The Ledger

Posted by Andrea Herbert

IFRS 17’s Contractual Service Margin – an actuarial or accounting issue?

Our IFRS 17 experts are frequently finding themselves in an industry debate over where the responsibility and resolution of IFRS 17 regulatory compliance sits…is it an actuarial issue? Or accounting?

This can be debated for a long time (and it has been!) Luckily, at Aptitude Software, we are in the beneficial position of seeing, in practice, how both the actuarial and accounting teams are affected on the road to IFRS 17 compliance. We have several projects in progress and are learning daily from real client situations. We have concluded that these departments, which often are run in silos, need to work together to find the right solution that works for their company. Of course, for most companies, the ultimate responsibility lies with the CFO – but both the actuarial and accounting departments need to play a key role in IFRS 17 projects.

This short blog explores the complicated, cross-team interaction required and suggests a route to successful collaboration for the mutual benefit of all.

We can trace the seed of confusion back to Solvency II, which for many organizations was an actuarial-driven initiative. There is a common misconception that IFRS 17 should be approached in a similar way and that much of what is required for reporting can be generated from an actuarial-driven approach. However, what we are seeing is that IFRS 17 requires additional and more complex calculations.

One of these complex calculations is the Contractual Service Margin (CSM), a form of unearned profit.  Actuaries have to produce cash flow projections for forecasting and analysis, but most insurers will require a CSM number to incorporate both expected and actual cash flows for IFRS 17 reporting.

In theory, insurers could extend their actuarial solution to provide the granularity of CSM required for actual reporting – but this would mean producing all the associated accounting transactions and postings. Using CSM numbers from actuarial systems would also require significant restructuring of actuarial models.  For example, actuarial systems would need to report at a much lower level of granularity and models would need to be run monthly to match the finance reporting time tables (typically models are run quarterly.) Actuarial teams would also have to develop new models and elements such as CSM release patterns and integrate this into financial workflows. Taking this on would be a significant effort for an actuarial team.

Of course, the CSM is a relatively small part of a much larger IFRS 17 picture. Actuaries could have a much lighter load if they were to provide the accounting system with their discount curves, probability weightings and risk margins etc. Then, with enough inputs from the actuarial side and the right calculation engine in place, the accounting system could take care of the actual and expected cash flows that make up the CSM, along with all of the other IFRS 17 elements that are much better suited to being developed and generated from the accounting systems.  These can include movements analysis, reconciliations and classification of contracts. The accounting system also can address many of the other key IFRS 17 requirements that you would not typically undertake in an actuarial environment:

  • Tracking and releasing the CSM/Risk adjustment (RA)
  • Calculating the Loss Component and CSM run-off [run-off is about businesses no longer writing new business]
  • Posting to General Ledgers
  • Undertaking the various reconciliations required i.e. to other GAAPs, tax reporting, SII, etc.
  • Disclosure data and population
  • Complex FX conversions/transactions etc.

Accounting environments tend to have more control and rigor than actuarial departments – this offers more of the audibility required for complex regulations such as this.

FWD Group, a leading insurer in Asia, saw IFRS 17 as a strategic opportunity to simplify their accounting and found the Aptitude Software IFRS 17 solution met their requirements. Our project team is helping them discover that their pre-project expectations regarding workflows can be simplified by this solution. The IFRS 17 solution is handling items such as expected and actual expenses, experience adjustments and allocations, as well as the CSM at initial measurement and in subsequent periods.

The actuarial system is feeding policy level cashflows into the IFRS 17 calculation engine. This is saving the actuarial team time and effort and producing a diverse range of undiscounted cash flows that can now be discounted in a consistent way – rather than having to unbundle a whole range of cash flows discounted on different bases.

FWD Group realized the complexity of IFRS 17 early in their impact analysis and have seen the benefits of using specialist software.  They have saved time and gained insights through the practical repeatability of generating the CSM within their accounting systems environment.  They can run the required processes in an hour rather than a day and in can be run as required.  For FWD, their IFRS 17 solution implementation is simplifying compliance and  delivering even more than expected. 

After countless discussions on the topic and multiple current implementations, our work with CFOs, actuaries and accountants has shown us that one thing is for sure - the IFRS 17 regulation is complex but achievable. Success will come from the right team, positive interactions, the right data, sequencing and a solution in place that delivers benefits to both the actuaries and accountants.

Read more on our IFRS 17 experts page or download our IFRS 17 eBook now.

If your system is complex, our solution may be a good fit for you. Let’s chat.

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