As the 1st of January 2023 implementation deadline for IFRS 17 is fast approaching, African insurers and reinsurers are at various stages of their implementation processes. Whether you are a large or small (re)insurer, IFRS 17 is going to fundamentally change the way financials are being presented and have a drastic impact on your entity’s reporting processes. IFRS 17 touches on all aspects of the business. We certainly see Finance, Actuarial, IT and even Underwriting teams having to step up to the plate, but what about the Risk Management area? Do we have a part to play in this regime change?

IFRS 17 is often regarded as a standard to merely comply with, check the boxes, ensure it will pass an external audit, and move on. However, as risk professionals, we owe it to our entities to help them leverage any additional benefits from the significant financial outlay they are making. We should get them to see it as an investment and not a sunk cost. Over and above tracking the usual project execution risks, we as Risk Managers should be asking ourselves, “what can I be doing to help my organisation make the most of this change in regime?”:

Common Benefits of IFRS 17

A reminder of the commonly stated benefits of IFRS 17 to an individual entity:

a) It should be a truer reflection of your profits

b) It should be a catalyst for more collaboration between teams within an organisation

c) It should be an opportunity to streamline your processes and incorporate any much needed modernisation in your systems

d) It should allow for better governance within the organisation with better documentation and stated policies

e) With the large amount of data and central databases needed for quick reference, it should also allow for better consistency within teams, including terminology. 

Benefits of IFRS 17 for Risk Managers

As Risk Managers working in the (re)insurance industry in Africa, we shouldn’t lose sight of these benefits. We should advocate for entities to view IFRS 17 from a value-add rather than a compliance perspective. If you think through some of the requirements, particularly splitting business into profitability groupings as well as focussing on the ultimate projection of profitability (not just reported to date), this standard actually opens up a huge opportunity for entities to better monitor performance in their books.

It is true, many African entities will struggle to comply, particularly as a lack of appropriate data and inadequate systems may inhibit their ability to do so. Those that are able to overcome this, and ensure professionals throughout their organisations are appropriately trained on the impacts of their actions as well as the value-add of IFRS 17 to the business, will reap significant benefits.

With IFRS 17, it will be more difficult to cross-subsidise within the financials, this will allow entities to better isolate poor-performing business from the rest of the book and put remedial actions in place faster for specific areas. If every entity can reflect on this and use the standard for what it is truly intended, overall, we will end up with much healthier (re)insurance companies across the continent, giving the insurance industry a much-needed boost.

As risk professionals, it will be up to us to work with business owners to identify such opportunities and build dashboards that will enable decision-makers to synthesise the information easily. This will enable the entity to identify the areas of the business which will need remedial attention, or alternatively, areas that could be growth opportunities.

Involvement of Risk Managers in IFRS 17 Implementation

On the flip side, from a regulatory and compliance perspective, there are indeed a few areas that will need risk management teams to be more involved. With IFRS 17 having a larger focus on the timing and uncertainty of future cash flows, there are many risk areas that have to be elaborated on in specific detail within the disclosures to the financial statements.

The risks usually expected during the course of insurance and reinsurance business for which the IFRS 17 disclosures are concerned include Insurance risks (pricing, reserving, catastrophe risk) and Financial risks (market, credit, liquidity risk). Now for each type of risk identified, IFRS 17 requires each entity to disclose both quantitatively and qualitatively:

• its exposure and how the exposure arises,

• its objectives, policies and processes for managing the risk, and the methods used to measure the risk,

• any changes in the above compared to the previous period.

IFRS 17 Disclosure Requirements

A summary of the disclosure requirements from the May 2017 IFRS 17 Standard is below:

Paragraph Ref: 126

Disclosures: Information about effect of regulatory frameworks

 In IFRS 4:  No

Summary Requirement: Disclose the effect of the regulatory frameworks in which an entity operates (e.g. minimum capital, rating factor restrictions, minimum/maximum rates).

Paragraph Ref: 127

Disclosures: All types of risk - Concentrations of risk

In IFRS 4: Yes

Summary Requirement: Disclose information about concentrations of risks (reflecting in appropriate amount of detail as required).

Paragraph Ref: 128, 129 

Disclosures: Insurance and market risks - Sensitivity analysis

In IFRS 4: Expanded

Summary Requirement: For market risks, explain the relationship between the sensitivities to changes arising from insurance contracts and those from financial assets. For insurance risks, the effects before and after risk mitigation from reinsurance contracts held. 

Paragraph Ref: 130

Disclosures: Insurance risk - Claims development

In IFRS 4: Expanded

Summary Requirement: Disclose actual versus expected analysis and reconcile it to the Liability for Incurred Claims and Liability for Remaining Coverage.

Paragraph Ref: 131

Disclosures: Credit risk - Other information

In IFRS 4: Expanded

Summary Requirement: Disclose maximum exposure to credit risks and the credit quality of reinsurance contracts held that are assets

Paragraph Ref: 132

Disclosures: Liquidity risk - Other information

In IFRS 4: Expanded

Summary Requirement: Explicit requirements regarding the net cash flows from insurance related liabilities and amounts payable on demand, as well as describing how liquidity risk is managed.

Note that there are many details required to be stated beyond the summary above, including reasons for movements between reporting periods.

The area African insurers and reinsurers may struggle with the most is understanding and reporting the sensitivity analyses. In addition, many companies that do not already have an actual versus expected analysis built into their reserving processes may struggle to understand the workings and impact of this requirement. By virtue of the actual versus expected analysis, it will require you to test your assumptions from the previous projections and compare them with what you projected to happen during the reporting period. Entities that did not have the required assumptions in place during the reporting period before implementation will have to put in effort to backfill this as they are trying to prepare for their first reporting cycle.

Many professionals that have gone before us in regulatory regime changes will tell you these are not areas that you would want to leave for the consultants to build at the end of the process and just hand back to you. To really appreciate the analyses and make the most of their outputs, it will be very important to test the processes, dig into the information, and ensure you understand the implications of making small tweaks to the models before the implementation date.

You should aim to avoid situations where, in the midst of reporting, you find large swings in your results between reporting periods that are very difficult to explain. This will more likely than not lead to management viewing IFRS 17 as a waste of time and something to just be complied with, rather than something that can add value.

The best thing to do is to start as early as possible, do multiple runs on different evaluation dates, then allow yourself the time to fully synthesise the information and get comfortable with changes you see between runs, so that you can fully appreciate and explain your results.

Revisiting Some Risk Management Elements

Lastly, let us touch on the KPIs, Risk Metrics and Tolerances that may need to be revisited following IFRS 17 implementation. IFRS 17, with the focus on ultimate and not only reported information, provides an avenue for the convergence of risk management goals and financial statements. Once everyone is comfortable with the IFRS 17 framework, more relevant statistics will be available for use due to the more detailed IFRS 17 approach.

Ensure you keep an eye out for these statistics and build appropriate dashboards as you go along. Focus on forward-looking information and early warning indicators that can help management teams to make decisions before risks are realised.

We must recognise that dual reporting of metrics and KPIs may be needed for a few reporting periods while entities get used to the new way of looking at figures.

Conclusion

IFRS 17 is indeed coming to add more work, cost, and disclosure requirements to insurance and reinsurance companies. It is also true that IFRS 17 is here to stay. Why shouldn’t we embrace the benefits and seize the opportunity for change?

Remember, change is not easy, but with the right approach and mind-set, risk professionals can help entities to leverage opportunities and get the best outcomes from the situations they face. For Risk Managers, such benefits are many as IFRS 17 adds a rather welcome layer of visibility into insurance and reinsurance underwriting operations.