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:

1. One-year time horizon or ultimate run-off?
2. How best to reflect catastrophe type risks (such as catastrophe mortality and mass lapse)? 
3. 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.

The post Top three challenges – IFRS 17 risk adjustment and confidence level appeared first on MBE.

Until recently, actuaries in product development and pricing teams might have had fairly little to do with the preparations that are on the forefront of the minds of their valuation counterparts. 

Now IFRS 17 implementation is in full swing, product actuaries may find themselves having to consider IFRS 17, both in terms of product design and pricing.

The points set out below are what we believe are some of the main points product development actuaries may need to think about when designing and pricing products in an IFRS 17 world.

Product Design

Contract terms

Generally, the longer the duration of the contract, the greater the impact IFRS 17 will have in terms of metrics such as recognition of revenue. Insurers may start to favour shorter term products or set contract terms to shorten contract boundaries.

Product volatility

High volatility products, such as participating contracts may need to be redesigned, replaced, or repriced. These volatile products have the potential to become unattractive because IFRS 17 requires the immediate reflection of economic changes – and what many insurers may see as short term or artificial volatility – in reported profit.

Cost of long-term guarantees

Under IFRS 17, the higher levels of transparency required mean that insurers need to carefully consider the design of products with guarantees, given the treatment of onerous contracts, the need for granularity and the diminished allowance for cross-subsidisation. 

Reinsurance

IFRS 17 requires reinsurance contracts to be measured independently from underlying contracts, which means that the risk mitigating impact of reinsurance is not shown on the balance sheet. Product development teams may opt to incorporate alternative methods of risk mitigation in their products going forward.

Innovate with mixed features

On the bright side, it has been suggested^[1] that IFRS 17 may give rise to new products with mixed features (e.g. insurance or service features) being introduced and there may be more transparency in the way in which tariffs are calculated. This greater transparency may eliminate redundancies in reporting and increase efficiencies, the benefits of which will eventually absorb the short-term costs.

Pricing

Impact of grouping on cross-subsidisation

Losing the ability to allow cross-subsidisation between profitable and onerous contracts, as well as intergenerational cross-subsidisation due to IFRS 17 grouping requirements may lead to higher premiums for high risk contracts, or a change in product offering altogether.

Shift of pricing strategy focus

The objective of pricing strategies may shift focus to avoiding losses rather than making profits in the long term, due to the requirement to recognise losses on onerous contracts at inception.

Reinsurance pricing

The impacts of IFRS 17-compliant reinsurance pricing, such as accounting mismatches between insurance and reinsurance contracts, may affect pricing.

Expense allocation

The IFRS 17 Standard does not provide details of how to allocate fixed expenses, leaving room for discretion.  This element of discretion may lead to expense allocation playing a greater role in pricing strategy.

Deferral of shareholder profit

The deferral of profit recognition under IFRS 17 may lead to a lower present value of profit than under IFRS 4 for the same internal rate of return (IRR).  In order to achieve the same profits as before, premiums will need to be raised, or shareholders will need to accept a lower IRR.

Different measurement of cash flows

Different rules for contract boundaries, discount rates, cash flows to be included and run-off patterns will most likely have an impact on pricing models.

Inclusion of risk adjustment

Depending on the methodology selected for the calculation of the risk adjustment, the setting of premiums under IFRS 17 may need to include provision for non-financial risk.

It has been said many times that the impacts of IFRS 17 will be far-reaching, and product development teams will not be spared.  We recommend that all actuarial teams in companies affected by IFRS 17 be provided a basic level of training on this new accounting standard to empower them to ask the right questions and participate in the conversation.  

Contact us to discuss your IFRS 17 challenges and to find out about our IFRS 17 training services.

^[1] Reference: paragraph 27 of EFRAG’s downloadable paper entitled IFRS 17 Insurance Contracts Potential impact on the insurance market

Article updated 18th January 2022

The post IFRS 17 for product development and pricing teams appeared first on MBE.

