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IFRS 17 Update

2nd Indonesian Actuaries Summit


21 April 2017

Kelvin Yap
EY Actuarial Services, ASEAN
The objectives of today

To provide an To outline To discuss


overview of main particular issues operational
changes and the Indonesian challenges to
rationale for industry may be insurers
IFRS17 face

To outline the To understand what


impact to the other insurers are
insurance industry doing
under IFRS17

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Agenda
1. Introduction
2. Key features of IFRS 17
3. Challenges of IFRS 17
4. Numerical Example
5. Implementation implications

This material has been prepared for general informational purposes only
and is not intended to be relied upon as accounting, tax, or other
professional advice. Please refer to your advisors for specific advice.
Introduction
01
Why are changes needed to Insurance Accounting?
IFRS17 brings insurance more in line with other accounting standards

It is believed that the existing insurance contracts accounting does not provide investors, lenders and other creditors
with the information they need to understand the financial statements of entities that issue insurance contracts or
make meaningful comparisons between such entities.

• IFRS 4 allows entities to maintain their existing accounting practices


Little or no Comparability between
• Current FS not comparable (1) across insurers due to different reserving
entities
practices (NPV, GPV wo PAD, GPV w PAD); or (2) across industries, eg
Banking and Wealth Management even for similar products

• Long duration contracts measured using outdated information (eg NPV)

• Economic risks such as options and guarantees embedded in insurance


Does not always reflect the contract are not reflected (eg Minimum Surrender Guarantees)
economic and risks in a timely
manner • Time value of money is not reflected (eg GI Chain Ladder)

• Little information is given about the sources of profit reported in current


period or expected in future periods (Analysis of Surplus)

• Information about underwriting activity is often reported on cash / cash-like


basis even when services is delivered in a different period, “change in
Accrual accounting basis
liability” item which is needed to reconcile cash-based amounts to the
accruals-based result of the period

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Simplified Example: Insurance vs Asset Management accounting
IFRS17 results in a more comparable P&L vs other financial institutions

Insurance Company
Simplified Example
IFRS 4 Phase 1 Year 1
• 5 Year Single Premium Unit Link, $10,000,000
Premium Income 10,000,000
• Mutual Fund Commissions (100,000)
• SPUL Initial Allocation of 97.5% OR Increase in Reserves (1,000,000)
• Initial Charges of 2.5% (Asset Manager) Investment income on underlying items 250,000

• Acquisition Cost of 1% ($100,000) which is DAC over


5 years Comprehensive Income 150,000

• Yr 1 UL Returns of 2.56% ($250,000)


• Ignore mortality, lapse IFRS 17 Year 1
Insurance Contract Revenue 50,000
• Fulfilment cashflows 0
• Change in RA 0
Asset Management Company • CSM amortization 30,000
IFRS 15 (Revenue Recognition) Year 1 • Acquisition cost 20,000
Revenue (from initial charge) 250,000 Amortisation of Deferred Acquisition Cost (20,000)
Distribution Costs (100,000) Incurred losses 0

Comprehensive Income 150,000 Underwriting result 30,000


Investment income on underlying items 250,000
Note: IFRS 15 may require the initial charge to be spread out over several
years if it is determined that the performance obligation is satisfied over Interest expense on insurance obligations (250,000)
time Net investment income 0
Other Comprehensive Income -
Comprehensive Income 30,000

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A Standard that better meets the needs of financial statements users

The new standard is expected to improve financial reporting by providing more transparent and comparable information.
The new standard is also seen as more in line with other IFRS standards for other industries.

Provides up-to-date market Treats services provided by


consistent information of obligation underwriting activity as revenue and
including value of options expenses in comparable way to other
& guarantees non insurance business

Single
accounting
Reflects time value Provides separate information
of money approach about the investment and
underwriting performance

Reflects the characteristics of the


insurance contract rather than the risk
related to asset/investment activity

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IFRS 9 (Financial Instruments) and 17 (Insurance Contracts) are
highly interdependent for insurers, hence timing of the standards is
aligned by the IASB

IFRS 9 and IFRS 15 Effective


Possible IFRS 9 deferred
date 1 Jan 2018 (*)
implementation date
IFRS 9 and 15

First IFRS 9 annual financial


statements (*)

