IFRS 17 Preparedness Report: Executive summary
The Actuary and Moody’s Analytics conducted a survey to seek actuarial practitioners’ views on IFRS 17 preparedness
The IFRS 17 preparedness survey was carried out in Q2 2021 and explored several key areas of methodology, aiming to capture a sense of the progress made on implementation. Highlights from the report, including some comparisons to the Q2 2020 survey, are noted here.
IFRS 17 allows for different approaches in risk adjustment (RA) calculation, and this has been refined since last year’s survey.
With parallel reporting looming, one third of respondents have still not finalised their methodology choice. Of those that have, the cost of capital remains most popular for general insurers; in a change from the margins/provisions for adverse deviation last year, Value at Risk is most popular for life insurers.
Most respondents will calculate the RA off-cycle, or off-cycle with some form of approximation. This suggests firms are considering IFRS 17 in the context of the wider reporting cycle and are planning to leverage existing processes.
IFRS 17 allows for two approaches to yield curve construction and discounting: top-down and bottom-up. The results suggest we will see both in the first set of financial statements published under IFRS 17. However, the bottom-up approach (where the discount curve is constructed by adding an illiquidity premium onto the risk-free curve) is most popular, with two thirds of participants choosing it.
Given the bottom-up approach’s popularity, it is surprising that only a quarter of respondents envisage using liquidity buckets – the discount curve should reflect the characteristics of the insurance contract, and liquidity buckets provide one way to do this. Perhaps the approach to classification is deemed too subjective or firms are adopting a similar approach to the volatility adjustment under Solvency II (currently under review).
Contractual service margin
The contractual service margin (CSM) is a complex part of the calculation under IFRS 17, and a consensus has not been reached on several aspects. One important area is coverage units where there is still uncertainty around the appropriate definition for many products. Another important area is contract grouping, where most firms intend to have additional CSM groupings beyond the level at which the CSM is calculated to support internal management reporting.
Implementation planning
Many firms expected to make significant progress over 2021, but this has not materialised. Firms are at a similar stage to last year regarding end-to-end dry runs, producing business plans under IFRS 17 and reporting sensitivity analysis. This suggests implementation has been harder than expected, or that the IFRS 17 delay was used to re-plan and revisit methodology, calculation and implementation decisions rather than push ahead, or that COVID-19 delays were greater than anticipated.
Transitional measures
Firms are finding more barriers to implementing the full retrospective approach and are opting to use the modified retrospective and fair value approaches.
Business readiness and concerns
There is more detailed consideration of actuarial cash flow models, with many firms indicating that more dramatic changes are required than were expected last year. This year, many more opted for outsourced or vendor-packaged solutions over in-house solutions, again suggesting implementation has been harder than anticipated. Concerns remain in areas such as reinsurance, coverage units and interim financial reporting.
Accounting
Respondents offered useful insights on calculation and consolidation challenges, frequency of reporting and disclosures.
Firms experience foreign exchange challenges. They also face challenges such as dual CSMs driven by different assumptions, intercompany transactions and contract grouping.
Respondents with more than one consolidation level prefer the step-by-step approach over the direct approach. Most plan to use a thin general ledger approach, with the detailed calculations for IFRS 17 being produced in a subledger or actuarial system.
Many of these challenges require more granular calculation and reporting systems that can consolidate on multiple levels.
We hope you find this report insightful. Please contact Moody’s Analytics representatives for more information.
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