes using R³S Process managers 1) R 3 S (Risk, Regulation, Reporting Solution: new name of AFM), 2) LH(Leading Hedge): hedging system, 3) LAT(Liability Adequacy Test), 4) EV(Embedded Value), 5) ALM(Asset Liability Management), 6) ERM(Enterprise Risk Management), 7) ORSA(Own Risk and Solvency Assessment) RNA Analytics Ltd All rights reserved. 14

15 Issue 2: Which System? (System Requirements) Korean insurers consider the following: (1) IFRS 17, solvency and capital management requirements: K-ICS (Solvency II), ALM, hedging, etc. (3) S/W performance (Speed), system maintenance (4) Governance, workflow automation, etc. IFRS 17 BEL / TVOG RA / CSM Other outputs for F/S Dynamic Modeling ALM, K-ICS etc. Market Value Modeling Dynamic Decision Modeling Solvency II or ICS modeling Hedging system S/W performance Speed Governance & automation Job scheduling, Workflow authorization, Audit trail, Security, Auditability, etc. RNA Analytics Ltd All rights reserved. 15

16 Issue 2: Which System? (1) suitable for IFRS 17 & ALM (MV)? R³S IFRS 17 Structure: (1) BEL, RA, CSM (2) Initial and subsequent measurements MODEL 3 IFRS 17 Calculation Model Main IFRS Model Calculation of IFRS 17 results by cohort 1) Data Layer IFRS Calculation of IFRS 17 Output PDL 2) Cash flow by cohort Cohort 1) Cohort Calculation of RA MODEL 1 Cashflow Model MODEL 2 Risk Adjustment(RA) Model contracts Data Layer Data Layer BEL Calculation (including FoG) CF_Layer RA 4) _Layer RA Calculation PV_Layer 3) PV_Layer 1) Cohort: Group of Contracts, 2) PDL: Projected Data Layer, 3) PV_Layer: Generation of premium and reserve, 4) RA: Risk Adjustment RNA Analytics Ltd All rights reserved. 16

17 Issue 2: Which System? (2) Dynamic Decision Modeling for IFRS 17/ALM/ICS Dynamic Step by Step Processing - The methodology expected to be required for cash flow calculation complying with IFRS17, Solvency II and/or ICS. Examples: development of an integrated model for dynamic decision Reflect redistribution process between assets / liabilities(crediting rate) Modeling for insurance contracts with dynamic features (e.g. discretionary cashflow, etc.) Reflect strategic asset allocation (SAA) (e.g. ALM) Implement method of dynamic decision (Management actions, etc.) The following is an example of life insurance company RFP that recently selected IFRS17 system builder. (the model must be implemented using the step-by-step methodology in order to calculate the cash flow required for the following tasks, ) [It is expected to be necessary for regulatory response from various viewpoints.] Step-by-step processing is necessary. RNA Analytics Ltd All rights reserved. 17

18 Issue 2: Which System? (3) Comparison between R-B-R and S-B-S A. Record by Record Processing CFs CFs CFs CFs Record 1 Record 2 Record 3 Endowment IIP 31/12/2013 IP IP IP 31/12/ /12/ /12/2016 IP 31/12/ Most Korean insurers have used this method for cash flow calculation models such as EV and LAT. - Model structure and creation is relatively easy. Advantages : The speed is fast and this method requires relatively small HW resources compared to the Step-by-Step method. Disadvantages : This method is very vulnerable to changing regulatory responses in the future such as IFRS17 or ICS/Solvency II etc. (e.g. It is impossible to calculate cash flows for critical requirements such as management actions.) RNA Analytics Ltd All rights reserved. 18

19 Issue 2: Which System? (3) Comparison between R-B-R and S-B-S B. Step by Step Processing CFs CFs CFs With profits fund Decisions Liabilities Data Assets IIP 31/12/2013 IP 31/12/2014 IP 31/12/2015 IP 31/12/2016 RNA Analytics Ltd All rights reserved. 19

