IFRS 17

IT Aspect Issues
Gap Analysis

Asosiasi Asuransi Umum Indonesia

(AAUI)
12 November 2021
Presented by :
1. Djohan Natawiria, CISA
2. Ludovicus Sensi W, CPA, CA
3. Jasinta Mirawati, CPA, CA

CTPRIMA
Agenda
1 Review Previously Topic of IFRS 17
❑ Implication to Management and Stakeholders
❑ Financial Accounting and Reporting Process
❑ Changes in FS Presentation and Disclosure
❑ Improve financial reporting
❑ Key focus area of the standard
❑ Measurement Model

2 More Understanding Impact of IFRS 17 for IT

❑ Recap on IFRS Requirements
❑ IT Systems Requirements
❑ IFRS 17 IT Gap Analysis
3 Focus Group Discussion
Section 1
Review previously Topic of IFRS 17

CTPRIMA
1 IMPLICATION TO MANAGEMENT AND STAKEHOLDERS

Accounting

Actuarial IT Systems
&
Processes

IFRS 17
/ IFRS 9

KPIs Human
Resources

Page 4
1 FINANCIAL ACCOUNTING AND REPORTING PROCESS

Financial Accounting and

Business Process Financial Statement
Reporting Progress

• Marketing • SOFP (BS) EXTERNAL USER

Recording
• SOCI (IS) • Tax Office
• Underwriting • Statement Of Cash Flow • OJK
Classifying • SOCIN Equity • Stakeholder
• Notes to Financial • Other
• Reinsurance
Summarizing Statement
• Claim Management
Presentation of Financial INTERNAL USER
• Investment Statement (Assertion)
• Completeness GAAP / IFRS 17 • Management
• Other • Employee
• Existence • Other internal user
• Right and Obligation
• Valuation and allocation
• Presentation and Disclosure
Information
for IFRS 17
Requirement

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1 CHANGES IN FS PRESENTATION AND DISCLOSURE

Statement of Comprehensive Income

Insurance revenue

Net earned premiums Insurance services expense

IFRS 4
Interest, dividend and other investment income IFRSIncurred
17 claims and expense
Acquisition costs
Incurred claims and benefits
IFRS 17 Gain/loss from reinsurance
Change in provisions Insurance service result
Profit or loss Investment income
Insurance finance expense

Key Changes : Net financial result

▪ Two drivers of profit presented separately
Profit or loss
▪ Insurance revenue excludes deposits [written premiums disclosed in the notes]
Discount rate changes on insurance
▪ Revenue and expense are recognized as earned or incurred
liability (optional)
▪ Insurance finance expenses are excluded from insurance service result and are
presented (i) fully in P&L or (ii) in P&L and OCI, depending on accounting policy Total comprehensive income

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1 CHANGES IN FS PRESENTATION AND DISCLOSURE (CONT’D)

Statement of Financial Position

Assets
Reinsurance contract assets IFRS 4
Deferred acquisition costs Assets
Reinsurance contract assets
Premiums receivable
Insurance contract assets
Policy loans IFRS 17
Liabilities
Insurance contracts liabilities
Liabilities

Insurance contracts liabilities Reinsurance contracts liabilities

Unearned premiums
Claims payable

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1 IMPROVE FINANCIAL REPORTING
Provides up-to-date market consistent Underwriting revenue and expenses are
information of obligation including recognised over time in comparable way
value of options and guarantees to other non insurance business

Single
Reflects time value of money
accounting Provides separate information about the
approach investment and underwriting performance

Assumptions used in the valuation of insurance contact

liabilities reflect the characteristics of the insurance contract
rather than the risk related to asset / investment activity

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1 KEY FOCUS AREAS OF THE STANDARD

Risk-Based Capital (RBC)

Building block approach /

Contractual service margin

variable fee approach

Risk adjustment
Presentation /
Discount rate Disaggregation
Definition and scope
Insurance Contract
Expected value of future
cash flows
Reinsurance Disclosure

Separation
Premium allocation Risk
adjustment
Component
approach

Liability for
remaining Transition
Discount rate
coverage

Cash flows of
claim liability

Financial instruments and other accounting changes

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1 OVERVIEW OF GENERAL MODEL

Release of contractual
service margin
Contractual
service margin
Change in estimates

Interest accretion at
inception rate
Profit or loss (insurance

+ service result)

