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Convista Asia
Operational Effect of IFRS 17 @ConVista
asiaconvista.blogspot.com/2022/09/operational-effect-of-ifrs-17-convista.html
The International Accounting Standards Council (Council) issued IFRS Standard 17 in
May 2017. This standard establishes the requirements that must be obeyed by the
insurance company in reporting information about the insurance contract issued, the
reinsurance contract, and the investment contract with the discretionary participation
feature. Effective 1, January 2022 Many regulators have begun to direct the insurance
company to apply the requirements given in the standard with the ongoing gap analysis
phase and impact.
The purpose of this new standard is to harmonize insurance accounting worldwide,
provide transparency and increase comparisons not only in the industry but also outside
the industry. It aims to provide information to account users to understand meaningfully,
insurance financial position, performance, and risk exposure. With a new financial
presentation, standards revise the definition of income and introduce new disclosures. In
addition, given the standard way of changing the appearance and nuances of financial
statements, new standards are expected to materially influence the measurement of
obligations and recognition of profits for insurance companies. Therefore, IFRS 17 is not
only accounting standards but also brings economic aspects to assess current health and
the feasibility of future insurance companies.
IFRS 17 requires companies that issue insurance contracts to report it on the balance
sheet as total

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1. Fulfillment of Cash Flow: The estimated amount of the current number expected by
the company can be collected from premiums and payments for claims, allowances, and
expenses, including adjusting the time and risk of the amount;
2. The margin of Contract Services: Profit expected to provide insurance protection.
The expected profit to provide insurance protection is recognized in profit or loss from
time to time because insurance protection is provided.
IFRS 17 requires the company to distinguish between contract groups that are expected
to generate profits and contract groups that are expected to make losses. Every expected
loss arising from the contract that makes a loss, or is severe, is calculated in profit and
loss immediately after the company determines that the loss is expected.
Before considering the impact of new standards on strategic and operational dimensions,
let's look at the important changes brought by IFRS 17:
Profit calculation
IFRS 17 requires the calculation of the Margin of the Contract Service (CSM) which
represents the earnings expected by the insurance company during the coverage period.
CSM is calculated as the present value of the excess cash flow of the cash flow
probability of the weighted probability and the cash outflow that is adjusted to the risk.
The insurance company will so that it can no longer realize the benefits in advance at the
time of the contract issuance but the profit will be bound back to the insurance
accountability component through CSM during the coverage period. But losses must be
recognized in advance.
The main components that will change the practice of profit calculation are:
Cash flow discount: The insurer currently has various practices; Non-living
companies with a 1-year-old contract that does not make discounts on other
insurance companies use risk-free rates or the rate of return of other uses on the
underlying assets to discount cash flow. IFRS 17 requires an insurance company to
use a discount rate that reflects the risk of cash flow from the contract rather than
from the tariff based on the characteristics of assets that support the insurance
contract.
Risk adjustment: Adjustment of implicit risk, and as a result, it is disclosed
incorrectly or applied selectively while the standard makes it explicit with
transparent calculations.
Acquisition Costs: Recognition of acquisition costs because suspended assets will
no longer be permitted. The cost of acquisition that can be directly attributed will be
recognized as cash outflows when calculating CSM.

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Assumption: To provide transparent and timely information about insurance risks,
and changes in these risks, IFRS 17 requires the use of the current estimation
based on the latest available information and the disclosure of relevant assumptions
for cash flow calculations at each reporting date is different from the assumptions
made on the beginning continued.
Disclosures:
This standard carries a set of reporting and disclosure requirements that are more
transparent and more transparent. Financial statements need to provide detailed
component breakdowns such as fulfilling cash flow, insurance service results, risk
adjustments, CSM, asset movements, and insurance contract obligations. In all
jurisdictions, similar insurance contracts or non-insurance components will be taken into
uniform. The changes introduced by IFRS 17 will make the current financial position of
insurance companies and future profitability more easily understood and will allow a
meaningful comparison to be carried out in all companies, contracts, and industries.
Strategic Impact
Existing insurance products and future product development
Life insurance companies will be the most affected by IFRS 17 because of the long-
term nature of life insurance contracts. Contract measurements to reflect economic
changes can cause volatility in the income of insurance companies. Life insurance
companies may prefer to improve long-term insurance offers. However, to a certain
extent, this volatility can be reduced by reaching the change in the measurement of
the contract through the OCI option. Harmonizing with IFRS 9 is thus important.
The financial benefits of insurance contracts supported by certain types of assets
may not be attractive. The contract is measured based on the characteristics of the
obligation rather than the asset. Therefore, this contract can cause volatility
IFRS 17 is expected to have a neutral impact on the property insurance segment
and victims of short-term contracts. However, long-term contracts will increase the
complexity of making their accounting treatments more difficult than today.
Products with heavy contracts when they start may need to be increased or stopped
Performance measurement
The performance of various distribution channels (measured by the written premium
collected) needs to be changed as well as the definition of income. The new
performance measurement matrix must be done. All sales channel hierarchies need
to understand this new matrix that will require additional training programs

