SAS Risk Customer Circle – the arrival of IFRS 17

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Until recently the approach to accounting for insurance contracts was considerably simple. Most of the existing accounting standards do not require any special processing after estimations are made by actuaries and before they are posted in the general ledger. However, with the arrival of IFRS 17, this will definitely change.

Insurers will need to calculate various “required measures,” such as contractual service margin and risk adjustments. They will need to include initial calculations and subsequent measurements, as well as generate posting entries about reserves. Additionally they may want to run a trial balance and follow other validation rules.

Two main approaches – and a third way

In general, there are two main approaches to IFRS 17 implementation:

Option 1: Extend the existing actuarial solution

This option leverages existing data, systems and processes, building on actuarial and Solvency II tools and models wherever possible. The current actuarial systems are enhanced to provide contractual service margin calculations and related data and results.

Option 2: Extend the existing general ledger solution

This option again uses the existing actuarial systems as a base but enhances the central finance system with multidimensional IT capabilities to provide a new multiledger, multiclient, multiproduct, multicurrency, multitime IFRS 17 platform.

For all that these are the two main options, it seems possible that the best way to implement IFRS 17 might be to meet somewhere in the middle.

The third way

This third way would be to acquire an integrated IFRS 17 subledger-type solution to connect the finance and actuarial systems, perform the contractual service margin calculations, provide a data model for source and results data, and offer flexible reporting and analysis tools.

Hidden Insights: SAS Risk Customer Circle – the arrival of IFRS 17

A general approach to an individual problem

The real issue, however, is that every IFRS 17 implementation project is individual. Each organisation is slightly different and has slightly different issues to solve. The implementation must start from the organisation’s current point and build on that. For example:

  • What are the possible data input scenarios?
  • Which tools will be used for discounting and grouping?
  • Will the generated output be cash flows or results?
  • What does the data model look like?
  • Will it be based on groups of contracts on tables or on position measurement?
  • What is the main reason for choosing those options, whether volume reduction or gaining independence from actuaries or finance?

All of these options have pros and cons, including restrictions that would need to be managed, such as availability of what-if analysis or group testing. Each decision is therefore highly individual and leads to a unique situation. On top of these, organisations also need to think about how to manage aggregations and allocation, data quality, and the generation of postings and reports. It is, or should be, clear that implementation projects are therefore highly complex, and a general approach will be hard to deliver.

At SAS, we believe that the best approach is to focus on delivering significant business value in IFRS 17 implementation. This should be the background to every decision. IFRS 17 is principle-based and regulation is still evolving, but it is possible to build in at least some future-proofing using this basis. The precise methodological approaches and implementation issues will vary between organisations, but the principles should stay the same.

Will your institution be ready for IFRS 17 - view infographic

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About Author

Thorsten Hein

Principal Industry Consultant

As Principal Industry Consultant in the Risk Research and Quantitative Solutions Division at SAS Institute, Thorsten Hein specialises in global risk management operations insights both in banking and insurance, focusing on Risk and Finance Integration, IFRS and Stress Testing. He helps risk management stakeholders to go beyond pure regulatory compliance and drive value-based management to maximise business performance. By applying experience from more than 20 years in Business Intelligence and Analytics, and supporting Financial Services and Risk Management, he ensures business relevance as well as technical coherence. Thorsten Hein joined SAS Institute already in 2004. Previously, he has been working for more than ten years for renowned providers of business intelligence solutions. Having started his career at the headquarters of Allianz Insurance in Germany, from the very beginning his main focus was assisting companies in the financial services industry in improving their processes and systems.

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