Experience
adjustments
Fulfilment cash flows

Risk adjustment

+ Release of risk
Probability weighted
adjustment
discounted expected
present value of cash
flows
Time value of money Profit or loss and/or other
and other assumptions comprehensive income
related to financial risk (insurance finance income
or expenses)
Insurance Contract Liability

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1 INSURANCE RISK VERSUS NON-INSURANCE RISK

Insurance risk, as defined – ‘Risk, other than financial risk, transferred from the holder of a contract to the issuer.’ [IFRS 17, A]
Take only the definition above into account you do not have to consider whether other requirements, such as uncertainty or timing are also met.
Examples of insurance risk (note that this is not an exhaustive list):

Insurance Risk Financial Risk

Death or survival Interest rates

Injury Financial instrument prices

Illness Currency exchange rates

Disability Indices of prices or rates

Loss of property due to damage/theft Credit ratings/credit indices

Failure of a debtor to make a payment when it is due Commodity prices

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1 SEPARATED COMPONENTS

Separation

Distinct
investment
components
Accounting under IFRS 17

Insurance Embedded
components derivatives, which are Accounting under IFRS 9
not closely related

Accounting under IFRS 15

Distinct performance
obligation to provide
goods and
services Accounting under IFRS 17, disaggregation for presentation in
Non-distinct income statement notes
investment components

1 Disaggregation is the exclusion of an unseparated investment component from

insurance contracts revenue
Disaggregation1

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1 LEVEL OF AGGREGATION

1 Portfolio = A group of contracts

Portfolio (a) subject to similar risks
(b) managed together

2 Permitted to group only contracts

At Contract Inception

Cohorts issued no more than one year apart

3
Contracts not onerous at inception

Other profitable No significant

Onerous
contracts possibility of Assessment based on:
contracts at
becoming (a) Likelihood of changes in estimates
inception
onerous which, if they occurred, would
result in the contracts becoming
onerous
(b) Using internal information
about changes in estimates

A loss is
CSM is recognized and released as
recognized in the
insurance service is provided
P&L at inception

Assessment is done at contract inception – no subsequent re-assessment

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1 LEVEL OF AGGREGATION GROUPING OBJECTIVES
18

Portfolio 1 Entity divides each portfolio into groups

Credit life insurance ▪ contracts issued within the same year
▪ information about the contracts’ resilience
 ▪ consistent with internal reporting
▪ exemption for regulatory pricing
▪ group not reassessed after initial recognition

Contracts that at initial recognition Unearned profit is

Group A recognised as part
Profitable  have no significant possibility of
contracts becoming onerous subsequently, if any of the liability and
is released as
Group B insurance services
Other profitable contracts, if any are provided

Onerous Group C Contracts that are onerous at initial A loss is
contracts  recognition, if any recognised in P&L

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Section 2
More Understanding Impact of IFRS 17 for IT

CTPRIMA
Recap on IFRS Requirements

CTPRIMA
2 RECAP ON IFRS REQUIREMENTS
18
IFRS 17 Key Calculation Components

Contractual Service Margin

CSM ▪ Effectively a balancing item that eliminates day one gain
▪ Cannot be negative except for reinsurance Risk Adjustment
Risk adjustment ▪ Released as services are provided ▪ Compensation the
▪ Adjusted to reflect impact of changes in best estimate assumptions in insurer requires for
respect of future service thereby reducing profit variability bearing uncertainty
Total
▪ CSM discount rate “locked” at inception except for directly participating ▪ May reflect diversification
Insurance within and between
Contract business
Market- portfolios Fulfilment
Liability ▪ Modified “variable fee” approach for direct participation business ▪ Disclosure of cash flows
consistent
value of cash confidence level
flows

Cash Flows Time Value of Money

▪ Explicit ▪ Reflect liquidity

characteristics of cash flows
▪ Unbiased
▪ Consistent with observable
▪ Entity perspective
market prices
▪ Within contract
▪ Exclude factors not relevant
boundary
to the cash flows

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2 RECAP ON IFRS REQUIREMENTS

Contractual Serv ice Margin Calculation Example

Page 18
2 RECAP ON IFRS REQUIREMENTS

Contractual Serv ice Margin Subsequent Recalculation

Page 19
2 RECAP ON IFRS REQUIREMENTS

Grouping, Discount Rates, Risk Adjustment

Grouping of contracts Discount Rates

Risk adjustment principle

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2 IFRS REQUIREMENTS - Changes in Balance Sheet and Income Statement

No of Claims and
Expenses in half
General Insurance year

General Insurance

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IT Systems Requirements

CTPRIMA
2 NEW SYSTEMS REQUIREMENTS

Data preparation, data validation, posting and reporting capability.

