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Cognizant Ifrs17 Whitepaper Webview
Cognizant Ifrs17 Whitepaper Webview
GLOBAL
FINANCIAL
REPORTING
STANDARD
03 - 04
EXECUTIVE SUMMARY
05 - 12
IFRS 17 DECODED
13 -18
IFRS 17 IMPACT AREAS
AND THE NEED FOR A
Table TARGET OPERATING
MODEL
of
Contents 19 - 25
THE ‘STRIDE’
APPROACH TO IFRS
17 IMPLEMENTATION
26 - 27
TEAM COMPOSITION
28
LOOKING FORWARD
2
TABLE OF CONTENTS
EXECUTIVE SUMMARY
The International Accounting Standards Board (IASB) In Europe, the European Commission is still considering the
published IFRS 17 Insurance Contracts on 18 May 2017, adoption of IFRS 17 by end of 2018, while many Asia Pacific
providing a single accounting model for all insurance regulatory bodies have already adopted it. Insurers in EU and
contracts. With the new standard, investors from anywhere in Asia Pacific have either undergone or are still undergoing
the world are able to understand and compare the financial significant capital restructuring over the last few years to adopt
positions and performances of companies that issue insurance Solvency regulations - Solvency II, SST, RBC, C-ROSS, etc.
contracts in any country. IFRS 17 also makes accounting for IFRS 17 is expected to add to the complexity of the
insurance contracts comparable with other industries. regulations.
This new Standard, which replaces IFRS 4, has a mandatory Insurers also have to consider the interaction with IFRS 9
effective date of annual periods beginning on or after 1 which defines the recognition and measurement of financial
January 2022. Insurers may, however, choose to adopt the new instruments. Insurers have the option of either transitioning to
Standard earlier (Refer to Figure 1 on the next page). IFRS 9 effective 1st Jan 2018 or deferring the implementation
of IFRS 9 to combine it with IFRS 17. The combined
Although implementation is expected worldwide, IFRS 17 implementation of IFRS 9 and IFRS 17 is complex and demands
is unlikely to impact North America with the US Financial proper planning of resources. On the other hand, if IFRS 9 was
Accounting Standards Board (FASB) deciding not to follow implemented effective 1st Jan 2018, Insurers need to reassess
IFRS. The FASB is working on a project to improve, simplify and reclassify assets for IFRS 17, which can mean short term
and enhance the financial reporting requirements for long-term volatility in accounting and reporting.
insurance contracts issued by companies using US GAAP. Some
of the proposed changes to US GAAP, if confirmed, are This paper aims to identify the areas impacted by IFRS 17
expected to reduce the differences between IFRS 17 and the across the Insurer’s business and lay out a comprehensive
existing US GAAP, including the use of current assumptions. implementation approach. In this light, the paper further
However, the two sets of requirements will remain different. discusses Cognizant’s capabilities that Insurers can leverage for
successful implementation.
EXECUTIVE SUMMARY 3
Evolution of Insurance Regulations
Pre-2010 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
SG RBC: Singapore Risk-Based IFRS 4 Phase II finalised. IFRS 17 Insurance Contracts IFRS 17 comparison period IFRS 17 first financial
Capital Framework for Insurers was (formerly IFRS 4 Phase II) is starts on 1 Jan 2021. statement to be submitted
published in 2004. Solvency II EIOPA preparatory published in May 2017. on 1 Jan 2023.
guidelines finalised. IFRS 9 comparison period
Swiss Solvency Test was published in 2006. (deferral) starts on 1 Jan 2021.
4 EXECUTIVE SUMMARY
IFRS 17 DECODED
The complete requirements can be addressed in four steps:
01
Contract unbundling, recognition and portfolio component called Contractual Service Margin (CSM)
creation – The first step is to unbundle the insurance to represent unearned profits at initial and subsequent
components of a contract from its investment and recognitions.
service components, followed by defining the contract
boundaries and recognizing the contracts based on For groups of contracts with less than one-year
their inception or payment date. These contracts need coverage period, the premium allocation approach,
to be further segregated based on their policy types, which calculates liabilities by allocating the premium
risk categories, issue year, coverage, etc. and over a period, is a cost effective approach and is only
grouped into annual cohorts (i.e. all policies sold in a allowed if the Insurer is able to prove that there will
single year with similar characteristics). Additional not be any significant difference in results with the
grouping is further applied based on contractual cash BBA. Finally, a variable fee approach (VFA) is
projections at inception to determine their chances of prescribed for policies with discretionary participating
becoming onerous. features to reflect the linkage between cash flows and
underlying assets.