PSAK 74 Ready, Steady, Go webinar

On 28^th October 2021, along with APACInsurTech and Legerity Financials, MBE took part in the inaugural PSAK 74 Ready, Steady, Go webinar. Attended by over 250 participants operating within Indonesia, partner Andries Beukes was able to share his experience and expertise in supporting numerous global insurers with their IFRS 17 implementation programmes and how that can be applied to implementing PSAK 74.

As part of his IFRS 17 Readiness session Andries covered:  

• All the considerations required when preparing for PSAK 74;
• MBE’s tried and tested approach for the successful implementation of IFRS 17 and how that can be applied to PSAK 74; and
• A detailed view of MBE’s IFRS Assess tool – our cost-effective modelling solution that can assist insurers in better understanding the impact of PSAK 74 on all areas of their business.

See pages 10-14 in the PDF below for more details of the different areas you need to consider for your organisation’s PSAK 74 gap analysis/impact assessment.

Partnership benefits for you

• Access the full range of experts needed for a smooth and successful PSAK 74  implementation.
• Local and regional presence for a better understanding of your specific needs and challenges.
• Single point of contact for you.
• Expert level knowhow in Accounting, Actuarial, IFRS 17 solution delivery including a full range (Managed) IFRS 17 Disclosure Service.
• Provide your budgets with the economy of scale.
• IFRS 17 community to exchange knowledge and experiences.

Contact us to find out how we can support you with your PSAK 74 implementation.

Future PSAK 74 webinars

We will be delivering further webinars on PSAK 74 in 2022. Please complete this form to receive updates.

The post How you can successfully implement PSAK 74 by 1st January 2025 appeared first on MBE.

The actuarial world is no exception. For example, IFRS 17 is challenging insurers and has forced many to investigate new systems to meet their evolving needs.

There are six key considerations when moving on-premises actuarial processes and systems to a SaaS solution.

1. One size does not fit all

When moving your strategic systems to an outsourced Software-as-a-Service (SaaS) solution, it is vital that the service provider fully understands your specific requirements as opposed to a generic set of requirements. The expectations of both parties must be clearly understood to avoid any ambiguities later in the project lifecycle.

2. Flexibility and scalability are key

A common objective of a database solution is to be the single source of truth for actuarial inputs and outputs, as well as a key integration point to finance. This has been particularly the case with IFRS 17 project implementations.

To achieve this, the design of the solution data model needs to meet your current requirements, but also be sufficiently flexible and scalable to accommodate assumed future requirements.

This is a key area where rework in the future can be costly, sometimes even resulting in a complete redevelopment of the data model.

Beware of generic data models being offered as quick routes to transformation projects. It’s much better to spend sufficient time validating the design through piloting and load-testing.

3. Interaction with the reporting process

Be sure to consider the implications of introducing a SaaS solution into your end-to-end reporting process:

• Assess the impacts of transferring data to and from the SaaS solution, including security, automation and transfer times.
  
• Consider the interaction of the SaaS solution link with your subsequent reporting process and on-premises Management Information (MI) processes. Deploying a Business Intelligence (BI) tool, e.g. Tableau or Power BI, into the SaaS environment means you are only able to build reports and dashboards on the data held within the SaaS environment. This excludes other data currently used in your MI processes, e.g. other input and output data in your reporting processes.

4. A good system needs good governance

Governance frameworks need to be expanded and/or created to deal with the introduction of SaaS:

• The scaling of the production environment to increase capacity should be executed within a governance framework.
  
• Current model development and release processes will need to be expanded or modified to incorporate all aspects of running on a SaaS environment.
  
• Starters and leavers processes will need to incorporate the management of the SaaS user base.

5. Implementation is a marathon, not a sprint

The implementation project is likely to require several areas of development and testing, i.e. it will not be just an easy “lift-and-shift” of your current environment and processes:

• Model development and testing will be required due to the change in the actual components involved as well as differences in version numbers of the SaaS solution compared to any on-premises solution.