2016 2017 2018 2019 2020 2021

Potential IFRS 17 start


Potential IFRS 17 Final of comparative period (**)
IFRS 17

standard

Potential IFRS 17 effective


date 1 Jan 2021 (**)

Ongoing IASB deliberations Implementation period Reporting

(*) IASB has proposed an option to either defer the effective date of IFRS 9 for insurers or to apply a temporary ‘overlay’ method to mitigate the PL impacts of IFRS 9
(**) Effective date tentatively set by IASB

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Adoption in Asia

Country IFRS 17 IFRS 9 Not adopting

aligned with IFRS delay in adoption aligned with IFRS delay in adoption
Indonesia Note 1 1 January 2019
Taiwan Note 1 Note 1
Thailand 1 year later than 1 January 2019
effective date of IFRS
China Note 2 
Malaysia  
Sri Lanka  
Laos Note 2 Note 2
Korea  
Philippines  
Japan Note 3

Note 1 – Local GAAP has not decided the date of adoption, but we are expecting the date to be later than the effective date of IFRS.
Note 2 – possible adoption but effective date of local GAAP is not known as of now
Note 3 - IFRS is not applied mandatory in Japan, and insurance/financial instruments accounting of JGAAP are different from IFRS4/9. However, listed companies can use IFRS.

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Key Features of
IFRS 17
02
IFRS 17 ED
Key areas of the proposed model will require Actuarial involvement

Regulatory capital standards

Reserves
Contractual service margin

Building block approach/


variable fee approach
Risk adjustment
Presentation /
disaggregation
Discount rate
Definition and
scope Expected value of future
cash flows
Reinsurance Disclosure

Risk
Premium allocation

Separation adjustment
approach

Liability for
remaining Transition
Discount rate
coverage

Cash flows of
claim liability

Financial Instruments and other accounting changes

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Sample P&L presentation: Term Insurance Actuarial Involvement
Insurance Contract Revenue replaces Premium approach
A simplified statement of comprehensive income is presented below (when experience is similar to assumptions):
Current IFRS 4 Future IFRS 17
Year 1 Year 2 Year 1 Year 2
Premium Income 178,486 169,688 Insurance contract revenue 308,183 183,461
• Fulfilment cashflows 223,437 105,090
• Change in RA 4,324 3,048
• CSM amortization 49,358 46,228
• Acquisition cost 31,064 29,094
Amortisation of acquistion cost (31,064) (29,094)
Claims & Expenses 252,685 105,090 Incurred losses (223,437) (105,090)
Increase in Reserves - 44
Underwriting result 53,682 49,277
Investment income on underlying items (156) 354 Investment income on underlying items 7,139 14,213
Interest expense on insurance obligations (12,852) (10,669)
Net investment income (5,713) 3,544
Other Comprehensive Income - -
Comprehensive Income (74,355) 64,909 Comprehensive Income 47,969 52,820

• Reserves are zeroised at the end of year 1 • No initial strain, less volatile
• Initial strain on surplus due to high acquisition expenses • Underwriting results reflect changes in RA and CSM amortization
when actual experience does not deviate from assumptions
• Drop in CSM amortization due to change in mortality
assumptions

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Contracts with no participation features
General model — overview

A component of the measurement of the


Contractual insurance contract representing the unearned
service margin profit that the entity recognizes as it provides
services

The compensation that an entity requires for


Risk adjustment bearing the uncertainty about the amount and
timing of the cash flows
Fulfilment cash
flows
PV of Time value of An adjustment that converts future cash flows
expected An explicit, unbiased
and probability-
money into current amount
future
cash inflows weighted estimate (ie
expected value) of the
present value of the Best Estimate Liabilities (BEL)
future cash outflows (very similar to GPV wo PAD)
less the present value
of the future cash
inflows that will arise Expected cash flows from future premiums,
as the entity fulfils the Future cash flows expenses, claims and benefit payments
insurance contract,
including a risk
adjustment

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Contracts with no participation features
General model – Future Cash Flows

• The estimates of CFs used to determine the fulfilment CFs shall include all cash inflows and outflows that
relate directly to the fulfilment of the portfolio of contracts:
Contractual
service • Current and explicit (separate from discount rate and risk adjustment)
margin • Market variables as consistent as possible with observable market prices
• Incorporate all available information in an unbiased manner (including trends), eg Best Estimate
Risk • Possibly use stochastic models if cashflows are asymmetric
adjustment • Include all CFs within contract boundary

