to ifrs 17/9

The IFRS 17 standard was released over a year ago. Insurers are now a quarter of their way into delivery projects. Some insurers are well on course for delivery. Others are, well, groping in the dark. This section identifies what insurers would expect to have delivered by now. It is updated monthly.

This insight looks into the what an insurer’s IFRS 17 delivery project would have achieved if it was on a standard trajectory. Major activities during the first year would have been:


1.      Made key decisions
2.      Shaped delivery strategy and set up formal project
3.      Completed gap analysis of current and to-be situations
4.      TOM design 60% complete
5.      Gone through several cycles of interpreting and updating the standard
6.      Completed dividing up products into portfolios and identifying cohorts
7.      Completed accounting solution design
8.      About to complete design of actuarial model
9.      Agreed how to manage costs to 2021
10.    Started early communication of change of direction to investors

Below each of these is reviewed in detail:

Planned action

Expected achievements by September 2018

1. Made key decisions

Delivering a project is easier when everyone knows what they are working towards. This is impossible at the beginning of a project because there will be more questions than answers.

The key task of a project team during early stages of a project is to determine either the big decisions or create mechanisms that answer questions that enable those decisions.
  1. Identified the key decisions required to enable specialist teams get on with their work
  2. Agreed how the work is to be divided up
  3. Agreed who will do the work
  4. Agreed where the work will be done
  5. Agreed which accounting practises to align across different territories
  6. Agreed which actuarial practises to align across different territories
  7. Agreed what stakeholders in the business are prepared to change and what they are not prepared to change
  8. Agreed revised approach to assumptions management
  9. Agree materiality thresholds
  10. Agree acceptable model accuracy and tolerances
  11. Identified what business management tools and data are required
  12. Identified what investor information will be affected and how it will be managed


2. Shaped delivery strategy and set up formal project

Mechanisms need to be in place to anticipate and manage the contradictions, challenges and obstacles that will be found along the way. Key to this is to give the project enough structure to ensure delivery takes place on time, but no so structured as to become bogged down in bureaucracy.
  1. Set up a decision-making mechanism
  2. Set up a conflict identification and resolution mechanism
  3. Set up provisional timelines, highlighting constraints, dependencies and issues
  4. Set up plans to work through resolving constraints, dependencies and issues
  5. Set up workstreams
  6. Group Audit Committee has approved plan

3. Completed gap analysis of current and to-be situations

The best way to get to somewhere new is to map out the quickest and easiest path to get there. The same is true of projects.
  1. Outlined the current high-level operating model (so that there is a reference point for development)
  2. Outlined the ‘to-be’ operating model
  3. Identified ‘easy wins’ and ‘big challenges’
  4. Identified what will be automated and what will remain manual
  5. Assessed impact to ‘to be’ accounting practises
  6. Assessed impact of revised modelling approach
  7. Identified what systems can remain the same and systems that need to change
  8. Agreed ownership of data standards what they will be
  9. Identified policy data management requirements

 
4. TOM design 60% complete

Delivering a new TOM is one of two core objectives of the project. Everything else is a detail within it.

Designing a TOM is an act of starting with a blurry or high-level picture, then over time fining it into sharp focus revealing more detail.

This can be commenced without understanding the detail of the standard. Over time as the standard becomes better understood and it is interpreted and reinterpreted, then the the model becomes more detailed until it is at a point where is is well enough understood to be made operational (coding and automation too). 
  1. Segmented the high-level operating model and assigned departmental ownership
  2. Identified high-level steps in the process
  3. Identified what needs to change
  4. Set up development plans for each step that needs to change
  5. Prioritised level of automation between steps

 5. Gone through several cycles of interpreting and updating the standard

The standard and its implications will go through many cycles of re-interpretation until its technical and mathematical implications are understood. This will be a continual process. We cannot wait, we do not need to wait for this to be complete prior to developing the operating model. Indeed, the operating model development will help inform where work is required on interpreting the standard
  1. Understood the high-level implications of IFRS 17 and IFRS 9 on your business model
  2. Provided feedback to stakeholder groups inside the insurer outlining the risks issues
  3. Make the case for your position to stakeholder groups, regulators and TRG
  4. Received latest interpretation updates from stakeholder groups including TRG

