IFRS 17 and 9 Implementation for P&C companies: Best Practices and Opportunities

May 8, 2019

May 8, 2019 2

1. IFRS 17 and IFRS 9 – Standards Update and Implementation Best Practices

2. IFRS 17 and IFRS 9 Implementation for P&C companies: Solution Design

Agenda

May 8, 2019 3

Moody’s AnalyticsA Trusted Advisor to the Global Insurance Market

350+Professionals

» Actuaries (100+)» Accountants» Economists» Software Engineers» Product Managers» Researchers» Business Analysts

400+Customers

» Insurers» Re-Insurers» Life, P&C, Composite» Asset Managers» Pension funds» From large multinationals

to small institutions

30+Countries

» Africa» Americas » Asia Pacific» Europe» Middle East

IFRS 9 / CECL

Proxy Modeling

Actuarial Modeling

Scenario Generation

Capital Management Solvency IIInternal

Models IFRS 17 /

LDTI

May 8, 2019 4

Moody’s Core Competencies

Process Automation

• Discount rates• Liquidity premia• Market leading

calibration services

• IFRS 17 impact on profit profile under a range of different scenarios

• Standard and customized economic forecasts, scenario probabilities

• Leading Actuarial Software

• High Performance• Cloud based

• Risk Adjustment• Grouping Strategy• Transition Method• Coverage Units• Projection of financial

statements

Reg

ulat

ory

Com

plia

nce

Actu

aria

l sy

stem

s• IFRS 17 and US GAAP

Targeted Improvements for Long Duration Contracts

• IFRS 9 and CECL automation, calculation and reporting

• Leading solution insurance regulatory capital calculation (Solvency II, US RBC)

• Cloud Technology• Data management• Automation• Audit• Governance

IFRS 17 and IFRS 9 –Standards Update and Implementation Best Practices

IFRS 17 and IFRS 9 –Standards update

May 8, 2019 7

Timeline

US GAAP – Targeted Improvements Effective

2014 2017

2018 2021

IFRS 9 Issued

2022

IFRS 17 and IFRS 9 (if eligible for deferral) Effective

Today

IFRS 9 Effective

IFRS 17 Issued

May 8, 2019 8

IFRS 9 Financial Instruments» Consequences of sequential implementation of IFRS 9 and

IFRS 17 versus a holistic simultaneous implementation– An example of the unintended consequences could be an

increase in accounting mismatches rather than the opposite» ALM, Valuation, and Financial Reporting considerations» Often actuaries haven’t yet been included in the IFRS 9

implementation project so be sure to reach out to that team to align decisions between the IFRS 17 and IFRS 9 implementations to avoid any unintended consequences

8

May 8, 2019 9

IFRS 9 Classification Decision TreeSecurity in scope of IFRS 9

Solely for Payment of Principal and Interest (SPPI) test

Held to collect contractual cashflows

Held to collect contractual cashflows and sales

Neither – Active trading

FV Option

Amortized Cost FV OCI FV P&L

Pass Pass

Yes

YesYes

Yes

PassFail

No

NoNo

May 8, 2019 10

IFRS 9 – IFRS Interpretation CommitteeMarch 2019 meeting

» “The IFRS Interpretations Committee (IFRS IC) received a request:– how an entity presents unrecognised interest when a credit-impaired financial

asset (commonly referred to as a ‘Stage 3’ financial asset) is subsequently paid in full or is no longer credit-impaired.

– whether an entity can present the reversal related to previously unrecognised interest within interest revenue.

– At its March 2019 meeting, the Interpretations Committee published a final agenda decision concluding that an entity is required to present the difference described in the request as a reversal of impairment losses.”

