IFRS 17: Making the complex manageableAdvisory

KPMG Lower Gulf Limited

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IFRS 17: Making the complex manageable

OverviewIn May 2017, the International Accounting Standards Board (IASB) issued IFRS 17: Insurance Contracts, which replaced IFRS 4. It is a new insurance contracts accounting standard, effective from 1 January 2022 and requiring one year of comparative disclosures.

Required date of application for comparative purposes

Insurance companies will face complex changes, related to the introduction of new international accounting standards and changing regulatory requirements.

IASB is expected to improve the comparability and quality of information in insurance companies’ financial statements, supporting a better understanding of risk exposure, profitability and the financial position of insurers, ensuring a timely recognition of expected losses.

1 January 2021

Balance sheet

Financial metrics

New priciples

Increased volatility

of liabilities

Equity impact at

transaction

New assumptions

New granuilarity

New disclosures

Valuation model

RoE

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Key considerations for CXOsChief Executive Officer

Chief Finance Officer

Chief Information Officer

Chief Actuary Chief Compliance Officer

— How will the effects of IFRS 17 be included in your business planning and forecasting?

— Have you considered the impact IFRS 17 will have on your product pricing and strategy?

— Are you able to clearly explain the business strategy and possible results under the new standard to board members, regulators and other stakeholders?

— How do the impacts of IFRS 17 interact with other industry changes, including reforms to distribution arrangements, statutory schemes and regulatory oversight?

— Have you considered how the volatility in cash flows will affect your bottom-line and change profit emergence patterns? Are you aware of forward-looking estimates?

— How do you plan to achieve an end-to-end financial reporting process capable of delivering consistent auditable results?

— Do you anticipate synergy between IFRS 17 and IFRS 9, in terms of changes required by the two standards?

— Have you considered changes to reinsurance contracts?

— Do your systems have the data required for IFRS 17’s modeling and disclosure requirements?

— Have you considered how the required data will be collected, cleansed, integrated and housed?

— Do you see opportunities to leverage automation to support the organization through the IFRS 17 transition period and beyond?

— Do you know which systems you will use?

— Are you equipped to meet strategic needs of the organization in the IFRS 17 paradigm?

— Do you have the knowledge and resources necessary to provide the organization with appropriate models?

— Are you ready to embrace operational and process efficiency?

— Have you considered how IFRS 17 will affect your product pricing?

— Have you considered how IFRS 17 will affect your governance frameworks?

— How will your business ensure that the required controls are in place and operating effectively?

— Do you have a plan to create consistent data and model governance frameworks?

— Are you aware of senior management’s expectations?

IFRS 17: Making the complex manageable

What are the expected deliverables, according to IFRS 17? “While your future state vision may provide a good framework under

which to proceed, it will be difficult to deliver the entirety of your vision under IFRS 17 timelines. This begs the question: what milestones should be included on the 2021 critical path?

Focus on IFRS 17 compliance Delivering a robust and controlled environment to support reporting, disclosure and analysis under IFRS 17 must be the primary focus of

your program in the run up to 2021

Additional business value While key systems are being reviewed, consider

what additional business value can be delivered for relatively low additional cost

Be pragmatic Apply an understanding of

current state complexities to define the scope for 2021

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32021 Scope

Focus on the aspects of your future state vision which are required to be delivered against IFRS 17 requirements. It is important to consider the potential complexity of components prior to placing them on the critical path. Some features of your vision may only be partially implemented by 2021.

Delivering requisite data, systems and modeling changes may present a significant challenge under IFRS 17. There is a base level of cost associated with these changes. Your organization may do well to consider what additional business value could be delivered with a relatively small increase in effort and spend.

An understanding of your organization’s current state will help you to comprehend the practicality of delivering against your 2021 vision. You may need to decide on an interim state for aspects of your vision, which will then be carried forward to the final state after 2021.

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IFRS 17: Making the complex manageable

Gap analysis and impact assessment phase

Design phase Implementation phase Post-implementation phase

— Document current state (people, processes, data and systems) and compare these against your scope for 2020

— Highlight necessary changes, as well as the magnitude of the work required to move to the desired future state

— Leverage unrelated changes to meet IFRS 17 requirements (e.g. data to support experience monitoring and studies)

— Define key metrics in the business case which can be tracked throughout the project lifecycle (e.g. working day timetable, effort, systems cost and audit cost)

— Generate a project plan with the goal of:

– delivering several stable interim state solutions

– providing incremental value at each stage: reporting, people, processes and data and systems

– being grounded in a business case

— Implement changes to the IT, finance and actuarial systems and/or:

