IFRS 17 Update 2nd Indonesian Actuaries Summit 21 April 2017 Kelvin Yap EY Actuarial Services, ASEAN
The objectives of today To provide an overview of main changes and rationale for IFRS17 To outline particular issues the Indonesian industry may be face To discuss operational challenges to insurers To outline the impact to the insurance industry under IFRS17 To understand what other insurers are doing Confidential All Rights Reserved EY IFRS17: latest news, implications and challenges faced by insurers 2
Agenda 1. Introduction 2. Key features of IFRS 17 3. Challenges of IFRS 17 4. Numerical Example 5. Implementation implications This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice.
01 Introduction
Why are changes needed to Insurance Accounting? IFRS17 brings insurance more in line with other accounting standards It is believed that the existing insurance contracts accounting does not provide investors, lenders and other creditors with the information they need to understand the financial statements of entities that issue insurance contracts or make meaningful comparisons between such entities. Little or no Comparability between entities IFRS 4 allows entities to maintain their existing accounting practices Current FS not comparable (1) across insurers due to different reserving practices (NPV, GPV wo PAD, GPV w PAD); or (2) across industries, eg Banking and Wealth Management even for similar products Long duration contracts measured using outdated information (eg NPV) Does not always reflect the economic and risks in a timely manner Economic risks such as options and guarantees embedded in insurance contract are not reflected (eg Minimum Surrender Guarantees) Time value of money is not reflected (eg GI Chain Ladder) Little information is given about the sources of profit reported in current period or expected in future periods (Analysis of Surplus) Accrual accounting basis Information about underwriting activity is often reported on cash / cash-like basis even when services is delivered in a different period, change in liability item which is needed to reconcile cash-based amounts to the accruals-based result of the period Confidential All Rights Reserved EY IFRS17: latest news, implications and challenges faced by insurers 5
Simplified Example: Insurance vs Asset Management accounting IFRS17 results in a more comparable P&L vs other financial institutions Simplified Example 5 Year Single Premium Unit Link, $10,000,000 Mutual Fund SPUL Initial Allocation of 97.5% OR Initial Charges of 2.5% (Asset Manager) Acquisition Cost of 1% ($100,000) which is DAC over 5 years Yr 1 UL Returns of 2.56% ($250,000) Ignore mortality, lapse Asset Management Company IFRS 15 (Revenue Recognition) Year 1 Revenue (from initial charge) 250,000 Distribution Costs (100,000) Insurance Company IFRS 4 Phase 1 Year 1 Premium Income 10,000,000 Commissions (100,000) Increase in Reserves (1,000,000) Investment income on underlying items 250,000 Comprehensive Income 150,000 IFRS 17 Year 1 Insurance Contract Revenue 50,000 Fulfilment cashflows 0 Change in RA 0 CSM amortization 30,000 Acquisition cost 20,000 Amortisation of Deferred Acquisition Cost (20,000) Incurred losses 0 Comprehensive Income 150,000 Note: IFRS 15 may require the initial charge to be spread out over several years if it is determined that the performance obligation is satisfied over time Underwriting result 30,000 Investment income on underlying items 250,000 Interest expense on insurance obligations (250,000) Net investment income 0 Other Comprehensive Income - Comprehensive Income 30,000 Confidential All Rights Reserved EY IFRS17: latest news, implications and challenges faced by insurers 6
A Standard that better meets the needs of financial statements users The new standard is expected to improve financial reporting by providing more transparent and comparable information. The new standard is also seen as more in line with other IFRS standards for other industries. Provides up-to-date market consistent information of obligation including value of options & guarantees Treats services provided by underwriting activity as revenue and expenses in comparable way to other non insurance business Reflects time value of money Single accounting approach Provides separate information about the investment and underwriting performance Reflects the characteristics of the insurance contract rather than the risk related to asset/investment activity Confidential All Rights Reserved EY IFRS17: latest news, implications and challenges faced by insurers 7
