Servaas Houben considers how IFRS 17 principles could benefit insurers in the Caribbean – and what European insurers could learn from the region when it comes to implementing the standard
While some Caribbean insurance companies have expressed their commitment to implementing IFRS 17, the overall attitude towards the standard from local actuarial and accounting professions and regulators in the region remains unclear. This can be seen in the relatively limited number of local IFRS 17 resources available, and the limited guidance from local central banks.
Non-public insurance companies in the Caribbean are not required to report under IFRS, and some will wait for other regions’ experiences with the standard to emerge before deciding on their implementation approach. However, not implementing IFRS 17 principles might be a missed opportunity – and, equally, Europe may have a few things to learn from the Caribbean.
Challenges for the Caribbean
One of IFRS 17’s central concepts is the use of current, preferably market-based, data – for example in the setting of discount rates and the estimation of future cashflows and scenarios. Furthermore, stochastic modelling is sometimes necessary. These requirements pose less of a challenge for major economies, as access to financial markets provides information on market instruments, and they also tend to have more data available on insurance risks such as mortality. In addition, the populations in these economies tend to be larger, outliers tend to have less of an impact, and there tends to be more historical data available.
“Full implementation might be overkill for Caribbean insurance companies, but the standard’s underlying principles are still valuable”
Collecting current data is harder in smaller countries. Financial markets either don’t exist, as there is no local stock exchange, or are highly illiquid, as provision of local government bonds to the market is irregular and rare. Bonds that are issued tend to have shorter duration and not to match the liability duration of life companies. Mortality information can also be difficult to obtain and may be volatile due to smaller population sizes. As a result, some companies apply mortality tables from different geographies – for example, ENNIA Aruba uses Dutch mortality tables. Additionally, combining mortality data from different nations might not work as well as it does in Western Europe, where the practice is common, because the longevity trend is less homogeneous in the Caribbean.
Fortunately, IFRS 17 is a principle-based standard that allows for some leeway in implementation. The phrase “without undue cost and effort” is repeated several times in the standard; depending on the country or company’s size and circumstances, there is room for simplifications and shortcuts. For example, when it comes to the requirement to consider the full range of possible outcomes, it is possible to make shortcuts by carrying out simple modelling or reducing the parameters used (IFRS17.B39). IFRS 17 also allows for several application approaches for current assumptions, ranging from the preferred market/public available data to company specific data and expert judgment (IFRS 17.B82). This allows similar market instruments to be used as proxies for missing market values. For example, when the local currency is pegged to a foreign country’s currency such as the US dollar, data from that foreign country could be incorporated when estimating local market and economic parameters.
Combining worldwide or regional demographic data with local data can also help. More details on how this might be achieved can be found at bit.ly/Pricing_for_Mort. At a high level, the worldwide longevity trend is clearly present in the Caribbean. An approach that combines local and worldwide data would likely still result in a more locally suitable mortality table than many companies’ current approach of simply using mortality tables from another country, which may have a very different shape to local mortality.
What can Europe learn from the Caribbean?
In Europe, many firms have been preparing for IFRS 17 by building on existing Solvency II frameworks and methodologies. Given the similarities between the two frameworks, this is logical, reducing the time and cost involved in implementing IFRS 17. However, Solvency II, which started as a principle-based regime, has become rules-based over the years (particularly the standard formula). The level of detail and amount of legislation and documentation involved have become overwhelming. IFRS 17, in contrast, remains principles-based; the June 2020 standard, with amendments, stands only at 99 pages. This means judgment is required, allowing for different approaches to, for example, the IFRS 17 risk adjustment compared to Solvency II risk margin. Under IFRS 17, capital structure and risk appetite can change over time; this is not possible under the Solvency II standard formula. A mere replication of Solvency II for IFRS 17 purposes might therefore cause an insurer to miss the additional insights that IFRS 17 can bring.
As Caribbean countries don’t fall under the Solvency II regime, they may be more open-minded and able to start from scratch when it comes to IFRS 17. From industry experience and looking at European thought leadership around IFRS 17, Solvency II seems to have an anchoring bias effect, with insurance companies using their Solvency II setup as a starting point and checking whether it is IFRS 17 compliant, rather than starting from an IFRS 17 perspective and checking whether one of the existing reporting frameworks (such as Solvency II, IFRS 4, local General Accepted Accounting Principles, or economic capital) could be leveraged. European insurance companies therefore face the risk of IFRS 17 becoming a ‘Solvency II + add-on’ framework, instead of a completely new framework that provides new insights.
A valuable exercise
IFRS 17 implementation has been daunting for all insurance companies. Fortunately, its creators were mindful of companies’ different sizes and sophistication levels, and the different levels of information available to them; the phrase “without undue cost and effort” gives smaller insurance companies and countries some license to implement a version of the standard that is fit for purpose and proportionate to local circumstances.
For companies that are not required to implement IFRS 17, whether to do so is up to them. Full implementation might be overkill for Caribbean insurance companies, but the standard’s underlying principles are still valuable. Local regulators, actuaries and other stakeholders should be aware of these principles and promote them for the benefits of policyholder protection and public interest, in line with the Actuaries’ Code.
For our part, European insurance companies should be careful not to interpret IFRS 17 as a ‘copy and paste’ exercise of Solvency II + profit and loss. IFRS 17 is unique as is principles-based: creating a company-specific IFRS 17 implementation could therefore give stakeholders additional insight into the company’s strategy and vision for the future.
What benefits could IFRS 17 implementation bring to the Caribbean?
- Risk-based thinking: References to stochastic valuation and the use of scenarios will help companies to better consider and understand their risks, as well as the interactions between risks. IFRS 17 also requires the concentration of risks to be described and disclosed (127), which may be a new concept for some Caribbean insurance companies. These new considerations could encourage companies to consider mitigating actions, increasing policyholder protection.
- Asset-liability management: IFRS 17 stipulates the use of current and market available data, where possible. Where market data is missing and companies are forced to use comparable information from other countries, this will result in additional insights and better risk management. For example, as most Caribbean currencies are linked to the US dollar, combining local currency and US dollar yields would enable Caribbean firms to create local yield curves, increase investment opportunities in US dollar-priced assets, and allow for more asset liability management options.
- Mortality data sharing: IFRS 17 can stimulate co-operation between insurance companies or countries when it comes to sharing information on mortality trends – a co-operation that already exists in Western Europe.
- Data review: IFRS 17 requires assumptions to be backed up by external or internal data (B50). Undertaking an in-depth review of internal data can improve operations and help clean up any errors that have not been spotted before.
- What if?: IFRS 17 requires disclosure of sensitivity analyses (128), including effects on profit and loss and equity. This information would provide insights on the insurance company’s level of volatility for various stakeholders, allowing central banks to identify potential issues and risks at an earlier stage and take action, resulting in improved protection for policyholders.
Servaas Houben is actuarial manager at Ergo Insurance in Belgium, and president of CFA Belgium’s Society Committee
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