The Ledger

A digital finance blog

The Ledger

Posted by Brian Heale

Addressing IFRS 17 calculation and allocation gaps

There is no shortage of challenges associated with IFRS 17.  The data, systems, judgement application, and business process complexity of the Standard has been well documented. 

Recently, however, we have seen several less documented challenges arise at some of the global IFRS 17 projects we have live today. These issues include filling calculation gaps not addressed in existing actuarial and source systems and managing the cost allocations necessary for compliance. 

This is particularly driven by the requirements to apply allocation rules to data like expenses, risk adjustments, and even certain cashflows to ensure the granularity of data meets the IFRS 17 calculation and disclosure requirements. In addition, many insurers source systems are not flexible in their output nor automated which means additional supplementary calculations need to be performed.  These can include generating fulfilment cash flows from payment patterns for the LIC or converting accident year data into underwriting year data.

Challenges 

Data preparation 

Data preparation is a huge aspect of IFRS 17. Much of the input data needed for IFRS 17 is held in multiple source systems relating to the various types of insurance, premiums, claims and expenses data required. While most insurers have started to understand the complexities of bringing this data together and mapping it to their target IFRS 17 solutions, many have only recently realized the additional functional logic that is required to ready the data.  

While some insurers already have existing cost allocation capabilities running from their GL processes, the required data points for IFRS 17 are often not available in those systems or the timing of its availability doesn’t lend itself to use for IFRS 17.  In addition, many insurers were able to make do with spreadsheets but this approach is heavily manual and likely unsustainable under the new standard. One insurer we are working with currently has 80+ allocations based on a complex array of interactive spreadsheets and this will grow considerably under IFRS 17. Already they are struggling to make the changes necessary to meet the compliance requirements. 

Increase in volumes, complexity and audit requirements 

For many insurers, the initial approach to allocations and certain calculations was to look to their existing ETL processes to build the necessary rules.  This is now proving almost impossible in many projects.  The complexities of simply gathering and validating data from multiple sources is using up the resources pool.  More importantly, the Actuarial and Finance teams have realized that the complex nature of the rules, the extensive audit requirements, and the need to manage these rules over time to keep on top of the changing business requirements make an IT-heavy, ETL approach very complex to implement and ultimately not sustainable. 

Interpretations 

Allocations and interim calculations will have a material impact on IFRS 17 results. Cost allocations can make a profitable cohort/contract become onerous, or vice versa while the granularity of the unit of account, particularly at the portfolio level, can hide certain sensitivities. 

What has also emerged with our clients is the need to undertake “what-if” analysis to assess the impact that potential allocation/calculation methodologies will have on the IFRS 17 results. Thus, the ability to generate and perform tests based on different assumptions and drivers prior to implementation is critical. This relates to both transition balances and the impact on future reporting period results. Running these sorts of simulations is much more difficult when attempting to manage allocations and calculations using spreadsheets, rigid ETL tools, or ERP allocation tools that are often too aggregated. 

 

Overcoming allocation and calculation gap challenges – lessons learned 

From working with Insurers to map out allocation and calculation requirements under IFRS 17, we have learned some key lessons that can be applied across a range of processes.  

Prioritize flexibility 

When considering where allocations and gap calculations should be done, prioritize flexibility.  A rules-based data mapping tool can increase the automation of allocations and calculations and can allow dimensions and attributes to be added dynamically from existing data sources and structures available. Rules can then be chained together in any combination to build the allocations and calculations necessary for IFRS 17, while still giving finance the ability to change these rules without the need for IT.  

Be prepared to be flexible on DimensionsDrivers and Rules: 

  • DimensionsNeed to define the granularity and attributes of allocations, e.g. for APRA reporting or IFRS 17 allocations to open cohorts (NB, lapses, cancellation, etc.) 
  • DriversSupport for multiple methodologies and calculation types 
  • RulesThe ability to perform “what-if” modelling to compare results will be a big benefit – make sure you can do this 

Keep an eye on performance 

Depending on granularity, the volume of data required to deliver allocation results to comply with IFRS 17 can be massive. This can and will have architectural implications for data transfer mechanisms and network capacity. This can also affect timing implications for batch processing and performance so ensure the system you choose can scale with demand and can maintain a high level of performance in the face of high data volumes. 

Look to automate as much as possible 

Choosing an approach that automates allocations and calculations processes can greatly speed reporting timescales, reducing resource requirements and getting reporting into the hands of analysts and decision-makers faster.  For many, the alternative is loading in multiple spreadsheets at run time. With the right tool, automation can extend beyond IFRS 17 compliance processes to other reporting regimes and result in more efficient scenario planning, and more granular management information. 

 

Aptitude Calculatefficiently addresses calculation gaps and cost allocation requirements 

Aptitude Calculate (AC) is a stand-alone tool, capable of integrating with any upstream or downstream systems. It fills holes between source systems, actuarial engines, IFRS 17 accounting solutions, and reporting tools to undertake the significant challenges of cost allocations and gap calculations. Indeed, AC seems to be the missing link in many insurers IFRS 17 architectures fitting between their actuarial, finance and source systems and their IFRS 17 calculation engine and accounting tools. 

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For more detailed information on how Aptitude Calculate can fill gaps in your organization’s finance architecture, please download the Aptitude Calculate Solution Brief or reach out to info@aptitudesoftware.com. 

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