03
standard measurement metrics and comparability Transition planning – Insurers are expected to
across Insurers’ annual reports brought the need for apply IFRS 17 retrospectively for all existing contracts
a new measurement model. IFRS 17 prescribes three up to their inception date, to the extent practicable.
approaches to calculate liabilities for the groups of Wherever full retrospective approach is impracticable,
contracts. The building blocks approach (BBA) also insurers are given the option to choose between
known as the general model measures the fulfillment modified retrospective and fair value approach.
cash flows as present value estimates of future cash
flows with risk adjustments. It also introduces a new The modified retrospective approach is essentially a
retrospective approach, but with certain relaxations to
IFRS 17 DECODED 5
cover the gaps in data from inception date and can be used
only if reasonable and supportable information is available.
The fair value approach is not a retrospective approach - it
calculates Contractual Service Margin (CSM) at the
transition date as a differential between the fair value and
the present value of fulfillment cash flows. The fair value
calculation takes certain additional factors into account such
as non-performance risk, overhead expenses directly
attributable to the contract, etc. which causes the
differential CSM.
IFRS 17 DECODED 5
Quick Take
IFRS 17 Decoded: A Four-Step Process
STEP 1: Contract unbundling, recognition and portfolio creation
A. Contract unbundling
No
IFRS 17
Insurance Insurance
Unbundling
contract component
Service
B. Recognition and derecognition
IFRS 15
Yes
component
Non-insurance • Typical - Earlier of (coverage start date,
Insurer's component
business
premium due date)
Investment
IFRS 9
component
• Early - Determined as onerous at any point
Discretionary before the above mentioned dates
Investment No
participating
contract feature
Yes
C. Portfolio creation
Group Annual Contracts have to be segregated into
A cohorts
portfolios based on similar risk categories
and issuance (annual cohorts)
Group Annual
Portfolio A
B cohorts
Profit
sharing Group Annual
C cohorts
All
Contracts Portfolio B
Groups would contain:
Group A Contracts with no significant chance of
Lines of Policy becoming onerous at initial recognition
business coverage
Group B Contracts onerous at initial recognition
Portfolio C
Group C Remaining contracts
The higher the granularity insurers opt for, the greater the risk of contracts becoming onerous (Group B)
6
IFRS 17 DECODED IFRS 17 7
DECODED
Quick Take
IFRS 17 Decoded: A Four-Step Process
STEP 2: Selecting the measurement approach
an insurer requires to
absorb all obligations of
3. Variable Fee Approach (VFA)
insurer
Best estimate liabilities
Discounting (B2)
For contracts with direct participation features
Cash Flows Contractual Service Margin
(Expected Value (CSM): Eliminates any gains on • VFA identifies the fair value of the underlying items, and deducts a
of Liabilities) the present value of all future variable fee for service.
(B1) cash flows at inception • VFA follows the same blocks as BBA, and there is no change in CSM
at initial recognition.
• In subsequent measurements, CSM changes with the change in
At initial recognition discretionary cash flows.
8 IFRS 17 DECODED
Quick Take
IFRS 17 Decoded: A Four-Step Process
STEP 3: Planning measurement for transition
Contract Start Year-n-2 Year-n-1 Year-n Year-m-2 Year-m-1 Year-m Year-m+1 Year-2 Year-1 Year 0
Modified
Full
Fair Retrospective/
Retrospective
Value Simplified
Approach
Approach Approach
CSM at transition date = fair value • Grouping based on data at current data at transition date
IFRS 17 DECODED 9
Quick Take
IFRS 17 Decoded: A Four-Step Process
STEP 4: Measurement to reporting and disclosure
Building Blocks - P&L Relationship
Past / Current
Future Cash Outflows Change in discount rate
Cash Inflows (present value of liability changes)
Past / Current
Cash Inflows Other comprehensive income (OCI)
10 IFRS 17 DECODED
Adoption of IFRS 17 Across the Continents
Based on the current implementation of IFRS 4 across the continents and the stance taken by national statutory
bodies, the following is a prediction of the likelihood of IFRS 17 adoption across the globe.