– Source: ey-ifrs-developments-issue-147-curing-of-a-credit-impaired-financial-asset.pdf

May 8, 2019 11

IFRS 17 Insurance Contracts - Challenges

Calculations Accounting Data Reporting Technology Governance

» With IFRS 17, insurers are faced with many new significant changes including:

– Review of insurance contract valuation

– Complete rethinking of profit recognition

– Major revisions to financial statements and disclosures

– Wider business implications, like pricing, reinsurance, hedging

– Organizational changes required to bring together actuaries and accountants

» These changes requires insurers to transform their current financial reporting process along these 6 dimensions:

May 8, 2019 12

More granularity and differences in measurement and dimensioningIFRS 17 brings new accounting needs

IFRS 4 IFRS 17

Actuarial models…• Acted as calculation engines and

repositories of data• Linked data, assumptions,

calculation logic to results• (Typically) fed manual processes to

book results into the GL

Required data granularity has increased

Unit of calculation: IFRS 17 group= fn(portfolio, cohort, "onerousness")

Actuarial reserving calculationsmore dynamic⇒ accounting more complex

i.e. results depend upon the nature of the results (e.g. CSM → LC)

Actuarial calculations influence many more areas of the financials

e.g. revenue

IFRS 17 SubledgerProvides a solution to handle the increased complexity of IFRS 17

May 8, 2019 13

April 9, 2019 IASB Meeting» The Board unanimously agreed with all staff recommendations» The Board commented they weren’t aware of any insurers early adopting IFRS 17» Proposed amendments to IFRS 17 include

– Deferral of the date of initial application of IFRS 17 by one year and deferral of the expiry date for the temporary exemption from applying IFRS 9 for one year

– Changes to measurement (insurance acquisition cash flows relating to expected contract renewals, CSM allocation relating to investment components, reinsurance contracts held when underlying contracts are onerous)

– Simplification of presentation, Scope exclusions, Increased disclosure requirements

– Transition relief for business combinations and for the date of application of the risk mitigation option

» The next step will be for the Board to decide at the May 2019 Board meeting on the comment period for the Exposure Draft of the Amendments to IFRS 17

Source: *from ifrs.org

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May 8, 2019 14

IFRS 17 Proposed Amendments» The Exposure Draft of the Amendments to IFRS 17 include some changes that will effect

P&C including:

» Willis Towers Watson (WLTW) senior director, Roger Gascoigne, said the ability to offset insurance contract assets and liabilities at a portfolio level represents a “significant simplification”.

» “Particularly for contracts measured using the premium allocation approach (PAA),” he continued.

» “It will alleviate concerns raised by P&C insurers around the need to produce incurred claims estimates at a group and cohort level, which would have represented a major change.”

Source: https://www.theactuary.com/news/2018/12/amendment-proposed-for-ifrs-17/

14

May 8, 2019 15

IFRS 17 Considerations for P&C InsurersAggregation

Which portfolios of contracts and components should be aggregated

together?

PAA EligibilityWhich contracts qualify for PAA vs

GMM? What is the process for testing eligibility?

LRC + LICDo you current actuarial engine generate liability CF for incurred claims for long tailed claims?

AccountingManaging the accounting process – Postings, Trial balance, Close to True-ups

Onerosity Testing Which portfolios of contracts or contracts

are onerous?

AllocationHow should acquisition costs,

expenses, how should earnings be amortized or allocated down to the

contract group level?

(Dis) AggregationAllocation or Roll-up of results to seriatim level or other segments for postings and reporting

DisclosuresGeneration of all disclosures, Financial Statements and Reporting

May 8, 2019 16

» Contrasting decisions made at entity vs group level» Does the group include life insurance companies too?» Does the group report IFRS or US GAAP?» Has the group or another entity already implemented IFRS 9?

IFRS 17 P&C accounting policy and actuarial methodology choices: overall considerations

May 8, 2019 17

IFRS change to materiality definition» Trick or treat! On October 31, 2018 the IASB “issued amendments to its definition of material to make it easier for companies to

make materiality judgements.

» The definition of material, an important accounting concept in IFRS Standards, helps companies decide whether information should be included in their financial statements. The updated definition amends IAS 1 Presentation of Financial Statements and IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors.

» The amendments are a response to findings that some companies experienced difficulties using the old definition when judging whether information was material for inclusion in the financial statements. The amendments clarify the definition of material and how it should be applied by including in the definition guidance that until now has featured elsewhere in IFRS Standards. In addition, the explanations accompanying the definition have been improved. Finally, the amendments ensure that the definition ofmaterial is consistent across all IFRS Standards. The changes are effective from 1 January 2020, but companies can decide to apply them earlier.