Coverage period
Time value
of money
Cash inflows

Premium Premium

Future cash Cash flows within contract boundary Time


flows
Cash outflows

Claims payments
Claims including claim
Other payments handling cost
expenses/taxes

Acquisition
costs

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Contracts with no participation features
General model - time value of money

• Adjust the estimates of future cash flows for the time value of money using discount rates that:
Contractual • Reflects characteristics of fulfilment cash flows
service • Consistent with observable market prices for instruments with cash flows that have consistent
margin characteristics with insurance contract, e.g., with respect to timing, currency and liquidity
• Adjust observed market prices to reflect the characteristics of the liability/the factors that are relevant for
the contracts, e.g., exclude irrelevant risks, estimate the rate beyond the period of observable data
Risk
adjustment • Consistent with other estimates used to measure the insurance contract (e.g., inflation, discount rate for
participating contracts)
• Top-down approach or bottom-up approach
Time value • Bottom Up approach possibly: Risk Free Rate + Illiquidity Premium
of money
• No need to discount cash flows which are expected to be paid or received in one year or less (UPR)
• Together with the Future Cash Flow, this is commonly referred to as the BEL

Future cash
flows

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Contracts with no participation features
General model - risk adjustment

• Compensation that an entity requires for bearing the uncertainty about the amount and timing of the cash
flows that arise as the entity fulfils the insurance contract
Contractual
service • RA shall be included in the measurement in an explicit way (i.e., uncertainty/PfAD should not be included in
margin the Future Cash Flows)
• No prescribed technique so different companies may use different techniques
• Disclosure on the confidence-level is required if the entity uses a technique other than the confidence level
Risk
adjustment

Knowledge
Knowledge
Time value about
aboutcurrent
current
of money estimate
estimate
and
Low
Low and
trend
trend
frequency
frequency Duration
Duration
of
but
buthigh
highrisk
risk of
contract
contract
severity
severity

Future cash Uncertainty


Uncertainty Width
Widthofof
flows due
duetotolack
lackofof probability
probability
experience
experience distribution
distribution
Risk
Adjustment

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Contracts with no participation features
General model - contractual service margin

• At initial recognition, the CSM is defined as the negative of fulfilment cash flow, floored by zero.
Contractual • Purpose of recognizing a positive initial CSM:
service • To eliminate any day 1 gains (if initial Fulfilment Cash Flow is negative / CSM is positive)
margin
• Represents the unearned profit that the entity will recognize in future, as it provides services under the
insurance contract.
Risk • If CSM is floored by zero at inception, the insurance contract is onerous. All loss should be recognized in P&L
adjustment at inception
• Subsequently after day 1, future changes in assumptions and experience adjustments will affect the level of
CSM, instead of flowing thru P&L
Time value • The level of aggregation for determining CSM is therefore a key topic as it determines the cross-subsidy
of money between different policies.
• Each cohort consists of:
• Similar product lines with similar risks (Whole Life, Annuities, …)
• Contracts issued within the same year
• Divided into the following groups at sale: Onerous (Loss Making),
Profitable and no significant risk of being Onerous, Other Profitable
Future cash Contracts
flows
• This could have implications on:
• Cross-subsidy, for eg charging a single male / female premium rate
• Many separate CSM cohorts to track

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Contracts with no participation features
General model — contractual service margin

• Subsequently, the roll-forward calculation of CSM is summarized as follows:


Contractual
service CSM at the beginning of the reporting period
margin
+ Accreted interest

— Amount recognised for services provided in the period


Risk
adjustment +/— Changes in the estimates of future cash flows (eg changes in mortality assumptions)

= CSM at the end of the reporting period

Time value
of money • Locked-in interest rate at the inception of contract is used for accreting interest.
• An entity should recognise the remaining contractual service margin in profit or loss over the
coverage period in a systematic way that best reflects the remaining transfer of the services.
For contracts with no participating features, the service represented by the
contractual service margin is insurance coverage that:
• Is provided on the basis of the passage of time; and
Future cash • Reflects the expected number of contracts in force
flows

