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May 2022

Having the right plan and tech for IFRS17

Source: Middle East Insurance Review | Jan 2022

Abhishek JajooWith the deadline for IFRS17 compliance bearing down on insurers, AJMS Global’s Mr Abhishek Jajoo gave us his thoughts on some of the related challenges insurers will face in the next two years, and what steps can be taken to address them.
 
 
What is your outlook on the next two years with respect to technological challenges on IFRS17 and what preparations are needed?
We are almost at the end of year 2021 and we have very little time as the IFRS17 implementation deadline is fast approaching. Insurance companies and consulting firms have a short time to adapt to the massive changes expected in accounting, disclosure requirements, cash flow modelling, as well as performing actuarial calculations with regards to risk adjustment, contractual service margin (CSM) and generating reports.
 
With the ongoing challenges the insurance industry is facing due to the pandemic, it has become even more difficult to prepare for the changes.
 
In order to avoid last minute hiccoughs, a well-planned strategy for 2022 will help achieve a smooth ‘go-live’ plan for 2023.
 
The main challenge lies with the preparation of data at a granular level. The data requirement from all business functions such as policy data, premium collection, claims data and reinsurance data, is immense. A more holistic approach needs to be taken to address the data management issues at an enterprise level to reach a target operating model.
 
Grouping data according to the level of aggregation requirements of IFRS17 and computing CSM, best estimate cash flows, risk adjustment and discounting – including allocations – need to be in place to measure results, which would require large volumes of data at granular level.
The reporting of future cash flows for measurement is also a challenge under IFRS17. This is because data is fragmented, automation is lacking and, in the absence of an integrated data model, the reporting process can be time-consuming, prone to human error and not cost-efficient.
 
Once CSM, fulfilment cash flows and other metrics have been ascertained, these need to be reported in financial statements, including movement analysis. With the new standard being principles-based, companies will need to translate the principles into detailed interpretive models. The current reporting environments and reports will need to be changed to fulfil the new disclosure requirements. 
 
Why do insurers need an actuarial system in place and how does it help in the automation of disclosure requirements?
The new accounting standard touches every business function starting from policy information to disclosure in financial statements. It is not going to be simple for IT systems, which have been developed and rolled out over a period of time with minimal integration capabilities, to manage the change across all business functions within such a short timeframe. The granular level of data requirement makes conventional IT systems struggle to provide the data expected for the aggregation, calculation and reporting.
 
Insurers need to look at implementing an in-house system that takes care of the complete actuarial modelling and calculation and produces disclosure reporting as per IFRS17 standards.
 
The main aspects insurers need to consider for an actuarial system are:
 
Technology and business functions: A comprehensive digital transformation solution built on latest technology needs to be evaluated and identified for the IT system. This will enable a smooth and stable transition from IFRS4 to IFRS17. Basic functions such as grouping of contracts can be performed in the solution and various measurement models can be adopted based on IFRS17 groups. Insurers will also need to ensure the solution caters to all business functions including underwriting, claims, reinsurance and accounting.
 
Integration and reporting: The IT system should be capable of managing different types of integration with core insurance systems through Excel, API or direct integration based on ETL layers. The IT system should facilitate automated calculations of best estimate liabilities, future cash flows and produce income statements, balance sheets and disclosures. Comparisons with different measurement models and various periods are also essential part of IFRS17 as accountants need to see the impact of change in the measurement model frequently. M 
 
Mr Abhishek Jajoo is founding partner and CEO of AJMS Global.
 
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