Adoption of IFRS 17 in Korea - what we can learn? Presenter: Chihong An 2018. 11. 19
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Global Trend of Financial Management of Insurers Strong tendency toward for fair value approaches New Paradigm Pricing & Valuation Risk Management Approach Earnings based Korea Traditional Embedded Value EV is often used for valuation of insurers Economic Valuation Economic Capital Model Korea Asset Risk Models Deterministic Actuarial Valuations Global insurers developed Economic Model based on Stochastic ALM Analysis. Liability : Fair Value (discounting at market rates) Historic Cost Accounting IASB / IFRS 17 FASB / New GAAP Korea IFRS 17 Internal Model Approach Stochastic Model UK ICA EU Solvency II Swiss Solvency Model Risk-Factor Solvency (K-ICS) Korea US NAIC RBC Singapore RBC Taiwan RBC Simple Solvency Margins Accounting Solvency Regulation 2
Global IFRS 17 Survey Recent IFRS 17 readiness survey with 93 responses from around the world. Budget estimates vary a lot between $1 million and $25 million Industry Readiness A significant part (50-70%) of the work expected to be performed by actuaries Systems for Solvency II, EV or IFRS reporting may be used as a starting point for IFRS 17 Main concerns of the respondents: Determination of the discount rate (top down, bottom up, application UFR, RP requirement) Hedging and the possible accounting mismatch Granularity of the calculations/unit of account for new business/aggregation of in force business Determination and validation of the CSM (at transition and after implementation) Complexity of the income statement and disclosures Systems and models robustness, auditability, integration in reporting chain, run-times and process time Availability of resources and timescales during the project 3 Implementation 17% Gap analysis 13% Scoping 30% No activity 40%
Trends introduced with IFRS 17 Europe Limited to about 30-45 companies Solvency II system has been in operation since 2016 and is accumulating know-how on fair value assessment (since 2001) Problem is more on per-company basis rather than national level Adoption previously thought to be simple but multitude of issues have begun to appear recently Canada/ Australia Like Korea, approaching supervisory accounting that applies to all insurers They have accumulated over 20-30 years of experience in assessing fair value Large companies are appropriately responding, but smaller companies are finding difficulties in adoption Small/medium-sized companies tends to adopt simpler approaches. Korea Know-how on fair value evaluations is in the worst situation Confusion is expected with introduction of K-ICS at the same time Necessary to invest more in adoption of proper systems at the beginning. Not enough internal resources to perform good quality of analyses 4
Industry Updates IFRS 17 Big players: Progress Most finished the impact study and started major projects of implementations. Realized a big potential capital issues and are concerned about relationship with Solvency 2. Small players: Joined Industry Implementation TF led by KIDI (Korean Insurance Development Institute). New Business: profitability perspective Key Topics Inforce: Reserve / Solvency perspective Implementation systems and processes Action Items Quick-win: Product (re-design, re-pricing) Mid-Term: System Implementation, Inforce Optimization 5
Highlights of New Business Margin Analysis (1/2) Adopted stochastic techniques and IFRS17 & Sol2 (MCEV) concept Considered all embedded options and guarantees with dynamic policyholder behavior under 1000 interest rate scenarios (for TVOG - time value of options and guarantees) Considered economic capital based on Solvency 2 SCR standard formula (for CRNHR - cost of residual non-hedgeable risk) Example of considered options and policy behaviors Options and Guarantees Policyholder Behaviors LoB Product Variable Lapse MGIR GMSB GMxB Rate Annuity Options Additional Premium/Withdrawal Protection Annuity 1 2 3 4 WL VWL Annuity VA Savings 5 Savings 6
Highlights of New Business Margin Analysis (2/2) New metrics showed significant differences Many non-variable products are significantly deteriorated by cost of embedded options and risk Variable and savings products remain relatively similar profitability Old metric s high discount rate may not be appropriate for certain products not able to fully account for negative cash flows in the later durations Protection Annuity Savings (Unit : %) UWL VWL CI Annuity VA Endow. VUL VNB (Old) 12-15 10-12 10-12 3-4 6-7 2-3 3-4 Reflecting economic cost of guarantees and insurance risk VNB (New) 5-8 11-14 6-8 1-3 3-8 2-4 4-6 7
Issues with Profitability Study Not in line with their current marketing efforts Never understanding by the distributors Difficult to escape from traditional approaches No trusts from management The results can be changed whenever the environments change. 8
Data Server Enterprise Process of IFRS 17 Data Flow Illustrations for Actuarial and Financial Process Illustrative Data Source Preparation Cash Flows Financial Process Processing Reporting Backbone Policy/Contract Asset Accounting Assumption Actuarial Actuarial Engine IFRS17 Closing System Analysis EV ACTUARIAL Others Market Data Expense Economic ESG EV Enterprise Model Profit Study Planning Governance ALM Capital CSM Acq. Cost OCI IFRS17 MV MT Profit Study Risk M. Report ALM RBC Legacy EDW Policy Transaction Asset Data Mart Assumption Mart Assumption Study Data Mart Input Policy Data Assumption Data Asset Data CSV, Binary file, SQLite DB CF Output BEL Profitability Study MCEV ALM K-ICS Accounting Mart Ledger Data Transaction Data Cash Flow Data BEL, RA Data Accounting Financial Managerial 9
Issues with IFRS 17 Process Focus on actuarial calculation engine Clear definition of each process Data conversions Governance of entire process Connectivity between processes Flexibility for intensive analysis 10
Issues with IFRS 17 Adoption Understanding the background stories of principles. Comparing with Solvency 2 Multiple accounting regimes Regulators influences Different views from different professionals 11
Potential issues after IFRS 17 Adoption Unexpectedly long transition period Too much technical approaches Too expensive to maintain the process No interests from management Re-statement of prior results Human resources 12
What we can learn? Plan early and start only when you are ready Better understanding about available options in technologies Spend a lot more time for designing the processes and testing processes Educate talented professionals (actuaries, accountants, IT professionals) Be ready to work together with different professionals Should have good supports from management Believe that winners in this game would be winners in industry 13
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