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Sample P&L presentation: Term Insurance
Insurance Contract Revenue replaces Premium approach
A simplified statement of comprehensive income is presented below (when experience is similar to assumptions):
IFRS 17
Year 1 Year 2
CSM at the beginning of the reporting period Insurance contract revenue 308,183 183,461
• Fulfilment cashflows 223,437 105,090
+ Accreted interest
• Change in RA 4,324 3,048
— Amount recognised for services provided in the period • CSM amortization 49,358 46,228
• Acquisition cost 31,064 29,094
+/— Changes in the estimates of future cash flows (eg
changes in mortality assumptions) Amortization of acquisition cost (31,064) (29,094)
Incurred losses (223,437) (105,090)
= CSM at the end of the reporting period
Underwriting result 53,682 49,277
Investment income on underlying items 7,139 14,213
Interest expense on insurance obligations (12,852) (10,669)
Net investment income (5,713) 3,544
BEL Expected Claims Other Comprehensive Income - -
Comprehensive Income 47,969 52,820
Actual Claims Amounts

• Underwriting results reflect changes in RA and CSM


amortization when actual experience does not deviate from
assumptions
• Changes in assumptions does NOT affect UW result, as it is
absorbed into CSM

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From Non-participating to Participating contracts
General Model and Variable Fee model

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IFRS 17 proposed simplified accounting model overview
(Applicable for policies with contract boundary <= 12 months)

Liability for remaining coverage Liability for Incurred claims

Expected future cash flows Expected future cash flows


Building block approach

Time value of money Time value of money


(BBA)

Risk adjustment Risk adjustment

Contractual Service margin


Premium allocation

Expected future cash flows


approach (PAA)

Pre-claims liability Time value of money


(unearned premium)

Risk adjustment

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Impact of IFRS 9
Aside from IFRS17, IFRS9 (Financial Contracts) will simultaneously come in force

Classification
 Impairment
 Hedge accounting (micro)

• Fair value through other • All debt securities held at FVOCI • Less rules based
comprehensive income (FVOCI) or amortised cost in scope of • More economic hedging
no longer an election but the new expected credit loss (ECL) strategies qualifying for hedge
result of two tests (Single model accounting (e.g., aggregated
Project Professional Indemnity • Significant impact on large exposures, risk components)
and business model) portfolio of commercial loans • Accounting for costs of hedging
• No available-for-sale (AFS) for (banks)
equity securities; only • Significant disclosures to ‘tell the
• A number of systems, processes, story’
irrevocable election (FVOCI with governance changes required
no recycling)
• Significant reliance on the
• Accounting mismatches existing credit risk modelling
• Insurance liabilities often capabilities
still locked-in under current
IFRS 4

Test both sides of the balance sheet to ensure IFRS 9 (assets) and IFRS 17 (liabilities)
are consistent and do not result in any accounting mismatches

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Challenges
for insurers
03
Main impact on life insurers

Performance Accounting for Disclosures Internal accounting


reporting CSM systems
• New concept of “Insurance • Additional work to calculate • Significantly more • New IFRS9 and IFRS17
Contract Revenue” very CSM, including managing information needs to be processes and information to
different from “Premium” multiple groups (level of provided compared to be recorded will involve
aggregation) and storage of current IFRS substantial accounting and
• P&L similar to an “Analysis of initial interest rate actuarial system updates
Surplus”, more complex than • Additional processes and
current accounting • CSM roll forward will need to data are required to gather • For multinational groups may
be understood and explained, the disclosure information help with consistency —
• More stable P&L – changes to although US will be different
assumptions no longer affect
CY P&L result but absorbed
in CSM

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Main impact on Non-life insurers

Reserving Discounting Disclosures Internal accounting


systems
• Policies w. Term > 1 year will • CF > 1 year will be required • Additional process/effort • Changes, in particular for
require using Building Block to be discounted longer duration liabilities
Approach (Similar to Life) • More explicit margin
• Additional process work to information available for • New processes and
• Remove PAD - Moving to best determine time value of market for comparison information to be recorded
estimates may make results money (More significant for across companies will involve substantial
more volatile long-tailed liability insurers) system updates

• Need to explain to • For multinational groups may


stakeholders help with consistency —
although US will be different

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Some additional areas of challenges for Indonesian (life) insurers

