Case Study: IFRS 17 impact assessment using IFRS Assess

Hand over spreadsheet analysis

Background

A large South African bancassurer approached MBE to perform an impact assessment of IFRS 17 for some of their life and short-term insurance products. The main aim was to compare the calculation requirements and results of IFRS 4 and IFRS 17, under both the General Model and Premium Allocation approaches.

A decision was made to do the impact assessment for four products, two life and two short-term. The products were chosen for their different properties so that as many of the different factors that could impact results as possible could be captured in the assessment.

The client had two main goals to achieve during this exercise:

  1. Compile a gap analysis to understand the model, systems and methodology requirements of IFRS 17 and assign priorities within their IFRS 17 programme.
  2. Investigate the expected profit signatures under IFRS 17 since the chief areas of concern were profit emergence under IFRS 17 and the consequent tax implications. 

How we did it

MBE used their in-house, Excel-based simulation and modelling tool, IFRS Assess, to assist the client in achieving their goals.

Data collection

The first step was to collect all the cashflow data required for IFRS Assess. This already started to indicate some gaps that the current models had in regard to IFRS 17. The following points outline the main decisions that had to be made once the available data was assessed:

  • Transitional approach: the data that was available made it clear that the best approach would be the modified retrospective approach.
  • IFRS 17 groups: Cohorts were split into yearly groups for simplicity and profitability groups were assigned by calculating the VNB of each contract at transition date.
  • Discount rates: for simplicity, the IFRS 4 discount rates were used.
  • Risk Adjustment: A cost of capital method, based on stressed BELs, was selected.

These decisions and outstanding gaps were documented, and the data provided and assumptions made were used as input into the IFRS Assess model.

Customising IFRS Assess

Once the data had been sourced and formatted, MBE configured IFRS Assess to ensure that all material assumptions, data gaps and product features were taken into account.  The client wished to see more granular results with respect to time steps, so the model was converted to produce quarterly, rather than annual, calculations. 

Initial results from IFRS Assess

Once IFRS Assess was updated we could get initial results. These results were checked to see if it matches the current results from the relevant valuation. The main check was to see if the BEL was correct. From here we could find any issues and find the source (data/modelling).

The initial results also gave an indication of what effect the IFRS17 methodology, mainly the Risk Adjustment and coverage units, could have on the results. These methodologies could then be adjusted by the client.

Final results from IFRS Assess

After all the necessary changes were made to the data and model we had numbers for the general model and PAA that could be compared to the current results from IFRS4. We had a few different sets of results with different coverage units and assumptions to show what the impact of the different scenarios will be.

Shaun Lawton