The views and opinions expressed in this article are those of the thought leader and not those of CeFPro.
By Oscar Kitasoboka, Chief Actuary, UAE Insurance Authority
What advice would you give when communicating the impacts of IFRS 17 to internal stakeholders?
This should be a process, not an event, using very simple sequential examples, and drawing a clear link to pricing adequacy (affects the risk adjustment and onerous testing) and the link to different requirements to track specific cohorts of business. A focus on how this changes the business planning and management information processes and metrics would be useful, as would explaining the change in the look and feel of the financial statements. Other details can be tailored as appropriately.
Why is the treatment of investment components under IFRS 17 an important area to consider?
This is important because it impacts on the assessment of insurance revenues and insurance service expenses, given the differentiation between “investment components” and “premium refunds”. There are three types of payments to policyholders under IFRS 17: 1) Premium refunds, which reduce insurance revenue; 2) claims, which are recognised as insurance service expenses and 3) Investment components, which are excluded from insurance revenue and insurance service expenses because they do not relate to the provision of insurance services; and where a “distinct” investment component is separately accounted for under IFRS 9 Financial Instruments.
In your opinion, when is the right time to educate investors on the changes and future numbers?
I would say start now to mainly sign-post key issues, but emphasise always that this is all about timing and value-add in terms of the quality of information in the accounts. It is a fine balance between: 1) allowing enough time for the messages to be well understood and 2) having enough of an understanding of the dynamics between the transition balance sheet and emergence of future profits. With a little less than two-and-a-half years left, I think a six-monthly update would be in order, to break the discussions into manageable but reasonably frequent and incremental dialogue.
What are some of the challenges when maintaining relationships with investors and explaining the changes?
Three challenges: 1) preoccupation with the “here-and-now” or business-as-usual which is what investors are currently used to and what will determine current performance vs. the pivot towards a new presentational paradigm. 2) Having enough knowledge and understanding from the implementation to have a meaningful dialogue; a bit like the quantitative impact studies of the Solvency II process. And 3) needing to actually cater to a much wider audience than just investors, including internal as well as external stakeholders.
In your opinion, how could variation in the interpretation of profits impact the wider industry?
Regulators and risk managers have been confronted with a range of game-changing challenges that have already altered the status quo. These conditions have disrupted many banks’ profitability if not their prospects for long-term viability. An already difficult operating environment and set of challenges have now been exacerbated by the coronavirus pandemic. Longer-term objectives, such as implementing reforms like Basel III, can become subordinate to existential goals of achieving and maintaining financial stability and paving the way for sustainable economic recovery. This does not mean implementing already-agreed regulatory reforms have become irrelevant but that they need to be prioritized in pursuit of more immediate imperatives.