Revenue recognition Regulatory changes


• Many contracts are Unit Link with contain a • The IFRS 17 model is different compared to
large investment component (RPUL, SPUL) Tax, OJK regulations
• Investment components will be stripped out, which • Parts of current Indonesian GPV / RBC models
will have a material impact on “revenue” can be used for the new IFRS-17, such as BEL,
RA, DAC, experience studies
• Some components are new, such as CSM and
Measurement model Insurance Contract Revenue
• Insurers will have to use a VFA model for Unit • OJK / Tax / PSAK regulations may differ
Link contracts. This is different from the current significantly from IFRS 17, forcing insurers
Unit Reserve / UPR Non Unit Reserve approach to report on multiple bases
and require enhancement
• Actuaries will be in high demand.
• Determination of “current discount rate” might
• In addition to Liabilities, actuaries will also be
be challenging due to lack of market data, and involved in Revenue Recognition
may result in multiple approaches
• We need to work together with accountants to
• This is different from the current GPV discount implement the necessary changes.
approach • Actuarial Systems (Prophet/MoSes) and Finance
Systems (SUN/Oracle) will both have to be
enhanced

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Numerical
Example
04
Case study: background

 Term product sold in Singapore, pure protection with death and TPD coverage
 Total 132 policies incepted since January 2016
 No future new business
 First valuation at the end of 2016

Approach

 All policies are considered homogeneous, hence CSM is aggregated at product level
 Amortization of CSM is performed at product level by remaining coverage and number of policies in force
 Risk adjustment is set similarly as PAD under current Singapore RBC framework
 Economic assumptions remain unchanged for same calendar year
 Accretion of interest is calculated based on lock-in yield curve of 2016 at product level
 Changes related to future estimates are adjusted directly to CSM

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Presentation title
At inception
Insurance contract liabilities are equal to zero at inception

Best estimate liability

=-
Contractual
Service Margin
Expected contract profit
+
Risk adjustment

BEL = - 713
RA = 250
CSM = 463
Insurance contract liability = BEL + RA + CSM = 0

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Scenario 1: changes related to future estimates
Changes related to future estimates are absorbed by CSM
► At the end of year 1 (31 Dec 2016)
► The company expected 126 policies to remain in force mainly due to lapse
► In fact, 130 contracts remain in force at the end of 2016.
► This is due to good lapse experience but worsening mortality experience.
► The company has decided to revise mortality assumptions to be heavier at the end of 2016.

Term product (Year 1) Analysis:


Change in
Inception Projected Experience
463 non-economic
end Year 1 415 adjustment435
assumption
359 ► CSM is expected to reduce to 415 at
the end of 2016 due to amortization
► More contracts remaining in-force at
the end of 2016 have resulted in higher
(109) CSM than expected (i.e. 435 vs 415)
(109) (109)
- ► Heavier mortality assumption has
resulted in lower CSM in order to
maintain the level of ICL
Change in non- ► Overall insurance contract liabilities
Projected end Year Experience
Inception
1 adjustment
economic
assumptions
remain unchanged
BEL (713) (769) (799) (757)
RA 250 246 255 289
CSM 463 415 435 359
ICL - (109) (109) (109)

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Sample P&L presentation
Insurance contract revenue replaces premium approach
A simplified statement of comprehensive income is presented below (when experience is similar to assumptions):
Current IFRS 4 Phase 2
Year 1 Year 2 Year 1 Year 2
Premium Income 178,486 169,688 Insurance contract revenue 308,183 183,461
• Fulfilment cashflows 223,437 105,090
• Change in RA 4,324 3,048
• CSM amortization 49,358 46,228
• Acquisition cost 31,064 29,094
Amortisation of acquistion cost (31,064) (29,094)
Claims & Expenses 252,685 105,090 Incurred losses (223,437) (105,090)
Increase in Reserves - 44
Underwriting result 53,682 49,277
Investment income on underlying items (156) 354 Investment income on underlying items 7,139 14,213
Interest expense on insurance obligations (12,852) (10,669)
Net investment income (5,713) 3,544
Other Comprehensive Income - -
Comprehensive Income (74,355) 64,909 Comprehensive Income 47,969 52,820

• Reserves are zeroised at the end of year 1 • No initial strain, less volatile
• Initial strain on surplus due to high acquisition expenses • Underwriting results reflect changes in RA and CSM amortization
when actual experience does not deviate from assumptions
• Drop in CSM amortization due to change in mortality
assumptions