» Old definition: Omissions or misstatements of items are material if they could, individually or collectively, influence the economic decisions that users make on the basis of the financial statements (IAS 1 Presentation of Financial Statements).

» New definition: Information is material if omitting, misstating or obscuring it could reasonably be expected to influence the decisions that the primary users of general purpose financial statements make on the basis of those financial statements, which provide financial information about a specific reporting entity.”

Source: https://www.ifrs.org/news-and-events/2018/10/iasb-clarifies-its-definition-of-material/

17

May 8, 2019 18

» Consider the granularity required for reserving, pricing, financial reporting, and management reporting and analytics and if there is a desire to align these approaches

» Within financial reporting how granular and disaggregated do you ultimately want your disclosures to be? Your general ledger postings?

» Onerosity and decision useful information

IFRS 17 P&C accounting policy and actuarial methodology choices: level of aggregation

May 8, 2019 19

» Is there really a significant implementation, operational, and training efficiency from using only GMM?

» Do you have both short term and long term insurance / reinsurance contract?* » Would it be possible to convert long term contract into short term contract to be

eligible for PAA approach?* » Would it be easy to maintain PAA and GMA approach going forward

operationally?*

*Source: KPMG IFRS 17 Briefing ARECA seminar 2017 August

IFRS 17 P&C accounting policy and actuarial methodology choices: PAA vs GMM

May 8, 2019 20

Follow industry developments and interpretations

» CIA draft educational note “Comparison of IFRS 17 to Current CIA Standards of Practice”– Note Appendix D: Situations where PAA is unlikely to be a reasonable

approximation to GMA » “Overview of ASB/CIA Activities Relating to the Implementation of IFRS 17”» IBC papers including “Assessing Premium Allocation Approach Eligibility” and

“IFRS 17 Implications on P&C Actuarial Analysis by Segment and Accident Period for Liability for Incurred Claims”

» EFRAG Background briefing papers on IFRS 17 topics

IFRS 17 and IFRS 9 –Implementation best practices

May 8, 2019 22

European banks' adoption on 1 January 2018 of the IFRS 9 accounting standard, which requires earlier recognition of credit losses, has had a limited impact on their capital

Moody’s Investor Service, April 30, 2018

“ ”

Learning from IFRS 9 Impact

IFRS 9 disclosures to date have been of uneven quality. Only a few have provided comprehensive details on the impact of first time adoption

The capital impact will likely be close to 50-60 bps reduction in tangible common equity to risk-weighted assets ratio

Most of the impact is due to higher provisions against Stage 2 loans, defined as those that have deteriorated but are not impaired

In the EU, option to spread the CET1 capital impact from increased impairments over five years where only 5% is absorbed at transition. No such option for Canadian banks

May 8, 2019 23

MIS Survey on IFRS 9 ImpactWhat is driving the capital impact

May 8, 2019 24

IFRS 9 Challenges to Date

Data• Lack of defaults (especially in wholesale lending)• Lack of recovery data• Not properly stored data historically• Lack of PD at origination

Resources• Lack of modelling resources• Lack of economic teams• Lack of IT teams• Lack of change management teams• Optimization of costs

Timelines• Most banks were relatively late in their

implementation of IFRS 9. We see similar trend emerging on CECL

• ECL methodologies not fully in place for parallel run

Integration• Integration of risk and finance• Integration with stress testing• Risk-based pricing models not present• Lack of clarity around business impact of IFRS

9/CECL

May 8, 2019 25

Implementation Challenges (1/2)IFRS9 models have been implemented in relatively short timescales, where the Financial Institution’s focus was on achieving regulatory compliance.

Many Financial Institutions are operating with somewhat limited resources against what is a changing regulatory landscape.

Key personnel risk. Very few permanent staff involved and ensuring knowledge transfer from third parties (consulting firms / contractors) with a changing client team.

Data availability and data quality posed a key challenge across all Institutions and in all regions. Especially the ability of clients to source consistent and accurate input data quarterly.

