06/07/2018

IFRS 17 - CHALLENGES AND CURRENT ZEB PROJECTS


The implementation of IFRS 9 and IFRS 17 presents insurance companies with major challenges. Most of the companies subject to IFRS are already working flat out to structure the complex business and IT implementation requirements. Auditors and consulting firms, such as zeb, support insurers in designing and implementing IFRS-compliant and efficient solutions.

The new IFRS 9 accounting standard which entered into force on January 1, 2018, introduces comprehensive new regulations for the accounting of financial instruments [1]. Similarly, IFRS 17 is intended to provide internationally standardized regulations for the accounting of insurance contracts for the first time. The final IFRS 17 accounting standard was published in May 2017 [2]. The initial application is scheduled for reporting dates after January 1, 2021, comparative figures according to IFRS 17, however, already have to be prepared for 2020. The valuation methods pursuant to IFRS 17, such as the building block approach (BBA), the premium allocation approach (PAA) and the variable fee approach (VFA), represent a paradigm shift in the assessment of insurance contracts with the objective of increased comparability of annual financial statements and, at the same time, a more economic view on insurance contract accounting and hence on profit measurement.

Overview of IFRS 9 and IFRS 17 schedule

Figure 1: Overview of IFRS 9 and IFRS 17 schedule.


The implementation of IFRS 17 represents a major effort for the insurance industry that will tie up internal and external resources prior to the initial application and beyond. Insurance companies will have to face the following main challenges during the implementation of IFRS 17:

 

  • New valuation models for the valuation of technical provisions. The final standard contains three models for the valuation of insurance contract liabilities: the building block approach (BBA) as a general model, the simplified premium allocation approach (PAA), especially for short-term contracts, and the variable fee approach (VFA) for contracts with participation features. The application of these valuation models require cash flow projections which must be prepared and processed by means of appropriate actuarial methods. For many portfolios, cash flow projections need to be performed using stochastic modelling techniques. Yield curves for discounting have to take into account the characteristics of the insurance cash flows and, in particular, consider their illiquidity characteristics. The risk adjustment for non-financial risk is added—to account for the uncertainty as to the amount and timing of the cash flows. In particular, the yield curves and the risk adjustment differ from those that we have seen under Solvency II.
     
  • Comprehensive reporting requirements (esp. for notes). Insurance companies are faced with increased reporting requirements for external disclosure. In particular for the notes, additional information needs to be stated, such as the composition of the insurance contract liabilities at the reporting date, the reconciliation of the development of the insurance contract liabilities in the reporting period, the choice of valuation methods, assumptions and premises underlying the valuation model and the estimations, as well as the (scope of) risks resulting from the insurance contracts.
     
  • Higher level of data granularity. The IFRS 17 standard requires a more granular level of calculations than, for instance, Solvency II. The standard sets the insurance contract group as the relevant unit of account. Insurance contract groups include those insurance contracts of a portfolio (consisting of contracts subject to similar risks and which are managed together), that are issued within a period of no more than one year, and that are either profitable, onerous or have a significant probability to become onerous. The onerous contract test will play a crucial role in defining insurance contract groups. Granular data used in actuarial pricing and a more comprehensive cost allocation will be the key factors. As the risk adjustment is to reflect the degree of diversification benefits the company takes into account when determining the compensation required for bearing the risk of the amount and timing of cash flows, allocations of risk adjustments to the unit of account will have to be defined.
     
  • New business and IT processes. IFRS 17 entails fundamental changes for the cooperation between actuarial services, accounting and IT. At the same time, the area of ‘scenario and analysis capability of results before posted in the main ledger’, assumes a new role in the annual financial statements process. These significantly increased requirements for data storage and processing necessitate a high level of automation of the processes.

 

Currently, zeb is co-managing an IFRS 17 implementation project at a large European insurer and supports this project in various business specialist and IT expert roles. At the same time, zeb continues to develop its own IFRS 17 subledger solution called zeb.control.IFRS 17. The following slide highlights the business process covered by zeb.control.IFRS 17:

Process zeb.control.accouting - IFRS 17.

Figure 2: Process zeb.control.accouting - IFRS 17.


Benefit from our offer of a comprehensive range of services from a single source: we provide all aspects from an integrative business perspective and process support to the technical implementation. Solving your IFRS 17 issues with support from thought to action—that is what the team of zeb can offer you.


[1] The IASB allows insurance companies a prolonged IFRS 9 implementation phase in order to prevent an accounting mismatch caused by the staggered entry into force of IFRS 9 and IFRS 17.

[2] See IASB homepage (https://www.ifrs.org/projects/2017/insurance-contracts/#published-documents, May 2018).


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