• Reporting spreadsheet development and testing will be required – this should not be underestimated as it is occasionally omitted from database solution implementation efforts, even though all Excel-based reports will need to be redeveloped as well.

• If the solution includes the moving of input data preparation processes, these will need to be developed and tested.

6. The uniqueness of actuarial SaaS developments

The points outlined above can most likely be applied to many types of projects where on-premise solutions and processes are migrated to SaaS. There is, however, a key distinction that tends to make actuarial system and process developments unique.

Normally, a pure moving of on-premise solutions and processes to a SaaS solution involves some changes in processes and some adoption of new tools and components. In the case of moving actuarial solutions, the introduction of an actuarial database as part of the SaaS solution usually presents a dramatic change in the way in which actuarial users work and operate, in particularly with regards to control and flexibility within the world of Excel, files and folders.

While the data governance (and regulator-driven) ideal is to dramatically reduce the dependence on Excel, there is a fundamental shift in culture and approach required to achieve this with success.

MBE Consulting specialises in designing, migrating and implementing actuarial systems. To discuss your challenges and requirements for a SaaS actuarial solution contact us.

The post 6 pitfalls to avoid when moving to an actuarial SaaS solution appeared first on MBE.

Read the full article here How much is IFRS 17 costing the insurance industry.

The post The impact of unexpected IFRS 17 costs appeared first on MBE.

The Challenge

Our client urgently needed support in their IFRS 17 transition preparation for two of their main portfolios. 

These portfolios were to be valued using the full retrospective approach, meaning looking back to historic models, data and assumptions to ensure that the IFRS 17 Best Estimate Liability (BEL) calculations could be accurately performed.

The time required to perform these validations and calculations led to the client engaging MBE enabling their permanent in-house actuarial resources to focus on their daily tasks and other project work.

The Client

Our client is a well-established pan-African financial services company that provides a diverse range of financial and insurance solutions for retail and corporate customers.

We can now focus on the next phase of transition work. We are excited to get that going, with the help of MBE.

Finance Manager

The Approach

• Cooperation and collaboration
  • MBE worked closely with both the relevant Valuations team and the IFRS 17 Transition team to extract the information required and understand the runs and validations that needed to be performed.
    
• Listening to requirements
  • Given that they had performed similar tasks for other portfolios, the client had established a set of project goals and milestones.  The MBE team used this outline as a basis for their project plan and held themselves accountable by scheduling regular updates with the client to discuss progress according to the plan.
    
• Utilisation of modelling expertise
  • The MBE team thoroughly tested the validity of historical Prophet models going back ten years.
    
• Documenting results
  • Success at each milestone was evidenced in Excel artefacts prepared by the client for this purpose, ensuring that the process was fully auditable.

The Results

The client was able to perform their IFRS 17 transition calculations for these portfolios, employing the historic liability models that had been modified and validated for IFRS 17 use by MBE.  At the same time, the client was able to progress other BAU and project work, knowing they could trust and rely on MBE to successfully complete the project.

This has been a really successful collaboration. MBE was very responsive, willing and eager to listen to the team’s requirements. The MBE team worked well with both the segment and the IFRS 17 transition teams. We brought the MBE team onboard at just the right time, enabling us to meet critical deadlines.

IFRS 17 Transition Workstream Lead

Get in touch if you need support with ensuring the processes and procedures you established during the implementation phase of IFRS 17 are fully embedded and become BAU.

The post Fast tracking an insurer’s IFRS 17 transition preparation project appeared first on MBE.

When we talk about IFRS 17 and all its challenges, what we are actually talking about is the general measurement model (GMM). With all the attention given to building blocks, contractual service margin (CSM) and coverage units, it seems that the premium allocation approach (PAA) is either neglected or not even considered as a viable option.

But, in dismissing this simplified approach, are long-term insurers adding unnecessary cost and complexity to their new IFRS 17 worlds?

What is the Premium Allocation Approach (PAA)?