IFRS 9 (Financial Instruments) and 17 (Insurance Contracts) are highly interdependent for insurers, hence timing of the standards is aligned by the IASB IFRS 9 and IFRS 15 Effective date 1 Jan 2018 (*) Possible IFRS 9 deferred implementation date IFRS 17 IFRS 9 and 15 First IFRS 9 annual financial statements (*) 2016 2017 2018 2019 2020 2021 Potential IFRS 17 Final standard Potential IFRS 17 start of comparative period (**) Potential IFRS 17 effective date 1 Jan 2021 (**) Ongoing IASB deliberations Implementation period Reporting (*) IASB has proposed an option to either defer the effective date of IFRS 9 for insurers or to apply a temporary overlay method to mitigate the PL impacts of IFRS 9 (**) Effective date tentatively set by IASB Confidential All Rights Reserved EY IFRS17: latest news, implications and challenges faced by insurers 8
Adoption in Asia Country IFRS 17 IFRS 9 Not adopting Indonesia Taiwan Thailand China Malaysia Sri Lanka Laos Korea Philippines Japan aligned with IFRS delay in adoption aligned with IFRS delay in adoption Note 1 1 January 2019 Note 1 Note 1 1 year later than effective date of IFRS Note 2 1 January 2019 Note 2 Note 2 Note 3 Note 1 Local GAAP has not decided the date of adoption, but we are expecting the date to be later than the effective date of IFRS. Note 2 possible adoption but effective date of local GAAP is not known as of now Note 3 - IFRS is not applied mandatory in Japan, and insurance/financial instruments accounting of JGAAP are different from IFRS4/9. However, listed companies can use IFRS. Confidential All Rights Reserved EY IFRS17: latest news, implications and challenges faced by insurers 9
Key Features of 02 IFRS 17
Premium allocation approach Reserves Building block approach/ variable fee approach IFRS 17 ED Key areas of the proposed model will require Actuarial involvement Regulatory capital standards Contractual service margin Risk adjustment Definition and scope Discount rate Expected value of future cash flows Presentation / disaggregation Reinsurance Disclosure Separation Risk adjustment Liability for remaining coverage Discount rate Transition Cash flows of claim liability Financial Instruments and other accounting changes Confidential All Rights Reserved EY IFRS17: latest news, implications and challenges faced by insurers 11
Sample P&L presentation: Term Insurance Insurance Contract Revenue replaces Premium approach Actuarial Involvement A simplified statement of comprehensive income is presented below (when experience is similar to assumptions): Current IFRS 4 Year 1 Year 2 Premium Income 178,486 169,688 Claims & Expenses 252,685 105,090 Increase in Reserves - 44 Investment income on underlying items (156) 354 Comprehensive Income (74,355) 64,909 Future IFRS 17 Year 1 Year 2 Insurance contract revenue 308,183 183,461 Fulfilment cashflows 223,437 105,090 Change in RA 4,324 3,048 CSM amortization 49,358 46,228 Acquisition cost 31,064 29,094 Amortisation of acquistion cost (31,064) (29,094) Incurred losses (223,437) (105,090) Underwriting result 53,682 49,277 Investment income on underlying items 7,139 14,213 Interest expense on insurance obligations (12,852) (10,669) Net investment income (5,713) 3,544 Other Comprehensive Income - - Comprehensive Income 47,969 52,820 Reserves are zeroised at the end of year 1 Initial strain on surplus due to high acquisition expenses No initial strain, less volatile Underwriting results reflect changes in RA and CSM amortization when actual experience does not deviate from assumptions Drop in CSM amortization due to change in mortality assumptions Confidential All Rights Reserved EY IFRS17: latest news, implications and challenges faced by insurers 12
Contracts with no participation features General model overview Contractual service margin A component of the measurement of the insurance contract representing the unearned profit that the entity recognizes as it provides services PV of expected future cash inflows Fulfilment cash flows An explicit, unbiased and probabilityweighted estimate (ie expected value) of the present value of the future cash outflows less the present value of the future cash inflows that will arise as the entity fulfils the insurance contract, including a risk adjustment Risk adjustment Time value of money Future cash flows The compensation that an entity requires for bearing the uncertainty about the amount and timing of the cash flows An adjustment that converts future cash flows into current amount Best Estimate Liabilities (BEL) (very similar to GPV wo PAD) Expected cash flows from future premiums, expenses, claims and benefit payments Confidential All Rights Reserved EY IFRS17: latest news, implications and challenges faced by insurers 13