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Sample profit signature
Smoother profit signature under IFRS 4 phase 2

Comparison of profit signature


120

100

80

60

40

20

-
Y1 Y6 Y11 Y16 Y21 Y26 Y31 Y36 Y41 Y46 Y51 Y56 Y61 Y66 Y71 Y76 Y81
(20)

(40)

(60)

(80)

(100)

Current IFRS 4 Phase 2

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Some practical challenges we encountered

► Availability / granularity of historical data


Data ► Defining homogeneity and grouping of policies (“Level of Aggregation”)
► Ability to capture historical data for all periods in storage element

► Setting of assumptions which are not required under the current RBC framework, e.g. split acquisition expense by
directly attributable vs non-directly attributable, liquidity premium, risk adjustment, etc
Assumptions ► Storage of locked-in economic assumptions for all historical years (for CSM)
► Storage of non-economic assumptions for previous period
► Interest accreting rate basis – forward rate?

► Asymmetrical treatment of CSM due to experience change


Calculation ► Aggregate level calculation complexity – CSM amortization, accreting interest, etc
Mechanism ► Onerous contract treatment and its subsequent measurement
► Discounting approach – forward or shifted spot rate?

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Implementation
implications
05
IFRS 17/IFRS 9 High Level Roadmap
Involve both Actuaries and Accountants
Jan 2020 Q1 2021
Potential IFRS 4 Potential IFRS 4
Potential IFRS 4 Phase Jan 2018 Phase II start Phase II first
II final standard IFRS 9 effective date* of comparative period reporting

2017 2018 2019 2020 2021

Program High General Selected 2nd Design Solution implementation Dry run Restatements Full phase II
set up level imple- deep impact smart and reporting
impact mentation dive analysis tailored comparatives
analysis vision analysis solution

1 2 3 4 2 5 6 7 8

1 3 5 7
• Central and local team structure • Big bang, incremental or minimum efforts • Depends on general • Preparation of opening
• Program governance: decision • Accounting & reporting choices implementation vision equity adjustments and
making and technical support and deep dive analysis comparative information
(IFRS 4 Phase II and IFRS 9
• Work streams and overall plan 4 elements)
• Budget assessment • Deep dive analysis in key areas
6
• Business case • Unit of account • New data gathered,
• Participating contracts validated and stored 8
2 • Enrichment policy data • System changes built • Dry run of IFRS 4 Phase II
• Impacts on statements and • Central vs. local approach (reports & engines) and IFRS 9 reporting
accounting policies, reporting and • Adjustment cash flow models • Training of Finance, Risk elements on 30 June 2019
other processes of Risk and and other personnel numbers
Finance, data and technology • Implementation strategy
• 2nd analysis when final ED • Impact on processes
available • Assessment of data gaps and system changes

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EY has helped clients perform initial Gap analysis on a number of
themes around IFRS17, to help clients prepare for the change
The themes of analysis … to ensure an optimal implementation strategy Potential bottlenecks
we observe ..

1. Starting question to be What is the unit of account: • Current design for IFRS/EEV/RBC is not appropriate for
analyzed is the unit of the level of granularity required for IFRS 4 (unit of
• Loss recognition
account at which account) — data — models — reporting.
reporting will take place • CSM allocation
• Additional storage and enhancements to actuarial
Given the unit of account, which historically information systems will be required
will be available:
• At transition date a number of legacy source systems
• Transition: Fully retrospectively, Moderate will exist, which could impact the unit level of account.
retrospectively, Fair Value, participating contracts

2. Analyze how to treat • Which contracts fit within the variable fee model? Within some insurers different types and variations in profit
participation and unit link sharing exist for and within different products. All these
• How to apply BBA for indirect participating contract?
contracts types of profit sharing (and their variations) should be
• How to treat company profit sharing? analyzed.

3. Analyze different ways Enrichment of data could take place at different places: • Companies should determine first whether the ‘optimal’
to enrich (policy) data solution is to enrich data and results in the source
• Source systems
(depending on unit of systems or within data warehouses.
account) • Data warehouse
• Although the optimal solution could be source systems,
probably some legacy systems can’t adjusted in an
appropriate way.
• A hybrid approach could affect auditability.

