By James Orr, Chief Actuary, Head of Department, PRA, Bank of England.
Ahead of the IFRS 17 Forum, James shares with us his insight in to the complexity of IFRS 17.
James, can you please tell the Risk Insights readers a little bit about yourself, your experiences and what your current professional focus is?
I’m the Chief Actuary for General Insurance at the Prudential Regulation Authority, a role that I’ve held for some 10 years. As well as a focus on regulation, I’ve also worked in risk roles, including in risk-based capital (pre-ICAS and pre-Solvency II), exposure management and loss modelling.
My current professional focus is on how best to use the Solvency II regime to support our supervisory activities, particularly the use of internal model data, narrative reporting and the Actuarial Function. For instance, I’m meeting with Chief Actuaries in the market on a regular basis to discuss their experiences in providing opinions in their AFR reports. IFRS17 is coming up in these discussions on a regular basis, as an area of interest and, sometimes, concern.
In your opinion, what impact do you think IFRS 17 will have on financial balance sheet? And how should an institution prepare for this?
I expect that the impact will vary between firms, reflecting the make-up of their balance sheets and in particular their underwriting and reserving portfolios. For most, I expect this to present an operational challenge in incorporating the new requirements. For many there will be an impact on their balance sheets, and a further challenge in analyzing and communicating those changes. Compared to a typical financial balance sheet of today, existing management margins will disappear and be replaced by an explicit risk adjustment, technical provisions will be discounted and the traditional relationship of outwards reinsurance to the inwards business may change.
Drawing on the lessons from implementing Solvency II, I think that institutions should adopt a strategic approach, recognizing this as a potential business challenge impacting a number of key functions and requiring coordinated activity between them. They should also engage with modelling potential impacts at an early stage, to consider the possible implications for balance sheet volatility. A particular challenge for firms with a long history is likely to be the construction of the opening balance and meeting the transition requirements.
Without giving too much away, what are the considerations that need to be made for complex accounting at contract level? And what are the implications if this is done incorrectly?
IFRS17 will require firms to segment their portfolios into groups according to expected profitability or loss, to do this within a consistent framework that can handle a high volume of decisions, with quality data to support this. These groups need to be tracked until the risks are effectively run-off. I expect to cover this in more detail in my talk.
Done incorrectly, the costs of reworking the analysis and, in the extreme, the reputational risks of restating reported figures could be significant.
At the IFRS 17 Forum, you will be speaking on your insight regarding – Reviewing implications for finance and accounting teams and complexity of IFRS 17. Why do you believe this is a key talking point in the industry right now and what can risk professionals gain from this insight?
Having been through Solvency II, the industry is wary of a similar, but different balance sheet and a new, relatively complex framework which determines profit and loss recognition. These more complex reporting requirements will draw upon other functions within the business, particularly actuarial teams. Having a clear understanding of the nature and scope of these changes will strengthen the analysis and advice that risk professionals are able to bring to the businesses they advise. In particular, risk professionals will need to have a view on both the operational and financial risk consequences of IFRS17.
In your opinion what could be the impacts on back office finance?
The changes to processes, additional judgements and reliance on inputs from other functions will increase the complexity and reach of their work. There should be benefits for the back office in engaging more closely with other functions and helping the business better understand its value-creation activities.
What, in your opinion does the future hold for IFRS 17 risk professionals, and how can they ensure they are prepared for full implementation?
At this point in time, IFRS 17 risk professionals potentially have a lot of work to do, both in interpreting the IFRS’ requirements as they apply to their particular firm’s business, and then designing and implementing robust reporting systems. Although complex and challenging, many of the principles (and it is a principle-based reporting regime, in contrast to others) reflect legitimate business concerns around profitability and costs, and these should improve comparability between firms, which should correspondingly increase the demand for analysis and insights.