Contracts with no participation features General model Future Cash Flows Contractual service margin Risk adjustment The estimates of CFs used to determine the fulfilment CFs shall include all cash inflows and outflows that relate directly to the fulfilment of the portfolio of contracts: Current and explicit (separate from discount rate and risk adjustment) Market variables as consistent as possible with observable market prices Incorporate all available information in an unbiased manner (including trends), eg Best Estimate Possibly use stochastic models if cashflows are asymmetric Include all CFs within contract boundary Time value of money Coverage period Future cash flows Cash outflows Cash inflows Premium Acquisition costs Other expenses/taxes Premium Cash flows within contract boundary Claims payments Claims payments including claim handling cost Time Confidential All Rights Reserved EY IFRS17: latest news, implications and challenges faced by insurers 14
Contracts with no participation features General model - time value of money Contractual service margin Risk adjustment Time value of money Adjust the estimates of future cash flows for the time value of money using discount rates that: Reflects characteristics of fulfilment cash flows Consistent with observable market prices for instruments with cash flows that have consistent characteristics with insurance contract, e.g., with respect to timing, currency and liquidity Adjust observed market prices to reflect the characteristics of the liability/the factors that are relevant for the contracts, e.g., exclude irrelevant risks, estimate the rate beyond the period of observable data Consistent with other estimates used to measure the insurance contract (e.g., inflation, discount rate for participating contracts) Top-down approach or bottom-up approach Bottom Up approach possibly: Risk Free Rate + Illiquidity Premium No need to discount cash flows which are expected to be paid or received in one year or less (UPR) Together with the Future Cash Flow, this is commonly referred to as the BEL Future cash flows Confidential All Rights Reserved EY IFRS17: latest news, implications and challenges faced by insurers 15
Contracts with no participation features General model - risk adjustment Contractual service margin Risk adjustment Compensation that an entity requires for bearing the uncertainty about the amount and timing of the cash flows that arise as the entity fulfils the insurance contract RA shall be included in the measurement in an explicit way (i.e., uncertainty/pfad should not be included in the Future Cash Flows) No prescribed technique so different companies may use different techniques Disclosure on the confidence-level is required if the entity uses a technique other than the confidence level Time value of money Low frequency but high risk severity Knowledge about current estimate and and trend trend Duration of of contract Future cash flows Uncertainty due to to lack of of experience Risk Adjustment Width of of probability distribution Confidential All Rights Reserved EY IFRS17: latest news, implications and challenges faced by insurers 16
Contracts with no participation features General model - contractual service margin Contractual service margin Risk adjustment Time value of money Future cash flows At initial recognition, the CSM is defined as the negative of fulfilment cash flow, floored by zero. Purpose of recognizing a positive initial CSM: To eliminate any day 1 gains (if initial Fulfilment Cash Flow is negative / CSM is positive) Represents the unearned profit that the entity will recognize in future, as it provides services under the insurance contract. If CSM is floored by zero at inception, the insurance contract is onerous. All loss should be recognized in P&L at inception Subsequently after day 1, future changes in assumptions and experience adjustments will affect the level of CSM, instead of flowing thru P&L The level of aggregation for determining CSM is therefore a key topic as it determines the cross-subsidy between different policies. Each cohort consists of: Similar product lines with similar risks (Whole Life, Annuities, ) Contracts issued within the same year Divided into the following groups at sale: Onerous (Loss Making), Profitable and no significant risk of being Onerous, Other Profitable Contracts This could have implications on: Cross-subsidy, for eg charging a single male / female premium rate Many separate CSM cohorts to track Confidential All Rights Reserved EY IFRS17: latest news, implications and challenges faced by insurers 17