❑ Master data management Facilitating significant volumes of data feeds and storage, integrate with
general ledgers and actuarial models to load and post data. Audit trail
availability.

Ability to orchestrate end-to-end workflows with clear reporting processes,

❑ Process Organization ability to perform adjustments and audit data inputs, outputs and any
manual interventions.

Powerful enough to process a significant volume of information, with the

❑ Calculation engine ability to trace and document calculation inputs and outputs in detail.
includes best estimate cashflows, the risk adjustment and the CSM at
inception and subsequent measurements

Needs predefined rules that can integrate with data management to

❑ Rules engine generate posting. The engine must be easy to deploy and able to
accommodate your custom posting rules

❑ Reporting Ready for both predefined and ad hoc reports.

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2 DATA MANAGEMENT

Data Availability

Sufficient Granularity?

Cleansing?

Reference Data Ready for

Enrichment?

Data Management Process

in Place?

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2 DATA MANAGEMENT CONSIDERATION

Data management is critical to the implementation exercise

Insurers will need to deal with increased data volumes and data quality
requirements due to:
Increase in granular valuation requirements
Restatement of prior year numbers
Greater granularity of disclosure and reporting capabilities
Increase in the use of market data
Segmentation of portfolios in annual profitability groups
Insurers will have to modernize fragmented and
complex legacy Finance and IT infrastructure. They
should start by answering these key questions:
1. What business needs does an insurer have to address as a
result of IFRS17?
2. How can an insurer leverage its current IT infrastructure to
address business and compliance needs?
3. What data management solutions can an insurer build or
buy to address both business and compliance needs?

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2 MASTER DATA PROCESS

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2 DATA PROCESS ARCHITECTURE

Core
Prospective
Processes Simulation

Data Process Actuarial

Marketing
Collection Cleansing Cleansed
Underwriting Risk
Valuation Feed back
Policy Policy
Premium
Cash Flow Cash Flow
Reinsurance Cession Validation Enrichment Cession Transformation
Engine CSM
Investment Investment
Investment
Expenses Expenses
Public Data Expected Cashflow
Commission Claim Exp Claim Exp
Actual Cashflow
Semi-Private Journal
Claim Data Expenses Entries
Reference Data
Internal Data Insurance Acquisition
Management Cashflow
Legacy
Reserve
System?
Report
DLL
2 DATA IS THE FOUNDATION

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2 TECHNOLOGY, ACCOUNTING, AND DATA IMPLICATION
Impacts on business processes, systems, and accounting policy across the organization

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2 PROCESS INTEGRATION

What to Focus?

INSURANCE BUSINESS CYCLES

Financial Marketing
Underwritin Premium
g Collection

Actuarial Claim Investment

Reinsuranc
e

Operational Financial /
Actuarial IFRS17
Accounting

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2 IFRS 17 PROGRAM

Page 31
2 IT, SYSTEMS AND DATA DEVELOPMENT
IFRS 17 will impact businesses well beyond the finance, actuarial and product development areas (for example, product design and
distribution, development of revised incentive and wider remuneration policies and reconfigured budgeting and forecasting
methodologies feeding into business planning). There could also be an impact on the cash tax position and dividends, both on transition
and going forward.
The following depicts a typical impact of IFRS 17 standard on insurer’s functional areas.
Inputs Data Calculations Close, Reporting IFRS 17 Requirements (Impacts)
Management Consolidate
9
1 2 Group Statuto
ry
The ability to source data with
1 Contract Service Margin (CSM)
Policy Data Liability Allocations Reporting appropriate quality will allow
Calculations 2 Fulfilment Cash Flows (FCF) appropriate level of aggregation,
Regulatory
Reporting 3 Risk Adjustment (RA) and automation when achievable,
Data 3
Asset Data
Management
Tax
4 Other Comprehensive Income (OCI)
will substantially reduce manual
Capital Management workarounds and increase
6 Calculations Reporting 5 Discounting Factors
effectiveness throughout.
RI Data Ledger Close Other Reporting 6 Reinsurance
Other 4 (Local statutory,
Calculations 7 Other) 7 Presentation – Insurance Revenue
Other 5 8 Given the need of data and high
Data (ESG, e.g. earnings,
Consolidation Planning & 8 Presentation – Inc Statement & Bal Sheet
Expenses, AP,
Assumptions accruals,
Forecasting
reliance of systems in insurance
AR, Other) goodwill
9 Presentation & Disclosures company, technology aspect has
10
Accounting Policy, Methodology & Assumptions and Transition
10 Transition become an even more important
factor for the IFRS 17
Functional Areas Impacted implementation.