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The aggressive sales approach in pursuing top-line will not have a goal below new
standards because the order of heavy contracts will be seen negatively than as an
achievement
Product price
IFRS 17 is expected to change the current pricing methodology because it will have
an impact on the features of insurance products, profitability, duration, etc.
Risk premiums can witness revisions and above with tighter and transparent
computing requirements such as discount factors driven by the market and renewed
economic assumptions that support the current cash flow
The use of mutualization among insurance products to include loss-making
products will no longer be possible with heavy contracts that are recognized
separately to force the insurance company to review the product price
Capital Efficiency
IFRS 17 will reflect the capital efficiency of insurance companies in a more transparent
and balanced way. Because the standard does not require reserve requirements that are
too conservative and because the cost swelling will be charged to CSM, capital efficiency
will improve for insurance companies. At the same time loading the front profit, is not
permitted below IFRS 17 because the profit will be adjusted to the CSM and will be
released over a certain period. This will lead to a more balanced and transparent view of
capital efficiency.
Operational Impact
IFRS 17 will introduce significant operational complexity for insurance companies. The
following operational areas will be greatly affected:
Data management
IFRS 17 will require the organization to maintain the broad spectrum of historical
data, at present, and the future at the granular level that will be used to group the
contract, calculate the risk adjustment, the discount rate, the probabilistic cash flow,
and the CSM calculation produced, and the assessment of the insurance contract
Insurance companies need to have a comprehensive data management mechanism
with storage, taking, slicing, and eating ability with specified data flow and
governance control to achieve application requirements not only based on
retrospective at the time of transition but also on an ongoing basis
Integration of data at various levels will be needed to support financial reporting for
internal management and more stringent external reporting & disclosures
System

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When planning IFRS 17 Insurance companies must resign and plan to build greater
integration between finance, risk, and actuarial through a joint platform
We believe that the best way to approach this is through an integrated IFRS 17
solution that connects the financial and actuarial system and issues the disclosure
requirements below the standard
Insurance companies can also take advantage of existing systems with:
Increase the current actuarial system to produce CSM calculations, risk
adjustments, and related data
Improve the existing financial system and IT solutions to include IFRS 17 Specific
Accounting and Reporting Requirements
Process
The measurement and reporting process can experience more special changes in
connection with:
Mapping Account Chart
Consolidation, Reconciliation, and Accounting Close
Actuarial computing process to produce granular and CSM risk adjustments
It processes under a new system regime associated with data mapping and control
Disclosure process
Policy framework and governance
The new framework must be made and the existing policies can change, namely
IFRS Framework Document 17
Accounting policy
Disclosure policy
Investment policy
Product programs
People and Culture
Standard adoption brings a series of complexity itself. Conceptual understanding of the
standards and aspects of implementation (both initially and on an ongoing basis) requires
an increase in financial skills, data, and functioning. In addition, from the perspective of
insurance company culture, it needs to be prepared and flexible enough for a more

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transparent regime where performance will be measured and reported based on
economic considerations. Better governance and control framework will help insurance
companies after the standard is applied.
IFRS 17 gives a great emphasis on data management strategies, end-to-end system
architecture, and policy modification and processes around financial, actuarial, and
business functions.
Insurance companies need to spend significant time analysis of gaps and impact analysis
activities before developing a strategy on how to implement processes and operational
changes to adopt standards.
We are at Sutra, an advisory company driven by analytics, that has worked with many
insurance companies in the GCC region in the field of risk management and analytic of
the company and is fully directed to help companies carry out smooth transitions to
IFRS17 with advisory implementation services and solutions to solutions with solutions
and solutions to solutions and solutions solutions solutions and solutions with solutions
and solutions. On the actuarial side, we have also helped many companies in the fields of
pricing, product design, reporting, liability assessment, solvency monitoring, asset liability
management, and business planning. To find out more about our experience, don't
hesitate to contact us on the ConVista website. www.convista.com