Embracing change
Authored by: Kevin Hong, Head of Non-Life Business and John Bowers, Actuarial Product Director, RNA Analytics
IFRS 17 is changing the way that non-life insurers measure their liabilities – both in terms of methodologies and assumptions. Carriers are developing systems for this change, and some reserving processes may need to be fundamentally altered.
On the measurement of liability, a General Model, or Building Block Approach (BBA), should be applied as the default model. The BBA comprises the best estimate of future cash flows under contract boundaries, discounting, risk adjustment and contractual service margin.
IFRS 17 allows non-life insurers to choose Premium Allocation Approach (PAA) as a simpler method to measure the liability for unexpired risk subject to eligibility. Non-life insurers will need to navigate the criteria to qualify for the PAA to retain a familiar accounting model.
The discounting of the liability for incurred claims may be a significant change from current practice. Companies that do not currently discount their liabilities, such as non-life insurers that calculate an undiscounted loss reserve, might need to develop systems and processes to do so.
The need for new data and updated systems and processes will be challenging given the long time horizon over which many insurers operate, and the legacy systems that many still use. Carriers will also need to develop controls around any system and process changes and develop or upgrade existing controls for business as usual after transition. A significant effort will be required to install and test new or upgraded systems, and to co-ordinate all this between the finance, actuarial and IT departments. New presentation and disclosure requirements will also change the way performance is communicated – compelling carriers to develop or redesign KPIs, and educate internal and external users.
In our most recent blog, we introduced RNA Analytics' new roadmap - our plans to develop our offering for clients transitioning to IFRS 17, as well as for Solvency II and LDTI - and we are delighted to update the market on our progress, as insurers themselves work towards the deadline for the new standard.
RNA Analytics has developed a number of code libraries and example models that are specific to the requirements of IFRS 17.
The R³S IFRS 17 Package provides a reporting framework for the full reporting cycle using R³S Modeler functionality. This includes the opening liability amounts from the initial recognition run, or last reporting run, being read into the next iteration of the subsequent measure calculation without the need for any additional data manipulation or management.
R³S Non-Life Standard Code is a collection of the loss reserving modules for non-life insurers and calculates Best Estimate Liability (BEL) and Risk Adjustment (RA) for IFRS 17 calculations. Our out-of-the-box reserving calculation tool saves clients time and effort in preparing data and models.
Leveraging the work we have done on bespoke projects over the last 18 months has enabled us to continue to provide significant enhancements to our packages.
This month sees the release of a new version of the Non-Life Standard Code. This latest update includes writing array outputs into a database; mixing Loss Development Method (LDM) results; flooring Loss Development Factor (LDF) adjustment; enhanced RA calculation logic; automated LRC best fit selection; and enhanced output reporting templates. Additionally, alignment of the Non-Life Standard Code with our IFRS 17 package now also allows a ‘hands-free’ end-to-end IFRS 17 process.
As IFRS 17 becomes more familiar, and the disclosure preferences of companies (which unlike Solvency II are not dictated by the regulatory text) becomes clearer, carriers will benefit from adopting and embedding a solution that aligns with their own unique systems architecture, from the bottom up, and we are committed to supporting clients throughout transition – and beyond – along every step of the journey.