20 Issue 2: Which System? (4) - S/W Performance (Speed) Issue Solution For IFRS 17, companies should handle a large amount of data to produce financial statements and disclosure items and meet the closing deadline. In addition, they have to run more stochastic models and income statement analysis compared to their past practices. Therefore, actuarial software speed and performance are crucial in addition to H/W speed. The company has to perform POC to check the solution performance with the functionalities based on IFRS17 and ICS/Solvency II in the future (e.g. dynamic modeling) [POC Example1: System Performance Test Speed with functionality] - Objective : To verify computing speed and functionality considering IFRS17 and ICS/ALM requirements - HW Environment : x86 server 12 core - The followings can be used to validate the performance and functionalities by the company. No Run Item Runtime 1 Annuity_BEL_det 10 million records (Deterministic) 17 min 2 Annuity TVOG 1 million records(1000 Scenarios) 3 hr 27 m 3 Annuity RA 1 million records 59 min 4 BEL movement 15 year assumption 1 million records 5 BEL movement - MP change 1 million records 6 BEL movement lapse rate change 1 million records 11 min 7 BEL movement mortality rate change 1 million records 8 BEL movement fund ratio change 1 million records * subject to change based on the testing conditions RNA Analytics Ltd All rights reserved. 20

21 Issue 2: Which System? (4) - S/W Performance (HW Scaling Impacts) Issue Solution For IFRS 17 closing, we expect that a much larger amount of data will be handled and more information will be computed using increased IT H/W resources. When they use their H/W resources, performance should linearly increase depending on the H/W usage. The company needs to check the solution showing that performance improves linearly as H/W size (# of cores) increases. [POC Example2: System Performance Test - Linearity] - Objective : To verify linear scalability of R 3 S models - HW Environment: x86 server 12core vs HPC 80core No Run Item 12core HPC(80core) 1 Annuity_BEL_det 10 million records (Deterministic) 17 min 1 min 58 sec 2 Annuity TVOG 1 million records(1000 Scenarios) 3 hr 27 min 17 min 53 sec 3 Annuity RA 1 million records 59 min 5 min 6 sec 4 BEL movement 15 year assumption 1 million records 5 BEL movement - MP change 1 million records 6 BEL movement lapse rate change 1 million records 11 min 2 min 9 sec 7 BEL movement mortality rate change 1 million records 8 BEL movement fund ratio change 1 million records * subject to change based on the testing conditions RNA Analytics Ltd All rights reserved. 21

22 Issue 3: Too Many Issues in Defining IFRS 17 requirements Who will lead the IFRS 17 project: insurance company vs accounting/consulting firm? Analysis on IFRS 17 requirements (Phase 1) - Scope unbundling - Level of aggregation - Measurement model (BBA, PAA, VFA) - Measurement on initial recognition - Subsequent measurement - Reinsurance - Onerous contracts - Disclosure - Transition, etc. Big4 IFRS 17 Modeling (Actuarial S/W) - BEL modeling - RA modeling - CSM modeling - Movement analysis - Reinsurance modeling - Outputs for financial statements - Dynamic Modeling Additional study (Phase 2) - Level of aggregation - RA (confidence level) - Grouping for CSM - Monthly or Quarterly closing? - Assumption updates - Expense study - Others (e.g. transition method, discount rate, reinsurance) Insurer [Implication] (1) Insurance companies have to continue researching IFRS 17 and develop their methodologies until (2) They need to hire experts and train their employees to build a strong internal IFRS 17 team. RNA Analytics Ltd All rights reserved. 22