Contracts with no participation features General model contractual service margin Subsequently, the roll-forward calculation of CSM is summarized as follows: Contractual service margin Risk adjustment CSM at the beginning of the reporting period + Accreted interest Amount recognised for services provided in the period +/ Changes in the estimates of future cash flows (eg changes in mortality assumptions) = CSM at the end of the reporting period Time value of money Future cash flows Locked-in interest rate at the inception of contract is used for accreting interest. An entity should recognise the remaining contractual service margin in profit or loss over the coverage period in a systematic way that best reflects the remaining transfer of the services. For contracts with no participating features, the service represented by the contractual service margin is insurance coverage that: Is provided on the basis of the passage of time; and Reflects the expected number of contracts in force Confidential All Rights Reserved EY IFRS17: latest news, implications and challenges faced by insurers 18
Sample P&L presentation: Term Insurance Insurance Contract Revenue replaces Premium approach A simplified statement of comprehensive income is presented below (when experience is similar to assumptions): CSM at the beginning of the reporting period + Accreted interest Amount recognised for services provided in the period +/ Changes in the estimates of future cash flows (eg changes in mortality assumptions) = CSM at the end of the reporting period BEL Expected Claims Actual Claims Amounts IFRS 17 Year 1 Year 2 Insurance contract revenue 308,183 183,461 Fulfilment cashflows 223,437 105,090 Change in RA 4,324 3,048 CSM amortization 49,358 46,228 Acquisition cost 31,064 29,094 Amortization of acquisition cost (31,064) (29,094) Incurred losses (223,437) (105,090) Underwriting result 53,682 49,277 Investment income on underlying items 7,139 14,213 Interest expense on insurance obligations (12,852) (10,669) Net investment income (5,713) 3,544 Other Comprehensive Income - - Comprehensive Income 47,969 52,820 Underwriting results reflect changes in RA and CSM amortization when actual experience does not deviate from assumptions Changes in assumptions does NOT affect UW result, as it is absorbed into CSM Confidential All Rights Reserved EY IFRS17: latest news, implications and challenges faced by insurers 19
From Non-participating to Participating contracts General Model and Variable Fee model Confidential All Rights Reserved EY IFRS17: latest news, implications and challenges faced by insurers 20
Premium allocation approach (PAA) Building block approach (BBA) IFRS 17 proposed simplified accounting model overview (Applicable for policies with contract boundary <= 12 months) Liability for remaining coverage Liability for Incurred claims Expected future cash flows Expected future cash flows Time value of money Time value of money Risk adjustment Risk adjustment Contractual Service margin Expected future cash flows Pre-claims liability (unearned premium) Time value of money Risk adjustment Confidential All Rights Reserved EY IFRS17: latest news, implications and challenges faced by insurers 21
Impact of IFRS 9 Aside from IFRS17, IFRS9 (Financial Contracts) will simultaneously come in force Classification Impairment Hedge accounting (micro) Fair value through other comprehensive income (FVOCI) no longer an election but the result of two tests (Single Project Professional Indemnity and business model) No available-for-sale (AFS) for equity securities; only irrevocable election (FVOCI with no recycling) Accounting mismatches Insurance liabilities often still locked-in under current IFRS 4 All debt securities held at FVOCI or amortised cost in scope of new expected credit loss (ECL) model Significant impact on large portfolio of commercial loans (banks) A number of systems, processes, governance changes required Significant reliance on the existing credit risk modelling capabilities Less rules based More economic hedging strategies qualifying for hedge accounting (e.g., aggregated exposures, risk components) Accounting for costs of hedging Significant disclosures to tell the story Test both sides of the balance sheet to ensure IFRS 9 (assets) and IFRS 17 (liabilities) are consistent and do not result in any accounting mismatches Confidential All Rights Reserved EY IFRS17: latest news, implications and challenges faced by insurers 22