12 IFRS 17 DECODED
AFRICA & EUROPE
•Angola, Morocco, Namibia, Nigeria, etc.: Adopted Phase I; -Taiwan: Financial Supervisory Commission (FSC) has
no information on IFRS 17 planned for IFRS 9 compliance with global timelines; no
•European Union: All states follow IFRS as adopted by information on IFRS 17 but IFRS 4 to be adopted
European Commission. IFRS 17 is not likely to start •India: To adopt IFRS 17 as ED/Ind AS/2018/03 ‘Insurance
officially in Europe before Q3 2018. EFRAG (European Contracts’; delay is expected
Financial •Indonesia: IFAS is partially based on IFRS 4; IFRS 9 adopted;
Reporting Advisory Group) has held consultations with IFRS 17 yet to be adopted
interest groups and is currently gathering response from •Japan: Financial Services Agency (FSA) of Japan has allowed
Insurers on case studies. optional adoption of IFRS 17; however, JGAAP is still not
•South Africa: Likely adoption of IFRS 17 converged with IFRS
•Malaysia: MFRS 17, full adoption
AMERICA •Myanmar: MFRS 4 adopted; however, no information on IFRS
•Brazil, Chile: IFRS 17 to be adopted 17 adoption
•Canada: IFRS 17 being added in CPA Handbook, •New Zealand: NZ IFRS 4 to be implemented by 1 Jan 2019;
to be adopted IFRS 4 will be superseded by IFRS 17
•Columbia: IFRS 9 planned, no plans for IFRS 17 •Philippines: PFRS 17 - full adoption
•Mexico: Converging, however timelines not finalized •Saudi Arabia: Adopted IFRS 9 and 15; IFRS 17 can be
•US: FASB decided not to converge with IFRS adopted in near future
•Venezuela: IFRS adopted as per 2014 state; Phase II unlikely •Singapore: RBC 2, IFRS 17 - full adoption
•South Korea: IFRS 17 to be adopted
APAC & MIDDLE EAST •Thailand: Thai FRS adoption with one-year delay; IFRS 9
•Australia: AASB 17 likely to replace AASB 4 adoption is deferred to 2020
•Cambodia: Full adoption •UAE: IFRS 17 adoption likely
•China: C-Ross and PRC GAAP (CAS) are adopted in China. •Vietnam: Partial alignment with IFRS by 2018, no timeline
Adoption of IFRS 17 is expected for IFRS 17 adoption
- Hong Kong: HK RBC is still being discussed. IFRS 17 •Other ME Countries: No information on IFRS 17 adoption
will be implemented. HKFRS 17 to be implemented
ADOPTION MOST LIKELY MIGHT BE ADOPTED / ADOPTION WITH DELAY NO ADOPTION
IFRS 17 DECODED 11
IFRS 17 IMPACT AREAS AND THE NEED
FOR A TARGET OPERATING MODEL
Although finance and actuary are the two most
obvious areas affected by IFRS 17, they are not the only • Organization strategy
ones. Due to the fundamental changes introduced, • Training needs to address skill gaps
insurers will also see impacts across people, • New roles and responsibilities
processes and technology. People • Strong collaboration between teams
Insurers will need to develop a target operating • Update KPI changes in public
model to look at the impact holistically and address and management reporting
• Assess required • Build an integrated system • Build separate subledger and • Build a new IFRS 17
enhancements to legacy covering actuarial, allocation general ledger or a common reporting layer to cater to
systems and calculation engines system to cater to IFRS 17 required standards
• Data segmentation and • Data feed to accounting requirements • Sunset legacy reporting
grouping systems and data • Data feed to reporting tools post parallel run
• Data feed to warehouse for warehouse systems and data • Data feed from warehouse
portfolio aggregation warehouse and accounting systems
Technical Recommendations
01 (tactical)
• Build a separate IFRS module 02 Enhance existing systems
(tactical)
• Assess existing accounting,
more complex with further modifications
•
leading to lower risk of failure
• Low initial cost to implement in terms
Better use of existing systems as
PROS
PROS
•
making the system completely
compatible with existing
regulations
• Future regulations
can be incorporated
easily
CONS
design stages might stretch the
budget, but higher benefits are
expected in the long run
• More time consuming, hence
the risk of failure if unable to
start the approach on time
• Large data volume and reconciliation at different granularity • Data governance framework
Data • Data definition standardization across multiple sources • Data migration framework