– acquire new systems or amend the current system

– develop and validate financial and actuarial models

– undergo system/user testing and parallel runs

– engage in ongoing user training

— Provide ongoing support regarding the IFRS 17 calculated number

— Accommodate for regulatory changes that may hinder compliance

— Provide post-implementation training and assistance

— Engage with internal and external stakeholders, where applicable

Developing a delivery plan

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Gap analysis and impact assessment phaseDefinitions and onerous contracts

— Determine the definition of the insur-ance contract in order to understand which contracts fall within the scope of IFRS 17

— Understand the level of aggregation for ‘groups of contracts’ (including identification of onerous groups)

— Document key accounting judgments and issues requiring management ratification

— Implement recommendations in line with leading industry practice

Level of aggregation — Understand the current segregation

models through discussions with stakeholders

— Co-develop segmentation criteria for different portfolios taking into ac-count risk characteristics and assess portfolio concentration

— Collect all the required data in order to map the contracts across the portfolios

— Allocate costs to groups of contracts

Methodology — Determine an approach to analyze

movement/change steps to capture contractual service model (CSM) amor-tization impact for reporting purposes

— Create a clear policy for business/group lines’ contracts that fall under different models

— Capture data on investment returns and market yield curves in order to calculate an appropriate discount rate

— Decide on how to calculate risk adjust-ment, keeping in mind its influence on future profits

Transition and exemptions

— Decide an effective date for IFRS 17 implementation

— Define the transition approach, which will affect all policies at the transition-al stage

— Determine impact on the profit calculated as a result of the choice of discount rate and risk adjustment to be applied for transition

— Gauge potential impact on product approval processes

Reinsurance contracts — Analyze reinsurance contracts sep-

arately to understand the applicable methodology

— Modify the valuation approach for reinsurance contracts with respect to different treatment of profitability and onerousity

— Modify data present at a granular level as per IFRS 17 requirements and capture data for reinsurance at the contract level, or at least at group level

Governance — Establish a written policy for data used

in the calculation of the IFRS 17 liability and the revenue presentation

— Prepare an actuarial model to calculate IFRS 17 liabilities, statement of financial performance, statement of financial position and relevant disclosures

— Document existing internal processes and procedures to ensure the appropri-ateness, completeness and accuracy of the data

IFRS 17: Making the complex manageable

Design phase

Challenges

Solutions

Opportunities

Systems and data

Change management

Target Operating Model (TOM)

— Understand the scale of required systems changes

— Manage organization of data, data availability and granularity

— Ensure data alignment, processing controls across the entire systems’ environment

— Make a strategic decision on IFRS 17 delivery options

— Ensure staff size is capable of driving change

— Understand all costs associated with IFRS 17 implementation

— Determine where and how to imple-ment

— Decide whether outsourcing is required

— Handle unexpected valuation results — Manage the impact on products’ pack-

aging and pricing — Create reliable liability measurement

model — Manage operations in a new risk and

investment environment — Modify internal processes and prac-

tices

— Ensure integrated data warehousing — Design data quality framework

— Communicate the need to raise awareness of IFRS 17

— Create a time-bound action plan — Secure resources early, in order to

avoid scarcity or increased cost — Agree on cost assumptions to be used

for the project budget, aligning the cost with various regulatory transfor-mation initiatives

— Automate business processes — Change investment and business risks

management approaches

— Choose systems and vendors for the organization to invest in at the design stage

— Ensure strong information manage-ment systems to address new disclo-sure requirements

— Extend and enrich existing analytical processes, leveraging the data ware-house

— Create smarter processes with greater degrees of automation

— Train and hire new people to calculate and validate the transition

— Consider what you want to fix or optimize in the future and develop a view of the what is needed to support your vision

— Align processes, standards and methods

— Establish benchmarks against industry peers and best practice

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Target Operating Model (TOM)

Challenges

Solutions

Opportunities

Systems and data

Change management

Implementation and support phase

— Calculation, tracking and management of the CSM may require additional model runs, maintenance of historical data, inputs and assumptions.

— Map internal controls and audit trail

— Implement new accounting policies/ guidelines and control procedures

— Manage the end-to-end process to deliver consistent, auditable, results with the ability to quickly and clearly explain business per-formance to all stakeholders

— Standardize and centralize data — Improve business processes

— Develop tools to calculate transition amounts and disclosure

— Identify the need to implement discount rate assumptions and calculate the present value of cash flows using supporting IT systems

— Implement data governance process

— Create integrated data warehousing and data access

— Establish a robust and effective reconciliation process

— Review the data quality management processes

— Update system functionalities/features

— Review and analyze data to generate insights

— Enable faster and more efficient close and reconciliations processes

— Establish a data warehouse to compare all requisites

— Identify key milestones and dependencies on in-flight projects

— Apply IFRS 17 measurement models

— Define and validate transition strategy

— Create new Chart of Accounts (CoA)

