IFRS 17 Challenges – Part 2
Unit of Account definition
Many insurers attempt to derive their Unit of Account (UoA) definition based on test or simplified datasets. They are shocked when they first see their IFRS 17 results based on real data. It’s much better to take steps early on to avoid these nasty surprises.
It is very important to see IFRS 17 results based on data from real portfolios. Although the individual IFRS 17 formulas don’t seem very complex, our experience shows that many of the calculations required by the standard produce unexpected results when all the data is aggregated.
What’s wrong with testing your approach on mock data only?
The standard prescribes general guidelines, but insurers still have a significant degree of freedom to decide how to define their UoA. This means you should compute your initial approach on the basis of real portfolios to get a realistic idea of the impact of IFRS 17 and an indication that your considerations are on the right lines. It is simply too risky to extrapolate the results based on simplified data or individual policy results and then expect the final results to meet your expectations. To draw any firm conclusions, you need to use genuine data. The earlier you can analyze meaningful results, the more time you will have to adjust grouping parameters, refine data granularity, and reshape your UoA definition. All in all, you will benefit tremendously from early calculations based on true data, and avoid unpleasant surprises when it’s too late to address them.
How to find the ideal grouping
It’s challenging to find the ideal grouping of policies suitable for each company. In particular you need to consider that once the grouping of policies into UoAs is defined, changing it is not straightforward. So, it’s crucial to consider different approaches, compute them and find the right UoA which suits best. To achieve this result, the IFRS 17 solution must allow dynamic calculation of CSM/LC and P&L depending on the properties chosen for the grouping. This is not easy, as potentially millions of policies are in scope. Moreover, the IFRS 17 tool must offer the functionality to compare the results systematically across the multiple choices so that a reasonable decision can be taken. Systemorph’s solution offers a comparison view and formula debugger to facilitate the process of finding the ideal grouping. The tool retraces every defined step, so you can thoroughly analyze your results in detail (see picture 1). You can also slice and dice the policies into different aggregations at the touch of a button and receive instantaneous results.
What makes the slice and dice functionality of Systemorph’s solution so valuable?
In one of our PoCs the very first attempt to look at IFRS 17 results (according to what they thought the optimal UoA definition would be) was far from any expectations. It was therefore crucial to rethink the UoA definition and compare alternative approaches. Fortunately, our client was in the privileged position of being able produce expected cashflows and actuals at policy level. The exercise was to find the best grouping of policies compliant with the standard principles, which would decrease the number of onerous UoAs. After a few iterations, and using the capabilities of Systemorph’s IFRS 17 solution, they found the UoA grouping fulfilling all their requirements. By the end of the PoC our client was very satisfied with the results and could proceed with developing their IFRS 17 methodology.
You might believe that after the methodology is defined, you are ready for 2022. But have you thought about the business process and governance? IFRS 17 isn’t just about finding the right methodology. From a compliance perspective, it must be clear who is responsible for the calculation and who is signing off. Ultimately, it’s a matter of traceability and transparency.
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