Four Questions You Must Ask to Manage Your Business Under IFRS 17

Like Solvency II before it, IFRS 17 will create a more complex reporting regime for insurance practitioners. But when it comes to putting the right financial system in place, it could be a costly mistake to focus purely on your day-one reporting requirements and the feeding of actuarial calculations to finance. Critically, you’ll also need the tools to manage your business effectively under the new regulation.

Beyond reporting, IFRS 17 is set to transform the way that insurers deliver value and protect the interests of customers, shareholders and other stakeholders. So it’s imperative that actuaries and finance teams are equipped appropriately across the board – whether for pricing contracts, business planning or active risk management.

Most fundamentally, any system under IFRS 17 will require the ability to make future projections for these purposes.

Here are four questions you must ask when considering solutions and how best to run your business under the new regulations:

• What should I project? There can be considerable overlaps between the reporting requirements of regulations such as Solvency II and IFRS 17, so it’s logical to integrate these calculations within a single business projection. Centralizing your models – and your assumptions, where possible – will reduce maintenance duties, risk of divergence and inconsistencies.
• How far ahead must I project? For short timespans, a cash flow model equipped to perform embedded valuations will provide all the information required. For longer periods, a more pragmatic approach may be suitable and a higher level of approximation allowed for. This approach will make validation and calibration more costly but also improve runtime performance.
• How should I perform projections? It’s generally best to try to reduce the volume of calculations required for embedded valuations. Consider grouping policy data when moving from experience to valuation models during the projection – or integrating lighter models. In general, a more granular level of detail within the experience projection will help capture the scenarios being tested more accurately.
• Which reporting measures should I cover? Include any metrics that provide insight into your business’s performance. The contractual service margin (CSM), for example, measures future profitability and is sensitive to changes in assumptions. In projection terms, CSM can therefore indicate the impact of “what if” scenarios on the business’s future profit stream. But risk capital is also likely to play a large role in this stream and a projection system should allow for switching between heavy (e.g., cash flow) and light (e.g., proxy) approaches.

As insurers plan in earnest for IFRS 17 implementation, there is a big risk of overlooking these essential wider system requirements – and missing a key opportunity to increase profitability and reduce costs. By thinking in concrete terms about how to manage your business under the new regulations, you can make IFRS 17 as much about improving your numbers as reporting them.