Session 1B, IFRS 17: Deciding Whether to Build Internally or Buy a - PDF document

Session 1B, IFRS 17: Deciding Whether to Build Internally or Buy a Ready Made System Presenters: Scott P. Odierno, FSA SOA A Anti titr trust Disclaimer imer SO SOA A Presentatio ion D Discla laime

IFRS17: Deciding whether to build internally or buy a new system HASSAN SCOTT ODIERNO Partner 17 June 2019

1. Changing demands of the actuary 2. Flow of actuarial aspects of IFRS17 3. Data and Assumption Challenges 4. Actuarial Valuation Software 5. CSM and Sub-ledger calculation engine 6. Going beyond compliance 2

IFRS 4 • Traditionally, the actuarial department would use our actuarial models to produce the actuarial liabilities as of the reporting date. The total actuarial liabilities would then be provided to finance department, which would then be included as part of the balance sheet, and change in actuarial liabilities in the Profit & Loss Statement. The finance department is happy to use draft reserves in their work whilst waiting for us to finish our analysis. • Current IFRS 4 disclosure are as follows: • Gross liabilities and reinsurance assets by type of contracts • Sensitivity analysis for key assumptions on gross and net liabilities, surplus, profit before taxation and shareholder’s equity. Our work is just one small part of the financial statements

Profit & Loss Statement items that contributed by actuarial department IFR FRS 17 17 IFRS RS 4 4 Expected Claims and Expenses Premium Investment Income Release in RA Release in CSM Incurred Claims Incurred Claims and Expenses Change in insurance contract liabilities Acquisition Costs Expenses Reversal of Loss Prof Pr ofit a and L Loss Gain/Loss from reinsurance Investment Income Insurance Finance Expenses Pr Prof ofit a and L Loss Remember all the trouble the finance department goes through because of the yearly audit? This trouble is now passed to us!

Not to mention Disclosures! • The disclosures required under IFRS 17 are very extensive which include (but not limited to): • Reconciliation between the opening and closing balances of the future cash flows, risk adjustments and CSM • Analysis of insurance revenue by comparing with the changes in Liabilities of Remaining Coverage • Analysis of insurance contracts assets/liabilities for group of contracts that are onerous (separately from other groups) • Expected recognition of CSM All of this means a lot more runs of our actuarial software and less ability to hide problems .

Flow of Actuarial Work External Auditor Assumptions Policy Data Projections Actuarial Valuation Software Chief Risk Officer Cashflows Output needed for projections CSM and sub-ledger calculation engine Actual accounts Data required for data audit Accounts & Management Internal Chief Financial Disclosures Analytics Auditor Officer 6

Data and Assumption Challenges 7

Data Challenges • For insurers who have been reserving under Gross Premium Valuation (GPV) most required data to perform IFRS17 calculations will be already available. • We will need to understand which policies belong to which cohort though, so an extra field may be required. • We will also need to store profit carrier results, but it is likely this will be based on existing data fields. Our work is just one small part of the financial statements.

Data Challenges – Reinsurers • In some reinsurers there is long term guaranteed reinsurance under their treaty business, i.e. reinsurance where the rates are guaranteed. These plans may not have been reserved under a GPV approach in the past so data is likely going to be a challenge. Our work is just one small part of the financial statements.

Assumptions • Most assumptions we will be able to use similar to what we do for GPV. The lock in rate (discount rate for CSM) though will need to be set by cohort and remains fixed through the duration of the policy. This is likely to be the biggest challenge. Consistency with Simplicity and GPV Assumptions consistency globally Our work is just one small part of the financial statements.

Actuarial Valuation 11

Challenges with number of valuation runs • Most larger insurers already perform reserve movement analysis which captures the impact of change in reserves due to model, data and assumptions. • For IFRS 17, CSM has to be calculated retrospectively using locked-in rates (for BBA), hence a few extra runs using locked in rate would be required to quantify the change in CSM over the reporting period.

Run List Overview • The following run list table outlines the minimum runs required to perform the IFRS 17 calculations: Ste tep Name me Desc scriptions 1 Opening Position For all cohorts using previous year end’s discount rate 2 Opening Position For all cohorts using locked-in discount rate 3 Restated opening position Due to model changes, calculated using previous year end’s discount rate 4 Restated opening position Due to model changes, calculated using locked-in rate 5 New Business For cohorts with new business, using locked-in discount rate 6 Restated allowing for actual For VFA only. asset return 7 Roll forward Not actuarial run but this step is required to calculate interest accretion, release of cash flows for current service and future service

Run List Overview (continue) Ste tep Name me Desc scription 8 Experience Adjustment - Current period results based on current period inforce data, future service using locked-in rate 9 Change in non-financial Current period results based on current non-financial assumption assumptions, using locked-in rate 10 Change in risk of non- For reinsurance held only, using locked-in rate performance 11 Change in financial Current period results based on new financial assumptions, assumption using current period’s discount rate 12 CSM amortisation Or Loss reversal 13 Closing Position For all cohorts using current year end’s discount rate 14 Closing Position For all cohorts using locked-in discount rate • Step 8,9 and 11 can be further split into more sub-runs if the impact of each assumption change needs to be quantified separately.

Challenges with Memory • For those of us performing GPV already, it will be much of the same cash flows, but now we will need to keep track of cohorts and save the cash flows (including profit carrier) accordingly. • Furthermore, we also need to keep track of changes in IFRS 17 liabilities into different dimensions. For example, we need to keep track of the changes in BEL, RA, CSM and loss component for each step as this would be fed into the reconciliation of liabilities in the disclosure. • This process of writing and saving these cash flows can easily cause memory problems, so this is one concern. In the past we might just save the actuarial reserves or a few key values by plan code, so this is a major change.

Actuarial Software Survey (current not IFRS17) • There are very few formal comparison sites for actuarial software, so we took a simple survey, with 37 respondents: 21 Life insurers, 9 General insurers and 7 others (investment and pensions). • The main respondents were from Malaysia but there were respondents from Thailand, Singapore, Indonesia and around the developing world. • The life insurers used the software mainly for valuation, but also some business projections and pricing, whereas for general insurers the software was used more heavily for pricing. Our work is just one small part of the financial statements.

Actuarial Software Survey – Life Software Used Our work is just one small part of the financial statements.

Actuarial Software Survey – Prophet Comments Our work is just one small part of the financial statements.

Actuarial Software Survey – Unmodelled Business Our work is just one small part of the financial statements.

Actuarial Software Survey – Life Insurer IFRS17 Budget Our work is just one small part of the financial statements.

Actuarial Software Survey – General Insurer IFRS17 Budget Our work is just one small part of the financial statements.

Valuation software decision • For most insurers there will be a combination of greater memory issues and much longer run times. Considering that for most IFRS17 valuations there will be 14 times more runs, this can be used to determine if you can live with your existing software. We will also still need to do statutory reserving and maybe tax reserving. • It will be important to experiment with different software if possible. Our experience is that some software is very fast for traditional or straightforward plans, whereas when including more complex options such as having separate unit funds or Takaful funds some software works significantly better than others. • The elephant in the room is that the finance department will now be waiting on the actuarial calculations in order to put their accounts together, so we will need our programs running very efficiently! It is likely there will be Our work is just one small part of actuaries within the finance team, perhaps called the Finance Actuarial the financial statements. Team.

CSM and sub-ledger calculation engine 23