Challenges 03 for insurers
Main impact on life insurers Performance reporting Accounting for CSM Disclosures Internal accounting systems New concept of Insurance Contract Revenue very different from Premium P&L similar to an Analysis of Surplus, more complex than current accounting More stable P&L changes to assumptions no longer affect CY P&L result but absorbed in CSM Additional work to calculate CSM, including managing multiple groups (level of aggregation) and storage of initial interest rate CSM roll forward will need to be understood and explained, Significantly more information needs to be provided compared to current IFRS Additional processes and data are required to gather the disclosure information New IFRS9 and IFRS17 processes and information to be recorded will involve substantial accounting and actuarial system updates For multinational groups may help with consistency although US will be different Confidential All Rights Reserved EY IFRS17: latest news, implications and challenges faced by insurers 25
Main impact on Non-life insurers Reserving Discounting Disclosures Internal accounting systems Policies w. Term > 1 year will require using Building Block Approach (Similar to Life) Remove PAD - Moving to best estimates may make results more volatile CF > 1 year will be required to be discounted Additional process work to determine time value of money (More significant for long-tailed liability insurers) Additional process/effort More explicit margin information available for market for comparison across companies Changes, in particular for longer duration liabilities New processes and information to be recorded will involve substantial system updates Need to explain to stakeholders For multinational groups may help with consistency although US will be different Confidential All Rights Reserved EY IFRS17: latest news, implications and challenges faced by insurers 27
Some additional areas of challenges for Indonesian (life) insurers Revenue recognition Many contracts are Unit Link with contain a large investment component (RPUL, SPUL) Investment components will be stripped out, which will have a material impact on revenue Measurement model Insurers will have to use a VFA model for Unit Link contracts. This is different from the current Unit Reserve / UPR Non Unit Reserve approach and require enhancement Determination of current discount rate might be challenging due to lack of market data, and may result in multiple approaches This is different from the current GPV discount approach Regulatory changes The IFRS 17 model is different compared to Tax, OJK regulations Parts of current Indonesian GPV / RBC models can be used for the new IFRS-17, such as BEL, RA, DAC, experience studies Some components are new, such as CSM and Insurance Contract Revenue OJK / Tax / PSAK regulations may differ significantly from IFRS 17, forcing insurers to report on multiple bases Actuaries will be in high demand. In addition to Liabilities, actuaries will also be involved in Revenue Recognition We need to work together with accountants to implement the necessary changes. Actuarial Systems (Prophet/MoSes) and Finance Systems (SUN/Oracle) will both have to be enhanced Confidential All Rights Reserved EY IFRS17: latest news, implications and challenges faced by insurers 28
Numerical 04 Example
Case study: background Term product sold in Singapore, pure protection with death and TPD coverage Total 132 policies incepted since January 2016 No future new business First valuation at the end of 2016 Approach All policies are considered homogeneous, hence CSM is aggregated at product level Amortization of CSM is performed at product level by remaining coverage and number of policies in force Risk adjustment is set similarly as PAD under current Singapore RBC framework Economic assumptions remain unchanged for same calendar year Accretion of interest is calculated based on lock-in yield curve of 2016 at product level Changes related to future estimates are adjusted directly to CSM Confidential All Rights Reserved EY IFRS17: latest news, implications and challenges faced by insurers 31 Presentation title
At inception Insurance contract liabilities are equal to zero at inception Contractual Service Margin Expected contract profit Best estimate liability = - + Risk adjustment BEL = - 713 RA = 250 CSM = 463 Insurance contract liability = BEL + RA + CSM = 0 Confidential All Rights Reserved EY IFRS17: latest news, implications and challenges faced by insurers 32
