The Actuary conducted a survey sponsored by Moody’s Analytics in the summer of 2020.
The survey sought views of actuarial practitioners on IFRS 17 preparedness. Results indicate that workstreams related to implementation are mostly set in motion, with many firms making progress in areas including contract grouping and discount rates. Firms have much to do before progressing to other aspects of implementation, such as preparing a business plan based on IFRS 17. Most respondents have yet to recalibrate KPIs under IFRS 17. The survey explored several key areas:
1.0 Risk adjustment
For many firms, decisions around the risk adjustment are not yet finalised. However, respondents offered insights on the expected methodology, calculation, timings, and disclosures. A third of respondents had yet to confirm their methodology. Of those that were further progressed, the cost of capital was most popular for general insurers – but the margins/provisions for adverse deviation were most popular for life insurers.
The risk adjustment process is complex, and most respondents plan to do the calculation off-cycle, sometimes with approximations. Combined with methodology choices, this suggests firms plan to take advantage of existing processes wherever possible. Most firms appear to be targeting a risk adjustment at a similar level to the current IFRS 4 Provision for Adverse Deviations (PAD).
2.0 Discount rates
IFRS 17 allows for two different approaches to yield curve construction and discounting – the top-down approach and the bottom-up approach. Results imply that the industry has not reached a consensus. There is likely to be a wide variation in discount rate methodology on the go-live date.
It is natural for companies to gravitate to whichever is closest to their existing approach, such as the one adopted for regulatory reporting. This may explain why the dominant approach to estimating the default allowance is to use historical default rates and transitions – the approach used to calculate the fundamental spread in Solvency II.
3.0 Contractual service margin (CSM)
The CSM is arguably the most complex part of the calculation under IFRS 17, and the survey results reflect this. While there appears to be a consensus around the grouping approach for the purpose of calculating the CSM, questions and concerns remain. The results suggest firms will need to choose approaches that are most appropriate for their businesses, and offer robust justification for their choices to auditors.
4.0 Transitional measures
The challenges of implementing a full retrospective approach on transition were reflected in the results, with most respondents stating that they will use a combination of approaches.