23 Issue 4: Set up processes & final transitional policies Closing processes for IFRS 17 and/or business processes are to be reviewed and established. In addition, the company needs to find out the optimal accounting & actuarial policies for IFRS 17 transition. Based on the new processes and policies, the systems developed in phase 1 need to be modified. Task Analyze requirements Analysis / Design System Development (Phase 1) Set up processes & policies System modification, etc. Go live Implementation of IFRS 17 & ALM IFRS 17 accounting & actuarial requirements Assumption study IFRS 17 system analysis & design according to requirements IFRS 17 modeling (BEL/RA/CSM) Other systems (ALM, Assumptions) Set up processes & policies - Accounting - Actuarial - Operation Modify systems Test calculation for IFRS 17 results Start reporting under IFRS 17 Develop other related systems including accounting system [Implication] (1) Need to perform more pilot operations and review the financial results with the IFRS 17 system to minimize potential errors after (2) Additional work will be necessary to determine their accounting and actuarial policies. RNA Analytics Ltd All rights reserved. 23

24 Issue 5: Governance and Automation For IFRS 17 closing, companies want automated process and monitoring. Also, access permissions should be managed according to their internal policies for the internal control and external audit purposes. Some leading companies have started to recognize the necessity of tools for governance and/or automation. R³S Process Manager RNA Analytics Ltd All rights reserved. 24

25 Section C : Conclusion RNA Analytics Ltd All rights reserved. 25

26 Conclusion: Implications from the Korean experiences They don t have enough time to prepare for IFRS 17, ALM and K-ICS. A considerable amount of time and investment are necessary to build and stabilize IFRS 17 related systems and processes. What is your decision? Tasks Scope of system development System selection Decisions on accounting policies and methodologies Business process analysis and redesign Issues Scope IFRS 17 only vs IFRS 17 & Others (ALM, K-ICS) Which system existing actuarial S/W vs in-house S/W Too many issues insurance company vs accounting firm? Set up the processes Implication One consistent model for IFRS 17, ALM, K-ICS, etc. System requirements - IFRS17 & ICS - POC for dynamic modeling & speed to check IT resources Insurer: Strong team w/ active research & training (Accounting firm: advising) Company-wide cooperation to prepare - Start immediately! Governance, automation and security How to prepare? 5 Separate systems are necessary for internal control for IFRS 17 & ICS RNA Analytics Ltd All rights reserved. 26

27 Conclusion: Key items to consider It is critical to get started as early as possible. Project plan Technology Internal people Professional support with IFRS 17 / ICS Accounting/Actuarial methodology Sufficient budget Executive support Holistic and phased approach Considering the new solvency scheme, if necessary Proper solution for IFRS17/ICS/ALM w/ data mart, governance system Team building including hiring experts Training, retention plan, etc. Obtain good external experienced experts Detailed requirements and decision making within the time schedule Sufficient budget for projects and IT resources (H/W, S/W) Management s early attention and full support to IFRS and ICS/Solvency II projects RNA Analytics Ltd All rights reserved. 27

28 Appendix: Sample of IFRS 17 Implementation Schedule Insurers need to execute system build-up and various business tasks to prepare for IFRS 17 and K-ICS, aiming for completion by the end of 2019/2020. Korea Category '15 '16 '17 '18 '19 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q '20 '21 IFRS Roadmap Final IFRS 17 Apply IFRS 9 (May 2017) present IFRS 17 effective IFRS 17 System Build-Up Liabilities (IFRS 17 & others) MP 1 Detailed Design System Build-Up Accounting MP Detail Design Test System Build-Up Test Stabilization & Upgrade Maintenance Other System Build-Up ALM, Hedge, etc. MP Detailed Design Governance, Automation, Assumption management, etc. System Build-Up MP Detail Design Test or operation System Build-Up Test Stabilization & Upgrade Planning /RM Improve planning & performance management processes / Reform organization and R&R / ERM Business Tasks Product Channel Impact assessment MP Improve product pricing methodology / Monitoring profits(csm) Improve expense management / Change commission policies & profit G/L Assets Change asset portfolios / ALM This is a sample schedule restructured based on some Korean cases. 1) MP: Master Plan project RNA Analytics Ltd All rights reserved. 28

29 End of Document RNA Analytics Ltd All rights reserved. 29