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February 07, 2018
In May 2017, the International Accounting Standards Board (IASB) published the definitive version of IFRS 17, the new international accounting standard for insurance contracts. By June, FIS had updated its Prophet risk management software to better support the calculation, governance and audit requirements of the final standard. How did we deliver such a robust industry solution within a matter of weeks – and what challenges did we encounter along the way?
Objectives and requirements
Fortunately, our objectives were clear from the outset. In 2015, we had already released software updates to support the 2013 exposure draft of the standard. So, an immediate aim was to define current expectations of what the final draft of IFRS 17 would look like – and incorporate them into Prophet.
Another objective for the solution was to let insurers implement IFRS 17 in a cost-effective way, by allowing them to make use of existing investments and avoid “reinventing the wheel”. As a result, our clients could then focus their implementation effort on high-value activities. For example, they would be able to spend more time reviewing and improving existing infrastructure and governance processes, in line with the new standard’s additional demands.
Finally, we wanted to look beyond immediate compliance requirements to the long term. And that meant building a future-proof solution that insurers could use to manage their business more effectively under IFRS 17, such as for projecting business plans and balance sheets.
To bring an IFRS 17 solution to the market so quickly, it was essential to closely monitor how the draft accounting standard was developing. Since releasing our previous updates to reflect the 2013 exposure draft, the industry and preparers of the standard had proposed various changes – but no complete draft was available in the public domain.
Consequently, before we could define what a comprehensive solution should look like, our development team had to work from individual minutes of board meetings and consult widely with insurers, accounting advisors and the IASB itself. As these discussions took place in many countries, each with its own regional view, the process could be frustrating at times – especially when changes to draft wording, such as on the treatment of experience adjustments, necessitated a redesign. However, taking part in and revisiting the discussions also helped the team gain a deeper understanding of IFRS 17 and develop the best possible solution.
There were, of course, differing – if not surprising – interpretations of the standard, even once the final version had been published. This made it all the more essential to gather opinions from across the industry and address them as we continued to update Prophet.
Designing a cost-effective solution
Attempting to design a solution for a moving target was not straightforward. But it proved to be a welcome challenge and gave us the opportunity to explore how to get the best from insurers’ previous investments in regulatory models, such as for Solvency II. In other words, we wanted to make sure that any additional functionality required for IFRS 17 could be layered neatly onto existing systems and models, without costly re-engineering.
One of the biggest issues we needed to tackle was the concept of “grouping contracts”. As well as causing various data and process challenges, this IFRS 17 requirement meant performing additional, less granular calculations. The neatest solution was to introduce a new calculation layer that would simply sit on top of existing models – minimizing results handling and interfacing easily with other modeling systems to provide a single source of IFRS 17 results for each insurer.
Overall, the scope of our developments included support for both life and non-life contracts, as well as the different IFRS 17 measurement models – the general model, the variable fee approach and the premium allocation approach.
Differing views from our consultations on how the variable fee approach should be calculated made it a particularly interesting challenge. Ultimately, we supported two alternative approaches – one taking a more traditional accounting view that breaks down individual movements over the period, and the other a more actuarial view, examining changes in future value.
We were also a little surprised by the popularity of the premium allocation approach for life businesses in certain regions. As a result, we changed our plans to fully incorporate this measurement into our life products.
Throughout the development process, we strived to keep data volumes and runtimes to a minimum – by focusing only on information that is absolutely necessary for calculations and making maximum use of data that is readily available elsewhere. Separating the results needed to perform calculations from those needed for reporting also allowed us to introduce a feedback loop within the actuarial modeling process. This further reduces the volume of data that must be transferred to the accounting systems and processes.
The theme of achieving the most that you can within the actuarial environment continues with insurers being able to review actuarial results before they are posted in the general ledger. To make this possible, we ensured that Prophet could present financial statements and disclosures – and allow actuaries to drill down into the intermediate calculations.
In the wake of heavy expenditure on Solvency II and similar regimes, the result of all these developments was to give insurers a more cost-effective way to manage regulatory change.
Providing additional business value
How can insurers get extra business value from their IFRS 17 solution? To answer this question, we looked beyond the immediate reporting requirements to understand how models could be re-purposed for business planning and forecasting. This may have been a secondary concern for insurers, but we believe that firms should make a single investment that meets their requirements for years to come.
To help our clients gain additional value through Prophet in this way, we needed to take our solution’s new IFRS 17 calculation capabilities (such as for calculating the contractual service margin) and make them available within actuarial models themselves.
Under IFRS 17, it will no longer be sufficient to base forecasts on expected cash-flows alone. And ultimately, incorporating IFRS 17 data into models will empower insurers to make more accurate projections that allow for what-if scenarios. Making this happen certainly complicated the design process, requiring us to embed valuation models within business projection models. But now we can provide a solution that is fit for both reporting and wider business management purposes.
What happened next?
Launching an IFRS 17 solution so soon after the standard’s publication generated a lot of interest within the insurance community. Insurers were surprised by not only the solution’s advanced level of detail, but also how well it anticipated the finer points of the standard.
After running a series of webinars, including a panel discussion with industry experts, we were able to make further updates to Prophet at the end of 2017. These developments took on board both global feedback on the final standard and early feedback from insurers that have already implemented our solution. We also incorporated new features, including capabilities for transition calculations and providing additional disclosure materials.
Overall, for all those involved with IFRS 17, the year 2017 was challenging and rewarding in equal measure. We expect 2018 to be just as eventful, as many insurers start their implementation projects and the industry continues to debate outstanding, pressing issues.
Look out for our series of videos that provide further insight into the wider challenges of IFRS 17, for data, systems and processes. And please get in touch if you’d like to discuss any of the points we’ve raised or need advice about implementing the new standard. At FIS, we’ve done the initial work so that you can focus on what matters – driving additional business value through cost-effective solutions.