By Rahul Verma, Methodology Lead, Just Group.
What, for you, are the benefits of attending a conference like the ‘IFRS 17 Forum’ and what have attendees learnt from your session?
These conferences offer a unique opportunity to bring together several industry stakeholders, e.g. project leaders, technical experts, regulatory bodies, consultants, auditors, platform vendors etc. and allow attendees insight into the spectrum and contrast of practices being followed across the board. Such insight and associated learning I believe is by far the biggest benefit of attending such conferences.
From my session attendees learnt high level understanding of different routes available in implementing some of the key areas of the Standard and how their decisions might impact their future IFRS17 profits and balance sheet positions. This might help them assess cost and benefit of implementing simpler to more complicated ways of implementing the Standard. Further, they benefitted from some technical insight into the approaches which can be implemented by leveraging existing systems and platforms.
How can risk professionals maintain consistency across the industry?
Maintaining consistency (in my opinion) is going to be challenging in the initial years of implementing the Standard. This is mainly because at this stage, the Standard itself appears to be evolving and different participants may be ‘reading’ it in a different way. This may be analogous to implementing the Internal Model for Solvency II purposes (note not similar to Standard Formula, as that is largely prescriptive).
However, as time progresses, a common understanding and knowledge may emerge across the industry bringing consistency. This may be facilitated by various industry bodies, e.g. IASB, ABI, various accountancy and actuarial institutes, EFRAG, CFO forums, NoCA etc. but to name a few.
This can be further facilitated by conference platforms similar to this, and in addition bridging of interpretation along with understanding of approaches adopted by different insurance firms, by accessing big consulting, accountancy and audit firms working with multiple clients.
Although it may take a few years, it is likely that the industry will converge to form common practices throughout (and after) the implementation period. This is necessary as market analysts would need to assess insurance firms based on the set of accounts published using IFRS17 basis, and the risk profile of two similar firms should not be perceived to be different – which is one of the fundamental objective of the Standard.
Without giving too much away, what are some of the technical impacts on the balance sheet?
Any insurance firm implementing the Standard will need to set up IFRS17 ‘liability’ elements, i.e. CSM, Risk Adjustment and BE of policyholder liabilities.
Although the CSM is a quantification of profit, it is nevertheless to be held as (under the new IFRS17 measure) a liability on the balance sheet. This means, for any insurance firm if the CSM is a big enough number, it may result in material reduction in the free equity available. However, by how much would depend on the business profile of the firm in question. I expect this issue is not something specific to any particular insurance firm’s balance sheet, but across the industry challenge.
What top advice/tips would you give industry professionals when implementing the standard?
The Standard offers you the opportunity to design your implementation methods that are specific to your business, so long as they pass the auditor’s tests. Therefore, spend some time in analysing different techniques and associated financial impacts – on both spot impacts and projected release basis – which may impact fundamental economics of your company, for example, dividend declaring capacity, tax implications, perception of profitability by industry analysts and market participants etc.
In addition, their needs to be a right balance in the techniques decided and technology used (or available) to implement underlying techniques. I have seen some market participants with a perception that IFRS 17 is extremely data intensive – which I agree is true (especially for large multiline groups), however, only to a certain extent. Your data storage, processing and reporting requirements will only be as complicated as the level of granularity sought. Therefore, where possible, try to achieve aggregation harmony in results produced and keep the implementation simple – whilst ensuring that auditors are happy with any simplifications.
How do you see the FRTB landscape developing over the next 6-12 months?
Over the next 6-12 months I think will be a mix of learning, developing and analysing the impacts of the Standard, i.e. it will still be in somewhat project mode. However, by end of 2020 there should be a stable transition towards business as usual phase in terms of design and efficiency.