The PAA is a simplification of the GMM. It follows the principles of the GMM, in terms of grouping, delayed release of revenue, etc, but allows a more basic measurement approach. Most notably, it allows the entity to measure the amount relating to remaining service by allocating the premium over the coverage period.

Not only is it a much simpler model for liability measurement and revenue recognition, but it is also similar to the current methods used under IFRS 4 by the industry, so for companies choosing to follow the PAA, the methodology and model changes would be less significant than they would be under the GMM.

The reason many long-term insurers have not seriously considered using the PAA is because of its stringent eligibility criteria, set out in paragraph 53 of the IFRS 17 Standard:

Are these criteria as restrictive as they appear?

Coverage period one year or less

The coverage period is the period during which the entity provides coverage for insured events. This period includes the coverage that relates to all premiums within the boundary of the insurance contract.

IFRS 17 defines the contract boundary in paragraph 34 of the Standard as follows:

“Cash flows are within the boundary of an insurance contract if they arise from substantive rights and obligations that exist during the reporting period in which the entity can compel the policyholder to pay the premiums or in which the entity has a substantive obligation to provide the policyholder with services… A substantive obligation to provide services ends when:

(a) the entity has the practical ability to reassess the risks of the particular policyholder and, as a result, can set a price or level of benefits that fully reflects those risks; or

(b) both of the following criteria are satisfied:

the entity has the practical ability to reassess the risks of the portfolio of insurance contracts that contains the contract and, as a result, can set a price or level of benefits that fully reflects the risk of that portfolio; and

the pricing of the premiums for coverage up to the date when the risks are reassessed does not take into account the risks that relate to periods after the reassessment date.”

This definition seems to state that any possible future cash flow is inside the contract boundary, unless the entity can meet the high bar of the criteria to exclude. If, however, the terms of the insurance contract state that the insurer has the right to reprice or even cancel the contract with, say, 30 days’ notice, the coverage period may be well within the one-year boundary allowed by the PAA¹. Thus, even long-term insurance contracts may be eligible for the PAA, without having to prove similarity to the GMM.

No material difference from the GMM

The definition of ‘material’ in this instance needs to be defined by the insurer, but if the following three conditions hold, they may be able to apply the PAA, even if the coverage period of the contracts under consideration is longer than one year:

Future premiums are sufficient to cover future claims and expenses when they occur, without timing differences, i.e. the premium paid in a given month fully covers the expected claims and expenses pertaining to that month.

The allowance for risk adjustment in the premium is sufficient to cover the difference between best estimate cash flows and risk adjusted cash flows for each reporting period. In order to be able to prove this, the methodology used to calculate risk adjustment needs to be carefully considered. For example, if the risk adjustment is allowed for by adding a margin to premiums charged, it could be relatively straightforward to ensure that the risk adjustment allowed for in the premium runs off at the same rate as risk in portfolio.

The coverage units selected under the GMM ensure that profits are recognised in line with the profit priced into each premium.

A simple spreadsheet exercise shows that if these conditions are met, the liability for remaining coverage (LRC) under the GMM and the PAA are very similar. These assumptions are not always realistic, but meeting them may be possible for some products, such as certain term assurance contracts with increasing premiums.

Other considerations

Even if the aforementioned conditions hold and the LRC seems similar under the two approaches, it is also necessary to consider the variability in fulfilment cash flows. Paragraph 54 of the IFRS 17 Standard states that:

“The criterion in paragraph 53(a) is not met if at the inception of the group an entity expects significant variability in the fulfilment cash flows that would affect the measurement of the liability for remaining coverage during the period before a claim is incurred. Variability in the fulfilment of cash flows increases with, for example:

a) the extent of future cash flows relating to any derivatives embedded in the contracts; and

b) the length of the coverage period of the group of contracts.”

It would be up to the insurer to decide their appropriate interpretation of variability in fulfilment cash flows and whether it would be an impediment to using the PAA.