Scenario 1: changes related to future estimates Changes related to future estimates are absorbed by CSM At the end of year 1 (31 Dec 2016) The company expected 126 policies to remain in force mainly due to lapse In fact, 130 contracts remain in force at the end of 2016. This is due to good lapse experience but worsening mortality experience. The company has decided to revise mortality assumptions to be heavier at the end of 2016. Inception 463 - Inception Term product (Year 1) Projected Experience end Year 1 415 adjustment435 Projected end Year 1 (109) (109) Experience adjustment Change in non-economic assumption 359 Change in noneconomic assumptions BEL (713) (769) (799) (757) RA 250 246 255 289 CSM 463 415 435 359 ICL - (109) (109) (109) (109) Analysis: CSM is expected to reduce to 415 at the end of 2016 due to amortization More contracts remaining in-force at the end of 2016 have resulted in higher CSM than expected (i.e. 435 vs 415) Heavier mortality assumption has resulted in lower CSM in order to maintain the level of ICL Overall insurance contract liabilities remain unchanged Confidential All Rights Reserved EY IFRS17: latest news, implications and challenges faced by insurers 33
Sample P&L presentation Insurance contract revenue replaces premium approach A simplified statement of comprehensive income is presented below (when experience is similar to assumptions): Current Year 1 Year 2 Premium Income 178,486 169,688 Claims & Expenses 252,685 105,090 Increase in Reserves - 44 Investment income on underlying items (156) 354 Comprehensive Income (74,355) 64,909 IFRS 4 Phase 2 Year 1 Year 2 Insurance contract revenue 308,183 183,461 Fulfilment cashflows 223,437 105,090 Change in RA 4,324 3,048 CSM amortization 49,358 46,228 Acquisition cost 31,064 29,094 Amortisation of acquistion cost (31,064) (29,094) Incurred losses (223,437) (105,090) Underwriting result 53,682 49,277 Investment income on underlying items 7,139 14,213 Interest expense on insurance obligations (12,852) (10,669) Net investment income (5,713) 3,544 Other Comprehensive Income - - Comprehensive Income 47,969 52,820 Reserves are zeroised at the end of year 1 Initial strain on surplus due to high acquisition expenses No initial strain, less volatile Underwriting results reflect changes in RA and CSM amortization when actual experience does not deviate from assumptions Drop in CSM amortization due to change in mortality assumptions Confidential All Rights Reserved EY IFRS17: latest news, implications and challenges faced by insurers 36
Sample profit signature Smoother profit signature under IFRS 4 phase 2 120 100 80 60 40 20 Comparison of profit signature - (20) Y1 Y6 Y11 Y16 Y21 Y26 Y31 Y36 Y41 Y46 Y51 Y56 Y61 Y66 Y71 Y76 Y81 (40) (60) (80) (100) Current IFRS 4 Phase 2 Confidential All Rights Reserved EY IFRS17: latest news, implications and challenges faced by insurers 37
Some practical challenges we encountered Data Availability / granularity of historical data Defining homogeneity and grouping of policies ( Level of Aggregation ) Ability to capture historical data for all periods in storage element Assumptions Setting of assumptions which are not required under the current RBC framework, e.g. split acquisition expense by directly attributable vs non-directly attributable, liquidity premium, risk adjustment, etc Storage of locked-in economic assumptions for all historical years (for CSM) Storage of non-economic assumptions for previous period Interest accreting rate basis forward rate? Calculation Mechanism Asymmetrical treatment of CSM due to experience change Aggregate level calculation complexity CSM amortization, accreting interest, etc Onerous contract treatment and its subsequent measurement Discounting approach forward or shifted spot rate? Confidential All Rights Reserved EY IFRS17: latest news, implications and challenges faced by insurers 38
Implementation 05 implications
IFRS 17/IFRS 9 High Level Roadmap Involve both Actuaries and Accountants Potential IFRS 4 Phase II final standard Jan 2018 IFRS 9 effective date* Jan 2020 Potential IFRS 4 Phase II start of comparative period Q1 2021 Potential IFRS 4 Phase II first reporting 2017 2018 2019 2020 2021 Program set up High level impact analysis General implementation vision Selected deep dive analysis 2 nd impact analysis Design smart tailored solution Solution implementation Dry run Restatements and comparatives Full phase II reporting 1 2 3 4 2 5 6 7 8 1 Central and local team structure 2 Program governance: decision making and technical support Work streams and overall plan Budget assessment Business case Impacts on statements and accounting policies, reporting and other