Back in March last year, I did an interview for InsuranceERM about the impact the IFRS 17 standard is having on insurers and how they calculate their IFRS 17 Risk Adjustment and Confidence Level.
Based on the recent conversations and risk adjustment projects we have undertaken across global insurance markets, there are still some key areas that actuaries are either struggling with or unable to decide on which approach to adopt.
And with the deadline around the corner, the pressure is on.
These are the three key areas that clients are consistently getting challenged on by their auditors:
- One-year time horizon or ultimate run-off?
- How best to reflect catastrophe type risks (such as catastrophe mortality and mass lapse)?
- How to differentiate between general operational risk, and operational risk that arises from insurance contracts?
One-year time horizon or ultimate run-off?
This debate continues to rumble on as companies consider the different approaches. The final decision will be a trade-off between the ‘letter of the law’, as interpreted by some audit firms, and the practicality of implementing an ultimate run-off solution. Most companies are using simplified solutions to convert a one-year confidence level to an ultimate run-off, but the sensitivity of the confidence level to the assumptions underlying these solutions can obstruct the ability for analysts and regulators to perform a sensible comparison. Regulators from certain markets are hinting that they may require companies to disclose both.
How best to reflect catastrophe type risks (such as catastrophe mortality and mass lapse)?
The IFRS 17 risk adjustment is typically calculated at a much lower confidence level compared to that under a risk-based capital approach, and therefore some insurers are excluding catastrophe type risks from their calculations. Is this correct though? While for some companies, excluding some, or all these risks may not be material, this still needs to be demonstrated to the auditors. Where these risks are material, insurers should consider how to allow for this in their risk adjustment calculation in a way that is practical and cost-effective.
How to differentiate between general operational risk, and operational risk that arises from insurance contracts?
The IFRS 17 standard excludes general operational risk from the risk adjustment calculations, but how do you determine which operational risks are specific to insurance contracts? This is particularly difficult for standard formula firms or companies with relatively immature operational risk models. While general operational risk is not clearly defined, companies should consider the various different operational risk scenarios from their capital models and assess whether the risk arises from their insurance contracts or from conducting day-to-day business operations.
For support with the final stages of your IFRS 17 implementation get in touch.
