Final notes in the countdown to IFRS 17

With only a few weeks remaining before the implementation of IFRS 17 on January 1, 2023, we revisited the topic with FCIAs and Co-Chairs of the IFRS 17 Steering Committee, Sati MacLean and Les Rehbeli.

With the date for IFRS 17 implementation only a few weeks away, are there any outstanding items that companies need to address before January 1 rolls around?

Sati: We recently completed the Transition Readiness Test, which acted as a dry run for completing IFRS 17 regulatory returns. There are a few areas that companies have identified that they need to refine. Most insurers will likely be focusing on fine-tuning those areas, as well as addressing any specific technical areas that have not yet been addressed.

Auditor discussions are also a hot topic. Many insurers are working with their auditors to identify and address potential areas of concern before the standard goes live. This applies not only to policy choices but also to the application of those policies.

Les: Those are the same points I would have made on the life side as well. I know that some companies are continuing to fine-tune, with some of their policy choices being based on auditor discussions.

Is there any further guidance that’s still needed from the CIA?

Les: There are still a few minor things that are outstanding. For example, the Committee on Life Insurance Financial Reporting will update its educational note on coverage units in early 2023, to align with the International Financial Reporting Interpretations Committee’s final decision impacting payout annuities. As another example, a number of practice committees are reviewing much of the existing pre-IFRS 17 educational notes in light of changes needed to reflect IFRS 17. This will involve archiving some of the older educational notes or changing them to be relevant under IFRS 17. We don’t expect this to impact what has been produced for IFRS 17 at this stage.

Are companies comfortable with the determination of discount rates under IFRS 17, or are there still some potential learnings and adjustments?

Les: As with anything, the level of comfort varies between companies. Certainly, for many life insurers, there has been a lot of thought put into developing a discount rate methodology that optimizes financial performance going forward, which minimizes the volatility they may expect in their profit and loss statements. There may, however, be some insurers that have not yet done as much work on this as they may have wanted to.

Once the implementation is complete and insurers start to get more familiar with the volatility in their profit and loss statements on an IFRS 17 basis, my guess is that some insurers may turn their attention to refining their discount rate methodologies. 

Do you expect there will be any changes or adjustments to IFRS 17 once it has been released?

Les: I assume you are referring to adjustments to insurers’ accounting and actuarial policies and procedures, as opposed to changes to the IFRS 17 standard itself. I would not be surprised to see insurers make some refinements to their methodologies in the next year or two, for example the discount rate approach noted above.  

Sati: Yes, I agree that there will be refinements. We have not yet seen any published results at an industry level. I don’t think it will surprise anyone if we see a wide range of practices as we initially start reporting under IFRS 17. For example, the Office of the Superintendent of Financial Institutions (OSFI) already raised concerns about the range of practices they were seeing related to the risk-free rates used in the quantitative impact studies. It is yet to be seen if this continues to be of concern from a regulatory perspective. There are also other areas where practice may be fairly wide, for example, assessment of risk adjustments and assessment of loss components, to name a couple.

Have there been any surprises as companies analyze their comparative results? Have they prompted any significant changes in how business is developed, priced and managed?

Sati: It is difficult to comment on surprises at this stage, as there is little publicly available information. In some ways, we are waiting for the “big reveal” to see how insurers across the industry have interpreted and implemented IFRS 17. For P&C insurers, different policy decisions will make it more challenging to compare one insurer to the next. For reinsurers, the IFRS 17 treatment of commissions will impact the financials. For example, top line (i.e., revenue) is going to be lower because of the treatment of ceding commissions, although expenses will also be lower by the same amount.

When insurers are comparing IFRS 4 and IFRS 17, they are having to understand the presentational changes versus impacts from IFRS 17 assumptions changes and/or accounting policy decisions to better understand how IFRS 17 has changed the valuation and financials. I imagine such comparisons against IFRS 4 will continue for some time.

From a business perspective, given that IFRS 17 does not change the fundamental economics of most P&C insurance products, I don’t expect there to be significant changes to pricing and managing the business. But considering that the recognition of profit will likely change, there could be interesting strategic discussions regarding the types of products underwritten in the future.

Les: I wouldn’t say there are any surprises on the life side, but one obvious change for many companies is their asset-liability matching (ALM) practices. In particular, companies that have significant equity positions in their portfolio may start to divest and replace them with different types of assets. Additionally, companies may be revisiting their asset-liability matching strategies to fit the new framework. I would also expect some changes to the pricing of new life products as well. Finally, I agree with Sati that there may be additional learnings once the “big reveal” occurs.

It took a while for the capital rules to be finalized. What do capital ratios look like now, and are we seeing more variability than in the past?

Sati: At an industry level, OSFI is targeting a neutral capital impact. At a more granular level, I expect there to be significant variability in how IFRS 17 impacts the Minimum Capital Test (MCT) ratio from one insurer to the next. For example, OSFI introduced a 10% charge on the insurance risk charge calculation, which will benefit some insurers whilst adversely affecting other individual insurers.

Les: The same is true on the life side where there will be some insurers whose capital ratios are increasing while others are decreasing, which will largely be a function of their insurance product suite as well as the type of assets they have supporting their products. Companies that generally relied on heavy usage of equities and have long-term financial guarantees will probably find a decline in ratios, and others that have more simple products or “plain vanilla” fixed-income assets supporting the products will probably be neutral or have a slight gain. But I would also expect going forward that there would be more volatility in profits and losses, which would then cause the LICAT ratios to be more volatile going forward.

Are the users of financial statements (i.e., non-actuaries) comfortable with how earnings will be emerging going forward? Are the new concepts, such as Contractual Service Margin (CSM), generally understood and accepted?

Les: I would say that at a high level it’s easier to understand how the earnings will emerge. But when you get into the details – the finer operating points of how things like CSM and loss components work – it quickly becomes a maze that I think many people will probably have difficulty navigating. However, I’d also like to highlight that the education process continues to be underway. For example, most boards are in the process of receiving education on how to read these statements at a high level, and I think that that will continue to improve in the next year or so as this training is delivered.

Sati: I agree. I think as the training is delivered and familiarity with IFRS 17 financials increases, more actuarial practitioners and non-actuaries alike will gain a better understanding of earnings under IFRS 17. Investor calls, for instance, or information that’s provided to the markets, will be referencing IFRS 17 from next year onward. I do think that actuaries will have an important role to play in helping users understand what these new concepts mean and what the impacts are.

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