processes of Risk and Finance, data and technology 2 nd analysis when final ED available 3 Big bang, incremental or minimum efforts Accounting & reporting choices 4 Deep dive analysis in key areas Unit of account Participating contracts Enrichment policy data Central vs. local approach Adjustment cash flow models Implementation strategy Impact on processes Assessment of data gaps and system changes 5 6 Depends on general implementation vision and deep dive analysis New data gathered, validated and stored System changes built (reports & engines) Training of Finance, Risk and other personnel 7 8 Preparation of opening equity adjustments and comparative information (IFRS 4 Phase II and IFRS 9 elements) Dry run of IFRS 4 Phase II and IFRS 9 reporting elements on 30 June 2019 numbers Confidential All Rights Reserved EY IFRS17: latest news, implications and challenges faced by insurers 42
EY has helped clients perform initial Gap analysis on a number of themes around IFRS17, to help clients prepare for the change The themes of analysis we observe.. 1. Starting question to be analyzed is the unit of account at which reporting will take place 2. Analyze how to treat participation and unit link contracts 3. Analyze different ways to enrich (policy) data (depending on unit of account) 4. Analyze the pros and cons of centrally (finance) or locally (actuarial) driven solutions to ensure an optimal implementation strategy What is the unit of account: Loss recognition CSM allocation Given the unit of account, which historically information will be available: Transition: Fully retrospectively, Moderate retrospectively, Fair Value, participating contracts Which contracts fit within the variable fee model? How to apply BBA for indirect participating contract? How to treat company profit sharing? Enrichment of data could take place at different places: Source systems Data warehouse The pros and cons should be analyzed in different areas: data, models, output, tools (e.g., reporting tools (CSM), general ledger. It should also be analyzed whether a hybrid approach is feasible (including pros and cons). Potential bottlenecks Current design for IFRS/EEV/RBC is not appropriate for the level of granularity required for IFRS 4 (unit of account) data models reporting. Additional storage and enhancements to actuarial systems will be required At transition date a number of legacy source systems will exist, which could impact the unit level of account. Within some insurers different types and variations in profit sharing exist for and within different products. All these types of profit sharing (and their variations) should be analyzed. Companies should determine first whether the optimal solution is to enrich data and results in the source systems or within data warehouses. Although the optimal solution could be source systems, probably some legacy systems can t adjusted in an appropriate way. A hybrid approach could affect auditability. In the centrally finance driven solution, more functionality is necessary with the General Ledger. This functionality is currently not available. Confidential All Rights Reserved EY IFRS17: latest news, implications and challenges faced by insurers 43
EY has helped clients perform initial Gap analysis on a number of themes around IFRS17, to help clients prepare for the change The themes of analysis we observe 5. In which way should the cash flow models (eg Prophet) and reporting (output) be adjusted? 6. Which implementation strategies can be identified? 7. What is the impact on the processes (including controls) under the different implementation strategies? 8. What accounting changes need to be considered? to ensure an optimal implementation strategy Requirement regarding cash flow models and reporting tools How could (source) systems, models and reporting tools be adjusted to required output? What are the criteria regarding target architecture (how much manual effort is acceptable)? Based on the outcome of the previous steps, the following questions should be answered: Is the implementation strategy dependent on the unit of account Which implementation steps should be performed sequentially or in parallel In which way can be leveraged on previous projects optimization? What is the optimal process (depending on the implementation strategy)? Which (new) risks and controls should be defined. Which current risks and related controls could be removed? Which part of the process could be outsourced? Accounting choices will need to be made and updated policies will need to be formalised. Examples include whether