During a Moody’s Analytics webinar, ‘IFRS 17 in Africa’ with Britam, OUTsurance and Zamara, the panellists discussed some of the real-life challenges involved in meeting the IFRS 17 requirements, especially those related to insurers and reinsurers as they embark on their IFRS 17 journeys.
Many insurers have decided to use the 12-month extension of the deadline to get going and are some way along the route to compliance. The event started with a 30 minute discussion wherein Harshan Vallabh, former Actuarial IFRS 17 Lead at OUTsurance and David Limo, Actuarial Manager-Life at Britam, hosted by Irfan Begg of Moody’s Analytics, spoke about their implementation journey so far. They also shared some of the most valuable lessons they learnt.
Harshan explained that they kicked off their project in July 2019 with a full team. The first thing they found is that the standard is not very prescriptive with a lot of room for interpretation in key areas, requiring a lot of internal and external debate. Based on this, they wish they had started even earlier than they did. However, he mentioned, they were progressing well and their financial statement frameworks and cash flow models were beginning to take shape. He emphasized that IFRS 17 is an iterative process with auditors, consultants and solutions providers.
On the question as to where Britam is on their journey, David said they started in 2018 when they did a gap analysis and later started consulting with auditors and solutions providers leading to the project fully kicking off only in August 2019. The first step for the team was to build an impact model for the business and senior management and they were happy that the business understands what is needed.
With regards to guidance from auditors, Harshan indicated that the auditors have been quite useful assisting them with starting from the ground with their unit of account based on the different businesses’ risks and products that fall in the scope of IFRS 17. Also, as far as risk adjustment goes, he said, their feedback has been very valuable. According to David, the training by auditors, at Board and senior management level, was very helpful, especially as far as the key requirements, which helped bringing the project alive. Moody’s Analytics and Zamara confirmed that, in their experience, as an accounting standard, you want the auditors involved from an early stage as they will be signing off. Therefore, anything that is not clear, has to be discussed early on.
David mentioned that their biggest challenge has been on the life side. As most of their short-term business are 12 month term based, they could rely on the simplified premium allocation approach (PAA). All they needed to check was that, if the building block approach was used, the results could be very different, needing a check every two years or so. On the life side however, the long-term nature and different structure of the contracts meant that they needed to look outside for solutions that could help them.
On the long-term side, according to Harshan, they decided on a recently new product to develop the model and a full retrospective approach. They chose this product as the assumptions, variables, discount rates etc are easily accessible, making the modelling must easier. Once they have completed this phase, they will expand it to their other product lines. For the short-term business OUTsurance started off with the premium allocation approach for their smaller Namibia business where there are much fewer accounts, providing them with good experience in understanding IFRS 17. According to Harshan, this worked well as they then really understood the standard to a much deeper level which now is just a matter of scaling the models and calculations etc.
David said that, as most of their business qualified for the PAA, they built a model in Excel, starting with Motor as that is where they need to check if PAA is the right choice, due to the loss making challenges and onerous nature of these products in Africa. So, they did the model in Excel and then compared it to the PAA and IFRS 4. The next step was to share it with their quality assurance partner to see if it complied and review where they added in judgments. Basically, building Excel models for one product and scaling it to others. For some products the results with PAA were similar, but for the more onerous products not. They kept their key approach but added an additional loss component, which is the difference between the PAA and the GMM result.
When presenting the difference between the IFRS 17 and IFRS 4 balance sheet on the short-term side to the board, David explained, IFRS 4 allowed for an unexpired risk result which is essentially the same as the loss component, so it was not very different. However, on the long-term side, it was different from a balance sheet and an income statement perspective. For example, he mentioned that from and IFRS 17 perspective annuity premium is seen as revenue, whereas under IFRS 4 it is not. Cash flow is not part of the income statement, so now you have to separate what is revenue. That was a very stark difference from IFRS 4 and we did a lot of training around this. On the Balance Sheet side, David said, there currently is just one line for actuarial policyholder liabilities but under IFRS 17 you have to break it down to different components. Overall, the differences between IFRS 17 and IFRS 4 was quite a shocker for the Board and senior management. Furthermore, on the life side, he said they have always reported on embedded value which has some similarities with IFRS 17.
When asked whether, based on these different approaches with different product lines, they had to have different projects, approvals and resources, Harshan said they looked at it from a holistic point of view. According to him this was beneficial as sometimes you needed to apply GMM when there are onerous contract or where coverage is greater than one year, which they had in a lot of their short term business. So having broader IFRS 17 skills in one team was very helpful. This also helps when dealing with auditors and providers like Moody’s Analytics as the business, as a unit, makes coherent decisions. At this point Zamara mentioned that they have seen this time and time again, that running different projects for IFRS 17, in the same company, just adds unnecessary complexities, whereas looking at it holistically, from a group level is much more streamlined.
On the issue of challenges that remain outstanding, Harshan said that there are three big topics from a technical point of view needs to be focused on. Firstly, the risk adjustment and how it will be calculated, which can prove to be tough if you don’t have the right software. Secondly the reinsurance contract boundary, where you have to project future new business under the GMM. According to him that will be a new concept for most. Lastly, the counting of the cash back component, which is a bit of a gap in the standard, requiring further chats with the tax authorities and auditors.
For Britam, according to David, reinsurance is also a big issue and so is risk adjustment, which they started working on a few months ago. This includes the question of credit risk and its inclusion under risk adjustment. One of their other big challenges for them is budget constraints and having assistance and software for IFRS 17. The time they have spent so far made it clear that they need assistance and software. Lastly, change management and helping people understand what IFRS 17 means and requires is another focus area.
David was asked whether they approached IFRS 17 as an opportunity to streamline and, in general, advance their financial reporting to be more business intelligence oriented or if they saw IFRS 17 as purely a compliance issue. To this he mentioned that one of their business strategies going forward is better business analytics and they were certain it would help them there. For example, it helps them understand their product portfolio in terms of profitable or onerous business.
Harshan indicated they would like to finalise IT development and record some open balances at the end of 2020 and by June 2021 have their technical papers signed off by the auditors. They want a fully automated monthly process by June 2022 to provide comparative figures.
David concluded by saying that they have June 2022 as a milestone where they would like to have everything finalised and set up, but also hope to have basic models in place to see the impact by December 2021. For them 2021 is the make or break year, and he mentioned that one of the reasons is for this is that skills will become scarcer as the deadline comes closer.
To hear more about the readiness of insurers in the region, and challenges faced with the implementation, visit https://cover.co.za/gearing-up-for-ifrs-17/