Insurance IFRS 17

IFRS 17 is a principles-based accounting standard and allows for alternative accounting treatments. Under IFRS 17, changes in financial assumptions can alternatively be routed through Other Comprehensive Income (OCI) (for GMM contracts), instead of the Profit and Loss account and thereby reducing volatility.

Insurance company balance sheets were seen as black boxes and hence were considered non-transparent and non-comparable.This, amongst other reasons, led to the introduction of the new standard, IFRS 17. At initial recognition of the contracts, IFRS 17 (as against IFRS 4) doesn’t allow any initial profit recognition but requires setting up of a CSM component as part of the liability. This is expected to result in a release of profits that is more aligned with the delivery of insurance service and hence is expected to produce more uniform and stable profit signatures, compared to IFRS 4. On the revenue recognition front, IFRS 17 primarily recognizes both the ‘unwind’ of the insurance component of the liability reserve as well as ‘release of CSM’ as Insurance Revenue. However, given the complexities of CSM & Liability calculations, further aggravated by the volumes (due to level of aggregation requirements), IFRS 17 poses a significant actuarial and accounting challenge before the Insurers. The accounting entries need to closely follow and reflect liability and CSM at initial recognition and subsequent measurement and also the drivers causing changes in the liabilities and CSM.

.Presently, losses under loss-making (onerous) contracts are cross-subsidized against profitable contracts, but under IFRS 17, there is the requirement to identify onerous contracts separately and also recognize the losses immediately in profit and loss account.Presently, losses under loss-making (onerous) contracts are cross-subsidized against profitable contracts, but under IFRS 17, there is the requirement to identify onerous contracts separately and also recognize the losses immediately in profit and loss account. The loss component can also come into being due to adverse changes on subsequent measurement. The loss component is to be immediately recognized and then till the time the loss component is reversed, it also needs to reduce the revenue and thereby not to overstate it. The loss component is to be released systematically over the life of the contract or till the time it is reversed by favourable changes and CSM getting created.

Transitions are never easy, and IFRS 17 certainly not going to be an exception. The standard allows the use of either of Modified Retrospective or Fair Value Approaches over Full Retrospective on meeting certain conditions, but all the three methods come with their challenges. The standard also gives an option to apply a different approach to a different group of contracts. There would, therefore, be challenges from assumptions to account postings stages.Considering the challenges posed by IFRS 17, the solution that the insurers need to invest in can neither be a solely actuarial owned and driven nor an accounting owned and driven, but a holistic solution that caters to the needs of both actuaries and accountants. The solution needs to be a seamless one, without any gaps between the actuarial and the accounting pieces. Any gaps in the solution can lead to implementation failures, if any of the stakeholders are not comfortable signing off at the time of reporting.

Some of the desirable features the solution needs to possess are as below:

Data storage: All the policy data, market data, assumptions and then the CSM and Liability numbers need to be stored in a system versatile enough to group and ungroup policies/ cohorts, as needed for the use of the sub-ledger functionality.

A robust CSM engine: A robust engine capable of calculating the CSM and Liability numbers at the required level of granularity and then generating the movement analysis and reconciliation of the numbers for all the prescribed approaches.

Flexibility: Subledger functionality that works with a standard set of Chart of Accounts (CoA) which needs to be customizable to the existing set of Chart of Accounts (CoA) that the entity is using.

Accounting Rules: Accounting rules need to be framed for all the prescribed approaches and also the reinsurance contracts held and for most scenarios. These accounting rules need to be customizable to cater to the specific needs of the organisation.

Manual Adjustments: The functionality needs to also allow for manual adjustments or passing entries apart from the regular system generated entries.

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