With a lot of blood, sweat and tears insurers globally have managed to publish their first interim results for the half year 2023 under IFRS 17 reporting. Given the combination of short timelines and big adjustments needed, this can be considered a significant achievement. However, to reach this milestone, it was sometimes necessary to take shortcuts or apply manual interventions. Now that the first storm is over, insurers need to prepare for the full year 2023 reporting, and may want to further mature their (actuarial) reporting processes. Focus here is key. This article suggests five key actuarial priorities to focus on, based on KPMG’s observations during half-year review work and conversations with clients.
1. Improving the Analysis of Change
Compared to Solvency II, the Analysis of Change (AoC) of the insurance liabilities, including the Contractual Service Margin has become more important under IFRS 17. Where the AoC under SII is mainly used as a proof of the correctness of the final positions and a backtest on the assumptions, for IFRS 17 the line items in the AoC directly determine whether a movement is reported in P&L or CSM, depending on the source of the movement. For example: the timing of expected cash flows can impact whether an experience adjustment is recorded via P&L or CSM.
Compared to Solvency II, the Analysis of Change (AoC) of the insurance liabilities, including the Contractual Service Margin has become more important under IFRS 17. Where the AoC under SII is mainly used as a proof of the correctness of the final positions and a backtest on the assumptions, for IFRS 17 the line items in the AoC directly determine whether a movement is reported in P&L or CSM, depending on the source of the movement. For example: the timing of expected cash flows can impact whether an experience adjustment is recorded via P&L or CSM.
Insurers need to further mature their AoC processes by improving the granularity, quality, analytical capabilities, and controls surrounding the AoC.
2. Updating the actuarial models and processes
All these increased AoC requirements ask for improvements to the actuarial valuation models and processes. Furthermore, specific IFRS 17 elements require additional modelling. Examples are: contractual service margin, non-distinct investment components, locked-in discount rates, and the distinction between LRC and LIC. to correctly account for movements in unmodelled items, these items might requiring modelling as well.
Although the majority of the main items are modelled before the publication of the half-year results, significant workarounds were still in plans and insurers potentially have a to-do list of items that need to be modelled. Prioritizing them and making a detailed plan is the most appropriate approach to finalize all these items. When desired and if possible, these improvements can also be used as an accelerator for the reporting process. After the modelling, a careful model validation process is needed to provide safeguards on the modelling work done.
3. Maturing the control framework
The changes described in the first two topics require additional controls to be in place. Furthermore, opposite to SII, involvement of the actuarial function in IFRS 17 is not mandatory (although a number of insurers opt to involve the actuarial function also in the IFRS 17 control processes). These developments ask for a more mature internal control framework to demonstrate the correctness of the insurance liabilities and their movements. Controls should be clearly described on what they are checking, what evidence is obtained, what procedures were performed and how the checker reached its conclusion, with each control being part of a consistent and comprehensive control framework. Potentially, insurers have focused more on the capabilities of producing IFRS 17 results and have had less time to bring their control framework any further, but this is the time to do so.
4. Understanding and steering on results
Next to producing reporting results in a mature and controlled environment, understanding and being able to steer on the new IFRS 17 results is a learning path.
To understand and explain the results, improved analysis tooling is needed to explain impacts of (a.o.) assumption changes, experience results, and the difference between results on locked-in vs current discount rates.- What is new is that the experience results make the comparison between actual and expected cash flows more important. Since the interest rates have greatly increased since the IFRS 17 transition date, remarkable results on the difference between current and locked-in discount rates can be seen.
With new IFRS 17 numbers available, insurers need to reassess the key performance indicators, develop new projection tooling (including CSM and risk adjustment releases, finance results, and sensitivity testing), and identify key drivers for P&L and their alignment with SII capital generation.
All these initiatives require careful upfront considerations and specifications and detailed modelling.
5. Reassessing the discount rate
Insurers have invested a significant part of their IFRS 17 implementation budget in developing a sound discount rate methodology that is IFRS 17 compliant. Now that more information of peers is going public, it is time to reassess the current methodology and the results thereof. An interesting fact in this regard is that the financial volatility of the comparative year 2022 can serve as a stress test for the choices made.
Best practice in actuarial modelling: KPMG Integrated Insurance Platform (IIP)
A number of insurers use KPMG IIP for their actuarial valuation and reporting. The advantage of this platform is that it combines the modelling of the liabilities on all reporting frameworks (SII, IFRS 17, local GAAP) and at each desired granularity (from policy level to the IFRS 17 LoA and SII HRG), making efficient analysis and full consistency between the reporting frameworks possible. Furthermore, KPMG IIP has extensive automated controls, reporting capabilities and workflow automation functionality, easing the reporting process flow, whilst increasing its controllability, and leaving more time for analyses. For more information, go to our webpage: KPMG Integrated Insurance Platform - KPMG Nederland
Conclusion
Above, we listed the key priorities insurers can set in further maturing and improving their IFRS 17 reporting processes. Of course, other more specific topics, such as solving findings, onerous contract testing, and the modelling of reinsurance contracts, can be relevant.
Given the amount of work that needs to be done, the already high demands on the actuarial departments, and the scarcity in the labor market, insurers may need external help. KPMG’s Actuarial and Insurance Risk team offers a wide range of actuarial experts that can assists in all areas above, often with a multidisciplinary approach cooperating with other departments, such as audit advisory services, finance transformations, or data and IT improvements. If you would like to obtain more information, please contact Victor Vincent or Ernst Visser.