• Parallel processing of financial close data during user acceptance test • Data reconciliation and automation framework
STRIDE Approach
Transformation Charter
Pre- Post –
Implementation Implementation Implementation
Implementation roadmap Common support services - data governance, metadata, master data
Program Management
Change Management
Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
A2
Kickoff /
Project
Governance Design
Impact Assessment
Solution Design
Vendor Selection
Data Segmentation
Segmentation
Grouping
Data Transformation
Implementation
Data Warehouse
User Acceptance Test
Post−Implementation
Parallel Run
Bug Fixing
Internal Audits
Warranty
•Postdeploymentmonitoringeventsandbatches
•Refineoperationalreadinessstrategy
•Leantriageandresolutionprocessforreportedissues
Maintenance
•Batchmonitoring
•Availabilitymonitoring
•Followup/triageondifferentfailures
•Monitoringlogfilesinprod
•Adhocdatapreparation-forbusiness/testing/defects/additions
•Preparingweekly/monthlystatusreportswithstatistics
Cognizant helps insurers right from the assessment stage. With insurer as well to actively manage the risks and dependencies
our rich base of insurance consultants, regulations experts and and ensure successful delivery within timelines and program
data management practitioners, complemented by the IFRS budget.
calculation capabilities of our strategic solution partners, we
can tailor solutions and services that meets the insurer’s needs. Our insurance specialists have supported Fortune 500 financial
companies in their transformation programs worldwide. We
To augment this, the Insurer will be required to provide SMEs have started engaging with several insurers in APAC for IFRS
and resources for user testing. Cognizant will set up a robust implementation.
governance structure involving the management team of the
26 TEAM COMPOSITION
Case Study – Cognizant capabilities
in Solvency II implementation
CLIENT PROFILE COGNIZANT SOLUTION
Client is a solution-oriented underwriter offering a wide range •Gatheredrequirementsfrom
of insurance products supporting clients in various lines of multiplestakeholders
business around the world. In the UK, client operates two including actuaries
underwriting platforms: a limited company and a syndicate. •Updatedexistingartifactstomaket
hemSolvencyIIcompliant
•SolvencyIIapplicationcateredtothere •Supportedinternalmodelvalidatio
n
gulatoryrequirements set by EIOPA
•Supportedthere-
and fulfilled the reporting requirements for London Market designingoftheenhancedprocess.
Unit. CLIENT BENEFITS
•Datafromvarioussourceswasfedinto •Impactassessmentcompleted
theapplication.Itwas stored in the •To-bestatedefined
data mart layer to be picked up by the reporting tool at the •Highlevelofqualityensuredas
CLIENT REQUIREMENTS anoutcomeofrigoroustests
•Performassessmentoftheexistings delivered.
ystems
•Supportthedesignofenhancedrepl
acementsystems
•Supportimplementationofthe
enhancedsystemsbysetting
TEAM COMPOSITION 27
LOOKING FORWARD
It’s been over a year since the IFRS 17 requirements were regulation and managing market expectations are expected to
announced, but the progress of adoption is still slow. While pose major challenges to insurers. Starting without further
insurers in Europe are waiting for the adoption by the delay will allow insurers to properly assess their options and
European Commission, some Asian insurers are facing the lack transform their systems to be future ready, rather than merely
of direction from global headquarters, which are mostly based complying with the current requirements.
in the US or Europe. This delay may lead to insurers choosing to
opt for a sub- optimal solution rather than a complete Different actuarial and finance vendors are expanding their
transformation, due to lack of time. offerings to provide a complete solution, while consulting and
audit firms are partnering with these vendors to support
Even with ample time, issues such as data management, insurers right from business assessment to implementation.
availability of knowledge/ resources, lack of comprehensive Insurers should start planning immediately if they haven’t
solutions in the market, building systems for multi-entity, already done so, to avoid falling behind in this complex
multi- implementation.