 6. Completed dividing up products into portfolios and identifying cohorts

These are two of the key technical activities of the early stages of changing an insurer’s approach to recording its P&L. Current policies will need be assessed type by type, grouped and measured. The work will inform what technical changes are required to policy administration systems and also identify policies which the insurer wants to avoid accounting under IFRS 17 terms (by drawing down the profit from them prior to 2021).
  1. Identified what profits will be drawn down prior to 2021
  2. Identified what profits will be realised from 2021
  3. Created outline modelling plan
  4. Identified what valuation work to outsource
  5. Identified portfolio types
  6. Begun to subdivide portfolios into the 3 types
  7. Identified overall work plan for modelling cohorts

 7. Completed accounting solution design

The Accounting Solution needs to address eight core interdependencies:
•  Policy for FRS 4 to 17                     
•  Strategies
•  Organization                                    
•  Data
•  Actuarial & accounting systems    
•  Guidelines
•  Resources and skills                       
•  Processes

The purpose of this solution method is to enable and ensure that business is fit for purpose, ensures the wellbeing of the organisation and is agile enough to meet its future demands.
  1. Design for accounting solution
  2. Requirements for accounting solution
  3. List of accounting practices to be aligned across insurer
  4. Business units identified challenges and required changes to their policies
  5. Data requirements
  6. Policy administration system change requirements

 8. About to complete design of actuarial model

Actuarial modelling approach is a key challenge of IFRS 17. Assumptions and modelling approach will have to change (although not too much for companies who already do both Solvency II and US GAAP).
In addition, the scale of the calculations will multiply, meaning contemporary methods and systems will become redundant (too slow).
This means that modelling teams should consider alternative modelling and interfacing platforms (for example looking at modelling software that isn’t dependent on model libraries) Finally, new data from policy administration systems will be required.
  1. Understood the likely model run times based on 2021 customer base and anticipated tech.
  2. Started simulation and modelling and identified major challenges will be in  2021
  3. Made decisions about model hierarchy (head office versus local/agree who will run which models (at local, regional and group levels)
  4. Agreed how to deal with local regulatory reporting variations
  5. Agreed how to manage assumptions variations between head office and local
  6. Identified key areas of conflict between head office and local requirements
  7. Identified additional information requirements from policy administration systems
  8. Agreed strategy for determining how to manage policies where data is not available (CSM)
  9. Agreed automation strategy for model inputs and model outputs
  10. Agreed strategy for data thrifting/optimisation (optimise speed and decide how to deal with modelling systems that carry their model libraries with them)

 9. Agreed how to manage costs to 2021

We estimated that the cost of a devolved delivery of IFRS 17 would be approximately US$8M for work within a head office and approximately the same within each of its business units. So and insurer who operates in 10 territories would need to budget US$88M. If a centralised approach was preferred, then the cost would be lower, but require more organised and structured work up front.
Last year we asked stakeholders what they thought the delivery costs would be. Just over 40% of people who work at insurers believed implementation, based on our scenario would cost less than US$50m, just under 40% believed it would cost between US50m and US$100m. About 20% of staff believed that it would cost over $100m.
About 60% of staff at delivery firms believe that the cost would be between US$50m and US$100m. Two thirds of staff at regulators believe that delivering IFRS 17 will cost insurers less than US$50m.
 
From a management perspective, good clarity of strategic objectives will help focus the whole initiative and prevent nugatory spend. 
  1. Cost factors identified
  2. Scale of technology change agreed
  3. Scale of organisation change agreed
  4. Data forecasting undertaken
  5. Suitability assessment for policy administration systems undertaken
  6. Agree approach to undertaking the comparative accounts  (concurrent/outsource/retrospective)
  7. Agreement made over level of head-office/business unit delivery.
  8. Resource estimates identified
  9. Engaged with suppliers and delivery firms over delivering value-for-money outcome
  10. Procurement agreements to 2021 sought
  11. Technology platform options confirmed, and procurement put to tender
  12. Outsourcing strategy confirmed
  13. Recruitment strategy agreed

10. Started early communication of change of direction 

IFRS 16 will have an impact on the accounts of businesses across all sectors from 2019. It may have an impact on the world economy during 2020 as investors come to terms with revised profitability forecasts of their investments.
  1. Decided what the profitability profiles will be based on draw down of CSM between 2018 and 2022
  2. Devised plan for communicating changes with investors