May 8, 2019 26

Implementation Challenges (2/2)Experience of very different starting points for the implementation: - Institutions that use internal models vs. standardised - Headquarter requirements vs. local entity requirements.

Consistency with internal process (Credit process, watch list approach, ICAAP, Stress Testing, TRIM).

Ad hoc Central Bank information requests and changes to guidelines during implementations (e.g. PD and LGD flooring).

Differentiating communication method between internal validation teams and external audit as a third party.

May 8, 2019 27

IFRS 9 Lessons learned – What worked well

Institutions identifying a ‘Super user’ early on in the implementation project saw considerable synergies.

Strong Project Governance with Senior Management involvement and clear escalation procedures made projects more efficient from the start.

Early engagement of Internal validation and external audit teams brought everyone on the same level simultaneously and focused the formal process.

Local Workshops with detailed user training across the end to end calculation process

May 8, 2019 28

» Moving from a project set up to a BAU environment

– Reporting Infrastructure, Disclosures, Target Operating Model

» After achieving regulatory compliance Financial Institution’s can now review and optimise processes and input parameters for ECL Models and specific areas of focus might be:

– Staging rules / Stage 3 optimisation

» Detailed regulatory guidance – comparibility expected to be the key theme

» Further developing entity-wide infrastructure

– Data systems and resources to source and link all data requirements

» Managing, understanding and communicating volatility internally to Senior Management

IFRS 9 - Ongoing Improvements

May 8, 2019 29

» What do I need to do now?» How long does implementation take?» What should my process be?» What inputs are needed and what outputs will be received?» How do the systems connect?

A lot of focus on HOW not WHYIFRS 17 - Typical questions clients ask

May 8, 2019 30

AXIS

Actuarial System 2

Actuarial System 3

General Ledger

Financial Consolidation

Disclosure

RiskIntegrity IFRS 17 is a collaborative solution…

Accountant

» General Ledger

» Financial Consolidation

» Disclosure

» CSM , LC, LIC, LRC Calculations

» Charts of Accounts» Subledger - Reports

» Postings

» Cash Flows

» Best Estimate» Grouping

» Discounting

» Risk Adjustment» Assumptions

Mgt. (Discount rates, …)

Actuary

RiskIntegrityTM IFRS 17

» Reporting

» Reconciliations» Audit & Control

…Bridging Actuarial and Accounting

May 8, 2019 31

INPUT

Economic Scenarios

AXIS (Life)

ACTUARIAL SYSTEMS (Life)

ACTUARIAL SYSTEMS (P&C)

CSM / LCPOSTING /

SUBLEDGER

DATA MANAGEMENT

DATA SOURCES ACTUARIAL MODELLING & RISK IFRS 17 MODELLING TOOLS FINANCE

MOVEMENT ANALYSIS

GOVERNANCE & AUDITABILITY

GENERAL LEDGER

RiskIntegrity IFRS 17ESG AXIS IFRS 17

CSM SubledgerData Manager

Actuarial Output

Enhanced Reporting

Moody’s Analytics Solutions for IFRS 17

CONSOLIDATION

PAA / GMM / VFA

REPORTING

PUBLIC DISCLOSURE

May 8, 2019 32

Collaborative sign-off

IFRS 17 results analysis

• Historical balances

• IFRS 17 groups

• Accounting policies

• Assumptions (FX rates, locked-in rates, etc…)

Data Centralization

• Other act. models

• Other computing tools (Excel)

• RiskIntegrity IFRS 17 engine

Calculation• Ledger CoA mapping

• Reports, Analytics

• Drill-down

Using both Actuarialand Accountingviews

Results Analysis

• Adjustments

• Qualitative factors

• Supporting documentation

Collaborative sign-off • Financial

statements

• Final disclosures

Ledger Posting

Accountants

Actuaries Actuaries

Accountants

Actuaries

Accountants

Actuaries

AccountantsUse

Adjustments

IFRS 17Calculations

Our Vision of the IFRS 17 ProcessConnecting Accounting and Actuarial worlds

May 8, 2019 33

ETL

Export to RI

End-to-end Process for IFRS 17

Policy Admin

Systems Actuarial Valuation Engine

DataWarehouse(optional)

Regulatory Reporting andDisclosures

BI Analysis

Non-Modeled Business/Other

Valuation Engines

- Inforce- New

Business- Policy

Movements and/or ending inforce file

- Inforce- Policyholder Movement Transactions

Aggregation

RiskIntegrity IFRS 17

CSM engine

Analytics & Reports

Ledger Creation

DataMart & Data managementAutomation & Governance

Aggregation

ETL

Financial Systems (e.g.