Information Actuarial Technical Financial Planning &

Finance Controllership
Technology Functions Accounting Analysis

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2 ARCHITECTURAL MODEL FOR IFRS 17

The following depicts a typical architectural model of an insurance company and the new requirements of IFRS 17.

Reconciliations, controls, workflow and process automation

Source data Data warehousing and aggregation Life Stochastic Risk

Actuarial and
Cash risk modelling models aggregation

ETL
flow applications Non-life ALM GRC
Claims admin
model modelling modelling Systems
In force data

Policy admin Actuarial calcs Finance Insurance accounting

Other internal and aggregation Accounting systems General ledger
(sub ledger)
data
Extract scripts

Commissions rules
Staging area

ETL/ESB

management IFRS Extensions engine Investment accounting

Tax
Cash admin Historical data (sub ledger)
Finance calcs and
(inc AR, AP) aggregation
and bank
Reporting, KPIs and analytics
Investment Assumptions and
management run parameters
Consolidation Static reports User driven analytics
Risk calcs and
Reinsurance aggregation Disclosure
treaties Cash flow model XBRL/iXBRL FP&A
output Management
Other (FX,
ESG and Self-Service
experience)

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2 MODERNIZE IT ARCHITECTURE FOR THE FUTURE

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2 ACTUARIAL MODEL PROCESSES NEED TO BEINDUSTRIALIZED

▪ Separate models

Asset data ▪ (Unnecessarily) complex coding ?

▪ Ongoing reconciliation

Liability data

Stochastic
Assumptions Model
Output
data

▪ Various sources
Deterministic
▪ Different responsibilities
Liability model
▪ Different formats /
interfaces Input

Reporting
Other
▪ Various reports templates
reports
▪ Spreadsheet cascades
▪ Manual adjustments

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2 RISK ADJUSTMENT CALCULATION MODEL

Page 36
2 FAST AND SCALABLE CALCULATION

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2 SUB LEDGER POSTING FRAMEWORK

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2 REPORTS FOR COMPLIANCE, CONTROL AND DECISION MAKING

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2 CALCULATION SYSTEM QUALITY REQUIREMENTS

Calculation
System Quality
Requirements

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IFRS 17 IT Gap Analysis

CTPRIMA
2 TUJUAN GAP ANALYSIS

Kesenjangan Roadmap

Future State
2 PROSES GAP ANALYSIS

Outline
Define Future Review
Identify Gap Resolutions &
State Current State
Timeline
2 GAP ANALYSIS POINTS

Target Operating
Data Sistem & Prosedur Infrastruktur
Model

Business Target Data Component

Operating Model Availabiltiy Capability Capability

Calculation procedures Reference Data

Data & System Infrastructure
Architecture Component Architecture
Level of Integration Data Management

Operating Procedure
Performance
Granularity Adjustment
Process outline

Planning Data quality Project Management Continuity management

2 TARGET OPERATING MODEL

Data requirement
Policy Grouping
Profitability
Calculation: Full
Retro? Modified? System Capability
Fair value? requirement
Separate
recognition for Business Process
reinsurance Integration
Define
Risk Adjustment

Cash flow Infrastructure

information
source, discount
factor
CSM Calculation Organizational
Readiness
2 DATA

Availability Governance Quality

• Policy • Policy • Granularity

• Premium • Operations • Cleansing
• Commission • Master data • Modelling
• Expenditure • Reference • Accuracy
• Claims • Archival • Throughput
• Reference data • Retrieval • Interoperability
• Other • Security • Interface
metadata
2 SYSTEM & PROCESS

Capability

Architecture

Business User IT Management

Procedure Procedure

Project
Management
Capability
2 INFRASTUKTUR

Capacity Performance Continuity

Architecture
Management Management Management
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