Furthermore, the PAA assumes that no contracts in the portfolio are onerous at initial recognition, unless facts and circumstances indicate otherwise (paragraph 18 of the Standard). Paragraphs 57 and 58 describe how to account for the case where at any time during the coverage period, facts and circumstances indicate that a group of insurance contracts is onerous. So, the PAA does not seem designed to measure onerous contracts, but the treatment thereof may still be similar to how insurers currently account for loss-making contracts under IFRS 4, and hence the PAA may still be an attractive option.

Conclusion

Although the PAA has largely been disregarded by long term insurers, there may be a case for using it based on some relatively simple investigations and close examination of the contracts’ terms and conditions – especially if it means potentially avoiding the model and system upheavals that would be required under the GMM. One should, however, also consider whether one is complying with the spirit, and not just the letter, of the IFRS 17 Standard – as one’s auditors will surely be considering the same.

This article was originally published on 13 May 2020.

Notes

(1) The insurer will still need to consider their practical ability to reassess the risks; i.e. cancellation or repricing may strictly be allowed under the terms of the contract, but would practical issues, such as reputational risk, prevent enforcement of such terms?

The post Premium Allocation Approach – The IFRS 17 shortcut insurers have been looking for? appeared first on MBE.

Based on the conversations we’ve been having with our clients, it seems discussions are still ongoing in gaining agreement within their organisations on the best approach to adopt to deliver the IASB’s goal of ensuring industry consistency and comparability for measuring and disclosing risk.

One area which is yet to be resolved in the minds of many IFRS 17 practitioners is the question of whether the confidence level should be applied over a single year or over the lifetime of insurance contracts. In our survey, there was a division of opinion about the preferred approach between South Africa and the UK and Europe with the former clearly favouring the pragmatic one-year approach and the latter equally divided.

Insurers are facing pressure from some corners to adopt an ultimate run-off approach when specifying the risk adjustment confidence level.  This ignores the fact that many who do not currently have the capabilities to implement this methodology will view it as unnecessary and impractical. Implementing the more onerous approach would consume valuable resources that could be better spent elsewhere.

An opportunity for insurers to strengthen their position is to adopt a more collaborative approach amongst themselves. Currently, insurers are taking learnings about IFRS 17 in open industry forums such as events, online discussions, and trade press, but there is resistance from individual companies with respect to sharing experiences, the challenges faced and ideas on the best way to drive their industry forward.

We are now inviting insurers to take part in our follow-up survey that will further explore current thinking and the challenges facing insurers around IFRS 17, specifically focusing on the risk adjustment and confidence level.

If you would like to be included in this global research, please get in touch. For all companies that participate, we will be providing a personalised analysis of their risk adjustment scenario and relative position within the market.

The post IFRS 17 confidence level disclosure – the debate continues appeared first on MBE.

Education on Lean principles and process improvement tends to rely on case studies from industries far removed from what actuaries can relate to.

Sure, it’s impressive that changing the flow of an assembly line increased production in a factory, but how do we translate these kinds of examples into something a valuation actuary can apply?

In the last instalment of my transformation series, I’m going to spare you the analogies and boil down years of involvement in a variety of transformation projects into four practical lessons my team and I have learnt from those that worked well.

1. Create incentives for buy-in

Leaders need to accept that introducing a transformation project will affect their teams’ KPIs. Employees have little incentive to complete tasks which do not directly contribute to performance reviews.

Therefore, including transformation-related objectives in performance discussions is critical to obtaining employee buy-in to transformation projects.

2. You can’t measure what you don’t manage

Benchmarking actuarial processes may not be as obvious as counting the number of widgets produced per hour, but it has to be done somehow in order to measure the outcome of any project.

As highly skilled professionals, actuaries enjoy a level of trust which has traditionally exempted them from having to complete detailed time sheets and record performance metrics.

And if uprooting this tradition is not the answer, it may be worth investigating software solutions which can assist in performing such measurements automatically.

3. Outsource where it matters

Typically, in transformation projects, contractors are brought in to help with the project work, leaving permanent employees to fulfil their BAU tasks.