General Ledger)

- ActualTransactions

Results by runIFRS 17 GroupPortfoliosProjectionsetc

Assumptions

Projections

Pricing/Budgeting

May 8, 2019 34

Integration with GL systemsUse Moody’s Subledger and post journal in the GL system

Configuration

RiskIntegrity IFRS 17

Consolidation

Input data

Expected, Actuals(premiums, claims,

expenses)

Assumptions(discount rate,locked-in rate)

Market data(FX,…)

GLGLGL

Static data(legal structure,

counterparties…)

IFRS 17Calculation Engine

PostingsSL

IFRS 17Accounting

Engine

Reporting

Rules(Posting rules, controls,

reconciliation…)

Chart of Accountsstructure

May 8, 2019 35

Flexible Workflow Framework

Business PlanningInput forecasting data (6-quarter rolling forecast, 5-year projection) and generate associated budget and plan

Simulation and Sensitivity/Attribution AnalysisAdjust assumptions and parameters around variables and calculations and compare results with other runs to identify the drivers

Fast CloseProcess actuals, produce IFRS 17 calculations and satisfy actuarial, accounting and disclosure requirements on time

Different Use Cases

May 8, 2019 36

Advanced Results AnalysisLooking at numbers in different ways

Actuarial view Accounting view

VARIANCE ANALYSIS

FORECASTING /BUSINESS PLANNING

ANALYZE ACCOUNT BALANCE (SLICE

AND DICE)

ANALYSIS OF MOVEMENT

CSM ROLL FORWARD

SENSITIVITY ANALYSIS

RUN OFF

NEW BUSINESS

SCENARIO ANALYSIS

ALTERNATIVE SCENARIOS

MULTIPERIOD

TOP DOWN / BOTTOM UP

IFRS 17 Subledger

Mat

urity

cyc

leMinimum / automated compliance

Finance transformation

…

May 8, 2019 37

Reporting, Analysis and BI

DisclosuresExcel Format

In Built AnalysisAdvanced Pivot & Drill Down

Dat

a D

ictio

nary

I want to understand the

calculation steps, fix problems and verify the integrity

of my results.

I want to be able drill down into data,

pivot, sort, filter, search, etc.

I want a powerful BI solution and / or

customized reporting.

3rd Party Tools

I need to understand the

data in IFRS 17.

Data Lineage & Calc AuditData Flows and Reports

I want to see what my regulatory

disclosures will look like.

BI and Custom Reportinge.g. Microsoft Power BI

May 8, 2019 38

Moody’s project methodology (1/2)» Based on Moody’s experience around Solvency II, actuarial systems (AXIS) and regulatory

accounting standard such as CECL and IFRS 9

» Flexible and structured implementation approach

– Iterative implementation based on use cases to produce quick results

– Relies on 2 aspects: (1) clear definition of objectives along with a set of deliverables and (2) strong project governance

– Supported by education material, ad hoc training and on the job knowledge transfer

» Iterative methods based on agile

– Designed to have the same tasks repeated during iterations/sprints to increase the autonomy of the project resources

– Eliminate “tunnel effects” by providing visible progress

May 8, 2019 39

Moody’s project methodology (2/2)» Configuration rather than development

– RiskIntegrityTM IFRS 17 is a ready-to-use solution that doesn’t require any coding

– Implementation is focused on business needs

– Reduces the time to deploy the solution, risk and deployment costs

» Governance

– Setup of a Product/Solution committee to provide access to our product management team

– Establish a partner relationship and fast track issues

» Transfer of knowledge

– On both functional and non-functional aspects to reach full autonomy for RiskIntegrityTM IFRS 17 users

– Training and coaching

May 8, 2019 40

» Phase 1: On-boarding (pilot and project plan definition)

– Pilot is based on a defined scope.