TEAM COMPOSITION 29
FOOTNOTES
1. IFRS 17 Insurance Contracts, http://www.ifrs.org/-/media/project/insurance-contracts/ifrs-standard/ifrs-17-effects-analysis.pdf/
2.KPMG IFRS Peer Analysis,https://assets.kpmg.com/content/dam/kpmg/nl/pdf/2017/sector/verzekeraars/IFRS_Peer_Analysis_2017.pdf
3.Actuarial Societies of Hong Kong, http://www.actuaries.org.hk/upload/File/IFRS2017/IFRS2017HK_Session24.pdf
4. EY IFRS 4 Phase II & Solvency II Bridging the Gap, http://www.ey.com/Publication/vwLUAssets/IFRS-4-Phase-II-and-Solvency-II/$FILE/IFRS-
4- Phase-II-and-Solvency-II.pdf
5. PWC laying the foundations for the future of Insurance Reporting, http://www.pwc.com/en_GX/gx/insurance/ifrs/assets/pwc-laying-the-
foundations-for-the-future-of-insurance-reporting.pdf
6. Actuarial Society of Hong Kong 2017 Insurance IFRS Seminar Session 23, www.actuaries.org.hk/upload/File/ASHK%20IFRS%20Seminar,%20
1-2Dec.pdf
7. EY Impacts of IFRS 17 insurance contracts accounting standard, www.ey.com/.../ey-impact-of-ifrs-17-for.../EY-ifrs-17-global-dsp-considerations.pdf
8. Deloitte KPMG Swiss Re ch-fs-white-paper-ifrs-17, https://www2.deloitte.com/content/dam/.../deloitte-nl-fsi-beyond-accounting-report.pdf
Note: The logos and company names presented throughout this white paper are the property of their respective trademark owners and are
displayed for illustrative purposes only. Use of the logo does not imply endorsement of the organization by Cognizant, nor vice versa.
ABOUT THE AUTHORS
S Srinivasan Somasundaram is Principal Consultant and Senior Director with Cognizant Consulting’s Insurance
Practice. He has more than 20 years of experience in insurance across operations, product development, consulting and
IT services. His consulting experience includes business transformation advisory, digital strategy, regulatory program,
post-merger integrations and platform modernization. Srini can be reached at
[email protected]
S.T. Sailaja is a Senior Manager with Cognizant Consulting’s Insurance practice. She has over 14 years of experience
in consulting, transformation, regulatory compliance, process excellence, automation, program/ project management
and change management. She holds an MBA degree from K.J. Somaiya Institute of Management Studies and
Research. Sailaja can be reached at [email protected]
Pramit Pal is a Senior Consultant with Cognizant Consulting’s Insurance Practice. He has over six years of information
technology, consulting and business analysis experience in life insurance, annuities and retirement. Pramit holds a
PGDM from the Indian Institute of Management Indore. Pramit can be reached at [email protected]
ABOUT Cognizant is a leading global services partner in the insurance industry. Six of the top 10 global
insurers and 33 of the top 50 U.S. insurers have benefited from our integrated services portfolio.
COGNIZANT’S We help our clients improve their business by driving greater efficiency and effectiveness, while
INSURANCE simultaneously helping them operate in innovative ways, transforming their businesses for the
BUSINESS future. Cognizant redefines the way its clients operate — from increasing sales and marketing
effectiveness, to driving process improvements and modernizing legacy systems, to sourcing
UNIT business operations.
ABOUT Cognizant (NASDAQ: CTSH) is a leading provider of information technology, consulting, and
business process outsourcing services, dedicated to helping the world’s leading companies build
COGNIZANT stronger businesses. Headquartered in Teaneck, New Jersey (U.S.), Cognizant combines a
passion for client satisfaction, technology innovation, deep industry and business process
expertise, and a global, collaborative workforce that embodies the future of work. With over 100
development and delivery centers and 250,000 employees worldwide, Cognizant is a member of
the NASDAQ-100, the S&P 500, the Forbes Global 2000, and the Fortune 500 and is ranked
among the top performing and fastest growing companies in the world. Visit us online at
www.cognizant.com or follow us on Twitter: Cognizant.
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