Set to go live in 2023, IFRS 17 is not just an accounting standard but a change in stakeholder perspectives. Actuaries and accountants have historically taken different approaches for financial reporting.  While actuaries focus on reviewing reserve estimates to ensure these are reasonable, accountants have been more concerned with the bottom line. This is all set to change. This post provides a quick recap of the purposes of the Standard, covering the following:

• Transparency
• Comparability
• Correct and useful Information

In this article we focus on these three aspects from the actuarial perspective and we focus specifically on the role of an actuary in the GCC and how the purposes of IFRS 17 dovetail with the role of the statutory actuary in the GCC.

IFRS 17 in the GCC

The insurance market in the GCC is largely a General Insurance market. Within the KSA and UAE the average market share of Motor and Medical Insurance is in the range of 50% to 80%. The markets are unevenly distributed in terms of premium with large insurers in both markets claiming about 60% of the market share. Insurers in this GI dominated market have tended to take IFRS 17 less seriously due to the short-term nature of contracts (Motor and Medical insurance contracts usually having a term of only 12 months). With the conclusion of IFRS 17 Phase 3 from SAMA in the KSA most insurers and Actuaries have appreciated that the simplified Premium Allocation Approach (PAA) is not so simplified. The table below lists the type of reserves calculated for a GI insurer, broadly classified into liability for remaining coverage (LFRC as per IFRS 17) and liability for incurred claims (LIC as per IFRS 17).

Table 1. Reserves calculated for General Insurance (GI) companies

As a recap it is important to note that IFRS 17 lays down the following measurement models for LIC and LFRC.

Table 2. Measurement models for GI reserves

Historically, in an outsourced actuarial scenario, the external appointed actuary would not only estimate the IBNR, where significant actuarial judgement is needed but also the UPR, DAC and UCI reserves. This is simply done by proportioning the premiums, claims and commissions over the duration of the policy. In most developed countries, estimation of the UPR, DAC and UCI is not an outsourced function, but in the GCC region these reserves are usually estimated externally due to the following reasons:

• Regulatory requirements impose minimum qualification standards on the signing actuary,
• A lack of internal actuarial resources,
• System constraints.

Regulations aside, systems are an area where many insurers have struggled. While some insurers have been ahead of the curve in automating a number of processes, the majority of insurers in the region still rely on manual bulk postings and accounting journal voucher entries due to system limitations. This leads to actuaries having to make adjustments to their calculations and sometimes needing to exercise significant judgement in their processes. Things are, however, likely to change, given the requirement for increased transparency under IFRS 17.

Transparency

With increased transparency it must be possible for management and shareholders to identify profitable portfolios by year of origin. In a region where calculation of combined ratios can be onerous at times, due to non-availability of expenses split by LOB, the transparency required by IFRS 17 seems a tall order. This is where proactive insurers in the region are treating the implementation of IFRS 17 as an opportunity to improve systems and to add more sophisticated actuarial modeling and financial reporting tools to their arsenal, in order to do this correctly.

Many insurers however view this as largely a regulatory compliance exercise, with little tangible benefits to the business. For actuaries it’s not going to be an easy mountain to climb given that historically actuaries have estimated reserves at a higher level. Allocating these to specific portfolios while juggling with actual and expected LIC and LFRC cash flows introduces an additional responsibility.

To provide transparency you need data. Though spreadsheets can be useful they cannot always be leveraged due to their inability to handle large volumes of data and their limited data ETL (Extract, Transform and Load) capabilities. Given that most insurers in the market write multiple GI lines the issue of multiple groups within portfolios is likely, hence the question of the “right actuarial software” needs to be carefully considered.

Comparability

Comparability is not achieved without transparency. To compare portfolios written between two insurers the financials must contain relevant information which is not possible without data. Data cannot be stored in a hard drive as we are not going to be dealing with raw data but rather processed data in the form of cash flows. For example deriving the actual cash flows and how these change due to the experience for each group within a cohort can be a cumbersome task. Therefore, we are not just dealing with case estimates and reserves as at a specific valuation date but cash flows, something which is more familiar territory for Life actuaries.

Correct and useful Information

We then step forward towards correct and useful information which will be provided in the form of disclosures, a feat which is easier said than done. To meet this onerous and cumbersome IFRS 17 requirement the following two aspects are key:

• Data
• Systems

Key areas to look out for during IFRS 17 implementation include:

• Expense allocations by line of business level seldom exist at an adequate level of granularity. This will certainly impact the calculation of profitability of cohorts. Hence, this will be an important decision for the stakeholders.
• A lack of adequate reinsurance data is an impediment to reinsurance modelling. Where retention ratios are sometimes employed by actuaries to determine net of reinsurance provisions, this will now change, as IFRS 17 requires explicit reinsurance modeling.
• Risk adjustments are a key area that the GCC insurers need to understand. Using approximations from other jurisdictions is a useful starting point but far from what is required. The differences from market to market imply that risk adjustment approaches should be customised to suit the local terrain as well as the risk appetite of the Board. Insurers should look to develop internal capital models to derive risk adjustment factors representative of their portfolios. This is also an area of local regulation where more focus is needed on the importance of an Enterprise Risk Management (ERM) function. It is expected the Companies with well-developed ERM functions will be the forerunner in IFRS 17 developments.

In closing, the changing regulatory and economic landscapes of the GCC market must be considered. Some GCC regulators have been proactive in taking the lead whilst others have placed less importance on this for now. The responsibility however lies with insurers, auditors and actuaries as practitioners to align for the sake of all stakeholders.

It is important to understand the changes and the additional requirements of IFRS 17 to meet the requirements as and when they become due.