– We organize the configuration of this module in several layers to gradually refine the model. In order to have a fully functional end-to-end integration in the final sprint.

» Phase 2: Functional blocks roll-out

– In the roll-out we have 4 major sprints where we group product by methodology and scheduled them accordingly to the roadmaps.

– We could include Pilot-sprint to have a focus on the specificities of a new configuration and learn for the roll-out of similar configuration. E.g. first time we implement a VFA , PAA product or we integrate with an external valuation tool.

» Phase 3: Non-functional blocks roll-out

– This phase will address operating model (user access, workflow) and automation/integration.

An Agile implementation in 3 main phasesProject plan - strategy

May 8, 2019 41

Deployment supportImplementation via consulting firms In terms of implementation assistance or other advisory consulting services related to RiskIntegrityTM IFRS 17, we are

continuing our traditional business strategy and leaving these services in the hands of consulting firms.

We have engaged with consulting firms for implementing and operating RiskIntegrityTM IFRS17.

This collaboration started since the early version of the solution and we constantly updating them on the new features and direction that we are taking.

While the full scope of the project implementation will be done by partners with direct access to Moody’s Analytics. We want to keep a close contact with our clients through the project governance.

Quick start package

Be consulted during the project plan definition

Seating in steering committee and in operational meeting (on-demand)

Leading a product/solution committee where client can discuss directly with Moody’s Analytics about features and priorities on a regular basis.

May 8, 2019 42

» Provide an overview of the solution through training and practical exercises.

» Include in the subscription fee.

Provided by Moody’s Analytics as part of the license.Quick start package

Activities Estimated duration Delivery mode

Training – Risk Integrity IFRS17 Fundamentals

(available to client as long as they have a valid license)N/A E-learning /In-app learning

Workshop – Documentation overview / Project accelerators 0.5 days workshop Remote

Workshop – Hands-on exercises1 day workshop

and 1 day follow-upOn-site or remote

Workshop – Initial set-up 1-2 days workshop On-site or remote

Workshop – First Launch and review results 1-2 days workshop On-site or remote

May 8, 2019 43

Software deployment Project team training

May

Sample deployment timeline – RiskIntegrityTM IFRS17

Phase duration might vary based on client’s complexities/specificities

June July August September October November December

Quick start

On-Boarding

Start

1. Initialization workshops: Review systems cartography and

integration requirements Detailed requirements review Testing phase Strategy

2. Pilot scope and execution:

3. Sprint definition and project plan4. Kick-off meeting

Sprint 1

Sprint 2

Sprint 3

Functional blocks roll-out

UAT

Dry-run & go-live

Sprint A

Sprint B

Sprint C Sprint ...

Automation• Target operational model set-up

• Access control

• Integration with BI

Systems integration• Systems integration

designing and building

• Integration validation

• Staging area configuration

• Data quality definition and configuration

Layering on automation / integration

Performance testing Final users training

RiskIntegrityTM

3.1 GMM PAA Staging area

RiskIntegrityTM

4.0 VFA PAA reins. Multi ccy

May 8, 2019 44

Key drivers of the IFRS 17 project duration

» Readiness» Resources» Number of source systems, products, and methodologies to be implemented» Alignment with solution roadmap

May 8, 2019 45

Recommendations for a successful IFRS 17 implementation» Start as soon as possible activities such as data preparation and testing strategy» Dedicated project team with co-location » Get the right amount of support» Deploy with an Agile methodology» Strong project management and governance

IFRS 17 and 9 Implementation for P&C companies: Solution Design

CIAA Accounting Seminar, May 2019

May 8, 2019 47

1. Approach to IFRS 17 Solution 2. Recap of the IFRS17 Measurement model (Focus on PAA)3. Moody’s RiskIntegrityTM IFRS 174. Brief View on IFRS 9 Solution

Outline for our discussion

May 8, 2019 48

Poll Questions

1. Not started/Under review2. Kick Starting Implementation3. Implementation is well underway

What is your current state of IFRS17 Implementation?