This approach results in contractors who are enthusiastic and knowledgeable about the new process and permanent staff, for whom the process was designed, with little know-how of, and even less interest in, sustaining it.

Middle management should consider using contractors to assist with BAU work. Even if doing so releases enough capacity for just one person in their team to focus on transformation, it goes a long way to guaranteeing internal buy-in and retention of expertise after the contractors have left.

4. Optimise your existing actuarial tools

We know that the arsenal of an actuary confronted with a new problem comprises first principles and a blank Excel spreadsheet. As time passes and complexity increases, these become cumbersome and sluggish solutions.

In these situations, a transformation project does not have to be a huge end-to-end overhaul. Start small, look at the tools and software that you have.

Too often, teams will embark on significant projects or buy expensive technology when the systems they already had in place could have done the job just fine. Instead, they should invest in thorough training on what they already have; it often comes as a surprise just how much the application they’ve been using for years can actually do.

Final reflections

Throughout this series, I have shared my thoughts, based on years of experience at all points of the “project spectrum”, on why transformation projects are so often doomed to failure in actuarial teams.

If nothing else, I hope that it has generated some ideas and discussion at this critical time. To gain the most value from IFRS 17, we need to start adapting our systems and processes now to make sure they are sound and running efficiently by 2023.

And we’ll need well thought-out transformation projects, backed by strong leadership and plenty of buy-in, to get there.

If you would like to discuss any of the ideas shared in this series or find out how MBE can assist with your upcoming actuarial transformation projects from start to finish, please contact me.

I am backed by a highly skilled and experienced team of actuaries, IT specialists and process consultants, who are passionate about adding value to our clients’ businesses.

Read my full series on Transformation in Actuarial Teams starting with The Need For Transformation in Actuarial Teams.

This post was originally published on 28 June 2017 and updated on 16 March 2021

The post Actuarial Transformation Projects – How to Succeed appeared first on MBE.

In my previous post in the Actuarial Transformation series, I looked at the challenges of obtaining buy-in from actuarial teams, made all the more relevant with IFRS 17 implementation projects currently ongoing.

But it doesn’t end with obtaining buy-in. Even when teams are on board, there are other relationships that need to be managed to ensure successful transformation projects. In this week’s post, I talk about the complicated relationship between actuaries and a stakeholder that can act as the gatekeeper to any technological development; the IT team.

It’s complicated: mending the relationship between actuaries and IT for successful transformation

Qualifying as an actuary requires running a gauntlet of some of the toughest exams in the world. The education system covers everything from commutation functions to communication faux pas but fails to prepare students for practical life office work in a crucial way; there is a glaring neglect of IT training.

Any actuarial student starting work will be thrown into the world of coding, runs, databases and shared drive disk space.

But it’s accepted that the IT knowledge required to operate often complex and resource-intensive models is something that can be picked up “on the job”.

And the distant, often strained, relationship between actuarial and IT departments leads to actuaries working relatively autonomously with limited IT support; bolting on tactical solutions – which may not be the most efficient or sustainable approach – as they see fit.

This might have worked in the past, when regulatory and reporting requirements in the industry were more stable and simpler and did not require as much specialised software, data management and reporting capabilities or computing power. The last decade, however, has seen a surge of complex products and new reporting standards and regulatory requirements.

Actuaries need support, but also need to embrace change 

Actuaries feel that they can (or must) solve problems faster and more efficiently without IT support. But years of bad habits and lack of investment in actuarial IT infrastructure and relationships have resulted in a build-up of teetering solutions that are difficult to support and prone to deficiencies and errors.

It seems that actuarial transformation projects, of which the upgrade of IT systems and relationships is almost always a large part, may well be subject to failure until more investment is made into the relationship between actuaries and IT, or until actuaries formally become IT specialists themselves.

If you have ideas about, or experience in IT relationship management, or would like to talk about systems and IT options for an upcoming transformation project, please get in touch with me at andriesb@mbe-intl.com.

The post Mending the relationship between actuaries and IT appeared first on MBE.