to accrete interest on liabilities through OCI or P&L, when to apply BBA, PAA, VFA, Contract Boundaries, Onerous Contracts. Potential bottlenecks Current IFRS/EV/RBC models are not sufficient to meet the requirements for IFRS4 (speed interaction level of output necessary). The number of products, source systems, models complicate the choice (s) regarding the implementation strategy. Including extra risks and controls in the closing path because of IFRS17 reporting without reducing the current risks and controls, will severely impact the manageability of the process. Prophet models to be updated to allow for changes to liability valuation methods and accounting policy decisions. Confidential All Rights Reserved EY IFRS17: latest news, implications and challenges faced by insurers 44
Potential approaches for implementing IFRS 4 Phase II 01 02 03 Minimum efforts approach Incremental approach Big Bang approach Only implement those changes that are unavoidable Focus on the changes that benefit the existing process Step by step process by which the existing infrastructure is amended towards the desired infrastructure All lines of businesses and processes are migrated to new system in a single operation Redesign the existing modelling infrastructure and process Pros Easiest to implement Built primarily on SII/RBC approach Minimal investment required Build upon SII/RBC efforts Higher flexibility of the implementation process (easier to prioritize key bottlenecks) Can be broken down in subprojects to make it more manageable Lower critical path risk Opportunity to implement the most efficient system setup Benefits of migration are realized immediately Cons Potentially does not fit the current reporting timelines Inefficient system setup Likely to have considerable manual steps, resulting in higher cost and higher risk of errors More complex setup leads to complex audit trail Takes longer to realize benefits from migration Risk of a less (cost) efficient project Complexity of the process leads to major implementation risks Huge upfront cost Critical path risk Confidential All Rights Reserved EY IFRS17: latest news, implications and challenges faced by insurers 45
Thank You! For more information, please contact: Sumit Narayanan, FIA Partner Advisory Services Sumit.Narayanan@sg.ey.com +65 6309 6452 Kelvin Yap, FIA Associate Director Actuarial Services Kelvin.Yap@sg.ey.com +65 6309 6203 Ponno Jonatan, FSAI Senior Manager Performance Improvement Ponno.Jonatan@id.ey.com +62 21 5289 5307
About EY: We have the market leading insurance advisory and actuarial practice in ASEAN 1 We have the largest insurance advisory team in ASEAN and Asia Pacific: 3 We have the most globally connected insurance advisory team: We have a very strong presence in the insurance industry in Asia Pacific with over 2,000 insurance professionals working in over 70 offices. We have a global insurance sector dedicated to offering industry insight and coordinating a network of more than 9,500 insurance professionals Our Asia Pacific team advises our clients on a wide range of advisory services, ranging from M&A transactions to operational performance improvement. Our areas of expertise include accounting compliance and reporting, financial accounting advisory services to work with regulators and private sectors on the introduction of new and revised requirements Our teams are able to connect globally and access any relevant expertise from around the globe 2 We have the largest actuarial team in ASEAN and Asia Pacific: EY s Actuarial Advisory team in ASEAN has around 30 actuaries, the largest actuarial team in the ASEAN region, serving many life and non-life insurers in all ASEAN markets. We are part of a wider Asia Pacific Actuarial Advisory team which has 300+ actuaries, and we work closely with our actuarial teams in Hong Kong, China, Korea, Australia etc. to assist project delivery in the rest of Asia Americas 3,500 insurance professionals EMEIA 3,900 insurance professionals 238 offices Actuaries 300 in Asia Pacific Over 1,200 globally Our team has worked on a variety of projects including appointed actuary work, Prophet and MoSes development, product development and regulatory approval, actuarial transformation, fund management, asset liability management, actuarial reviews, transition support, customer analytics and distribution, and model reviews Asia Pacific 2,000 insurance professionals 70+ offices Confidential All Rights Reserved EY IFRS17: latest news, implications and challenges faced by insurers 47
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