1. Not started/Under review2. Kick Starting Implementation3. Implementation is well underway

What is your current state of IFRS9 Implementation?

May 8, 2019 49

Functional View of Solution

AUTOMATION & GOVERNANCE

SubLedgerIFRS 17 Engine

Accounting Rules

Allocation & Aggregation Financial

Systems (e.g

General Ledger)

Reporting & Disclosures

Policy

Premium

Claims

Expense

Payments

Discount Curves

FX

Contract

Grouping

Data

Transformation

Allocation

May 8, 2019 50

Several Topics/Questions to consider

- What are the input Data requirements for IFRS 17? Common Reference Data?

- How do we combine data from multiple sources and data types (i.e. SAS, DW, Excel, CSV)

- How do we ensure the measurements - LRC, LIC, Movements, PAA Onerosity, Loss Component etc. are accurate?

- How do we handle treatment of multiple currencies?

- How do we ensure we have all information and disclosures to meet current and future requirements?

- How we get broader value from this exercise – analytics or intelligence

- How do we validate the quality and completeness of data ?

- What are the transformations required to perform IFRS17 measurements?

- What does our accounting process and flow look like – how thick do we want our Ledger?

- How do we go about setting up IFRS 17 Accounting rules – CoA, FX Rules, Hierarchy, GL Mappings

- How do I structure the IFRS 17 process to run at pre-defined intervals and ad-hoc basis (stress tests or impacts analysis)?

- How do we ensure there is governance and controls to trace back for audit?

- What is our process for creating and managing IFRS17 Groups?

- How do we manage allocation of costs, expenses, fees, premiums to IFRS 17 groups?

May 8, 2019 52

IFRS17 Measurement model (PAA)

May 8, 2019 53

IFRS 17 Liability MeasurementIFRS 17 introduces two new types of liabilities to measure the insurer’s commitments:

– Liability for Remaining Coverage (“LRC”) to allow for risks underwritten that have not been incurred

– Liability for Incurred Claims (“LIC”) to allow for claims settlement for both claims reported and claims incurred but not yet / enough reported

Financial significance of each liability depends on the business written

LRC LIC

Life +++ -

GI* +/- +++

May 8, 2019 54

Eligibility of the PAAProcess to check the eligibility of the PAA

1 year coverage1

Variability of CF2

PAA GMM

Approx.GMM vs.

PAA3

PAA

GMM

Yes

no

Yes Yes

no no

Opt out analysis GMM

PAA

Considerations

1. Criteria's set in the IFRS 17 norms are soft criteria's (except for the 1 year threshold)

2. Variability of Cashflows: What impacts LRC? Drivers of variability expected claims, expenses, release pattern, severity of claims?

3. Reasonable Approximation of GMM and PAA: Comparison of LRC under both approaches on the basis of a threshold. Important to look at assumptions around RA, Discounting and CSM release.

Why opt out of the PAA approach ?

Some examples1. Share of PAA too small in the overall portfolio use of an

homogeneous approach2. Presence of groups with LRC becoming <0 avoid the complexity of

explaining such a concept3. Preference to have a “positive” financial communication via the CSM /

future profit vs a “0 profit yet” via the PAA

May 8, 2019 55

LRC computation Under PAA

Opening LRCPremiums received in the period1

Acquisition Cashflows

Paid3

Acquisition costs

Amortiized4

Interest accretion5 Closing LRC + - + + =

Closing process as described in article 55b (subsequent measurement non onerous group)

Calculated by IFRS 17 Engine Actuals Actuals

Derived from Amortization

pattern

Calculated by IFRS 17 Engine

Calculated using Locked in rate

LRCt = LRC (t-1) + (Premiums Received – Premiums Earned) – (Acquisition Cost Paid – Acquisition Cost Amortized) + Interest Accretion + Investment Component paid/transferred(IC)

1- New premium Received: Premiums received in period from existing or new contracts2- Insurance Revenue Recognized: Expected premium receipts allocated to the period (based on passage of time or release of risk)3- Insurance Acquisition Cashflows Paid: Acquisition cash flows paid 4- Acquisition Costs Amortized: Amortization of acquisitions costs in current period – can opt to expense immediately under IFRS 175- Interest Accretion: Based on locked-in rate. Assuming discounting has been considered.