— Perform technical and functional trainings

— Benefit from cross-functional collaboration

— Define the dry runs to be performed before the IFRS 17 effective date

— Reduce operational costs — Achieve consistency across the

organization — Conduct Board awareness ses-

sions

IFRS 17: Making the complex manageable

Overall timeline

Phase 1 - Gap Analysis Phase 3 - Design Phase 5 - Post- implementationPhase 2 - Impact Assessment Phase 4 - Implementation Phases 1 - 5

Readiness tool is used on a quarterly basis to assess the current state against the implementation of IFRS 17 during 2020

Q1 Q1Q3 Q3 Q1 - Q4Q2 Q2 Q1 - Q4Q4 Q4

2019 2020 2021 2022

Opening balance sheet Go live

Project setup and governance

Methodology specification gap analysis

Transition strategy

Post implementation

Parallel run

UAT

Methodology, assumptions, policies and processes design

Solution design

High level FIA for selected products

High level OIA for selected products

FIA on portfolio level

OIA on portfolio level

Conduct product classification

Implementation

Set up of accounting choice documentation

Financial statements presentation and data requirements

Project coordination & continuous alignment with main stakeholder

CSM & profit pattern under IFRS 17

CSM & profit pattern under IFRS 17

Workshop on IFRS 17 disclosures

Parallel run FS report

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IFRS 17 minimum compliant toolWhen assessing your solution features for IFRS 17 delivery it is important to consider the minimum compliance requirements for controlled regulatory reporting, disclosures and narrative development. After this initial framework has been established, then overlay value adding components that would be useful from a speed, control, efficiency and analysis perspective, provided that you are comfortable that these are well understood and achievable under the new IFRS 17 timetable.

IFRS 17: Making the complex manageable

Data lake

Meta data management

Other uses

Staging Rules engine

Sub ledger

General ledger

Data

Additional data sources ( e.g. policy data,

claims data, agent data)

Controlled environment to support regulatory reporting and analysis

Assumptions Disclosure

ModelCSM

Data warehouse Analysis and data discovery

Controls and reconciliation framework

Product design, pricing and distribution

Investment and ALM

Business planning

Risk and capital

Big data and advanced analytics

Reinsurance

Data lake We increasingly see insurers developing data lakes to store structured and unstructured data. This has significant potential to support big data and integrated and advanced analytics across an organization.

Data warehouse A finance and actuarial data warehouse which permanently stores highly structured and controlled data required for regulatory disclosures and narrative development. This has the potential to add significant value, even in an environment with a data lake.

CSM calculator ledger and rules engine There is a need for a CSM calculator and potentially an accounting rules engine to support the more complex reserve accounting. There are two key decisions to be made.

Legend: Accounting data Actuarial data

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Our global credentialsKPMG is working across a multitude of large IFRS and finance and actuarial transformation programmes. We will use our global IFRS and insurance leadership network to bring you real life insights on how other top tier multinational insurers are tackling similar challenges to the ones you face.

Our competencies

Selected clients Project Scope Accounting change

Actuarial Finance transformation

IT/ data management

PMO Process redesign

Regional pan-Asian life insurance group

IFRS 9 and 17 implementation support Regional

Global insurer IFRS 9 and 17 implementation support Global

Asia Regional Insurer RBC impact assessment Regional

Leading European insurer

Finance innovation and change Global

Large global insurer IFRS 17 impact assessment Global

Swiss multinational insurer

IFRS 17 business case support for the Asian region Regional

Asia regional insurer IFRS 9 implementation China/HK

Asia regional life insurer

IFRS 17 assessment International

Korean Insurer IFRS 17 Technical Advice for Implementation Korea

Malaysian Insurer IFRS 17 impact assessment Malaysia

Multi-national Canadian insurer

Actuarial valuation in the cloud and IFRS 17 and capital adequacy readiness Global

Global insurer EV global roll out and Financial Reporting Standardization and Technology Program IFRS 17 impact assessment in Asia and Europe

Global

Leading reinsurer IFRS 17 quality assurance Global

Leading reinsurer Technology-led multi-GAAP finance solution development and roll- out Global

European insurer IFRS 17 design support Global

IFRS 17: Making the complex manageable

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The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

© 2019 KPMG Lower Gulf Limited and KPMG LLP, operating in the UAE and member firms of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in the United Arab Emirates.

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Publication name: IFRS 17: Insurance Contracts

Publication number: J2269

Publication Date: June 2019

Yusuf HassanPartner Head of Accounting Advisory Services

Bhaskar Sahay Associate Partner Accounting Advisory Services

T: +971 4 424 8912 M: +971 50 167 5443 yusufhassan@kpmg.com

T: +971 4 424 8914 M: +971 56 993 2291 bsahay@kpmg.com