4. Analyze the pros and • The pros and cons should be analyzed in different areas: In the centrally finance driven solution, more functionality
cons of centrally data, models, output, tools (e.g., reporting tools (CSM), is necessary with the General Ledger. This functionality is
(finance) or locally general ledger. currently not available.
(actuarial) driven
• It should also be analyzed whether a hybrid approach is
solutions
feasible (including pros and cons).

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EY has helped clients perform initial Gap analysis on a number of
themes around IFRS17, to help clients prepare for the change
The themes of analysis … to ensure an optimal implementation strategy Potential bottlenecks
we observe …

5. In which way should the • Requirement regarding cash flow models and reporting Current IFRS/EV/RBC models are not sufficient to meet the
cash flow models (eg tools requirements for IFRS4 (speed — interaction — level of
Prophet) and reporting output necessary).
• How could (source) systems, models and reporting tools
(output) be adjusted?
be adjusted to required output?
• What are the criteria regarding target architecture (how
much manual effort is acceptable)?

6. Which implementation Based on the outcome of the previous steps, the following The number of products, source systems, models
strategies can be questions should be answered: complicate the choice (s) regarding the implementation
identified? strategy.
• Is the implementation strategy dependent on the unit of
account
• Which implementation steps should be performed
sequentially or in parallel
• In which way can be leveraged on previous projects
optimization?

7. What is the impact on • What is the optimal process (depending on the Including extra risks and controls in the closing path
the processes (including implementation strategy)? because of IFRS17 reporting without reducing the current
controls) under the risks and controls, will severely impact the manageability of
• Which (new) risks and controls should be defined. Which
different implementation the process.
current risks and related controls could be removed?
strategies?
• Which part of the process could be outsourced?

8. What accounting changes • Accounting choices will need to be made and updated Prophet models to be updated to allow for changes to
need to be considered? policies will need to be formalised. liability valuation methods and accounting policy decisions.
• Examples include whether to accrete interest on
liabilities through OCI or P&L, when to apply BBA, PAA,
VFA, Contract Boundaries, Onerous Contracts.
Confidential — All Rights Reserved — EY IFRS17: latest news, implications and challenges faced by insurers | 44
Potential approaches for implementing IFRS 4 Phase II

01 Minimum efforts 02 Incremental 03 Big Bang


approach approach approach
• Only implement those changes that are • Focus on the changes that benefit the • All lines of businesses and processes are
unavoidable existing process migrated to new system in a single
• Step by step process by which the operation
existing infrastructure is amended • Redesign the existing modelling
towards the desired infrastructure infrastructure and process

Pros • Easiest to implement • Build upon SII/RBC efforts • Opportunity to implement the most
• Built primarily on SII/RBC approach • Higher flexibility of the implementation efficient system setup
• Minimal investment required process (easier to prioritize key • Benefits of migration are realized
bottlenecks) immediately
• Can be broken down in subprojects to
make it more manageable
• Lower critical path risk

Cons • Potentially does not fit the current • Takes longer to realize benefits from • Complexity of the process leads to major
reporting timelines migration implementation risks
• Inefficient system setup • Risk of a less (cost) efficient project • Huge upfront cost
• Likely to have considerable manual • Critical path risk
steps, resulting in higher cost and higher
risk of errors
• More complex setup leads to complex
audit trail

Confidential — All Rights Reserved — EY IFRS17: latest news, implications and challenges faced by insurers | 45
Thank You!
For more information, please contact:

Sumit Narayanan, FIA Kelvin Yap, FIA Ponno Jonatan, FSAI


Partner Associate Director Senior Manager
Advisory Services Actuarial Services Performance Improvement
Sumit.Narayanan@sg.ey.com Kelvin.Yap@sg.ey.com Ponno.Jonatan@id.ey.com
+65 6309 6452 +65 6309 6203 +62 21 5289 5307
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1 We have the largest insurance advisory team in


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► We have a very strong presence in the insurance industry in Asia ► We have a global insurance sector dedicated to offering industry
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largest actuarial team in the ASEAN region, serving many life and
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work closely with our actuarial teams in Hong Kong, China, Korea, professionals
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Confidential — All Rights Reserved — EY IFRS17: latest news, implications and challenges faced by insurers | 47
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