Insurance revenue

recognized2

-

Derived from Premium Release Pattern

May 8, 2019 56

Data Transformation/Allocation

LRC computation Under PAA

Opening LRCPremiums received in the period1

Acquisition Cashflows

Paid3

Acquisition costs

Amortiized4

Interest accretion5 Closing LRC + - + + =

Closing process as described in article 55b (subsequent measurement non onerous group)

Calculated by IFRS 17 Engine Actuals Actuals

Derived from Amortization

pattern

Calculated by IFRS 17 Engine

Calculated using Locked in rate

Insurance revenue

recognized2

-

Derived from Premium Release Pattern

Acq Cost Amortization

Pattern

Premium Release Pattern

SourceSystems

Policy Premium Claims Expense Payments Discount Curves FX

Allocation of Acquisition

Costs to groups

Logic to derive the drivers (release patterns, grouping, allocation)

May 8, 2019 57

In case facts and circumstances indicate that a group of contracts is onerous, a test of profitability is to be performed in the tool

Onerous groups under PAA

LRC valued under PAA

Parallel calculation

Facts and circumstances

A = LRC using PAA

B = FCF for future coverage using GMM (BE + RA)

A-B > 0 ?

Y = Continue using PAA as usual

PAA LRC = A

N = Increase PAA LRC by B-APAA LRC = B

Non Onerous

Onerous

If the LRC (under PAA) is lower than the FCF computed based on BBA methodology, a LC must increase the LRC

May 8, 2019 58

LIC computationCalculated based on a best estimate approach

Opening LIC Interest accretion1

Release of Expected Cash

flows2

Experience Adjustments3 Closing LIC+ - + + =

LIC computation process

New Claims Incurred4

Calculated by IFRS 17 Engine

Derived using Locked in Rate

Release of payments + release of Risk Adjustment

Derived from claims and expense

patterns … (NFA, FA)

Calculated by IFRS 17 Engine

Derived from claims and expense

patterns

1- Interest Accretion: Future cash flows are accreted to reflect their present value at the end of the reporting period. 2- Release of Expected cash flows: Expected claims, expenses and Investment Components to be paid over the period for claims incurred on previous periods are deducted from the present value of future cash flows. Includes release of Risk Adjustment3- Experience Adjustment: Future cash flows for claims incurred in the past are estimated at the end of the reporting period to allow for experience adjustments and changes in non financial assumptions (e.g. development factors, ultimate loss ratios…) and Financial Assumptions4- New Claims Incurred: Estimates of future cash flows at end of the reporting period for new claims incurred during the reporting period.**Cashflows include Claims (IBNR + IBNER) and Expenses (ALAE + ULAE)

May 8, 2019 59

LIC computationCalculated based on a best estimate approach

Opening LIC Interest accretion1

Release of Expected Cash

flows2

Experience Adjustments3 Closing LIC+ - + + =

LIC computation process

New Claims Incurred4

Calculated by IFRS 17 Engine

Derived using Locked in Rate

Release of payments + release of Risk Adjustment

Derived from claims and expense

patterns … (NFA, FA)

Calculated by IFRS 17 Engine

Derived from claims and expense

patterns

Development Triangles

SourceSystems

Policy Premium Claims Expense Payments Discount Curves FX

Claims patterns, Payment Patterns, Expenses

Allo

catio

n(Convert from reserving segment to Insurance Contract Groups)

May 8, 2019 60

The Sub-Ledger as a Link to the GL

Journal EntriesJournal Entries

SubLedger

Generate Postings

Disclosures

Journal Entries Regulatory Reporting andDisclosures

Financial Systems (e.g.

General Ledger)

Journal Entries(balanced D/C

journal file)

Chart of Account Variable MappingRules

(Posting, Control)

IFRS 17Engine Output

⁻ Feed thick or thin GLs⁻ Transaction files and/or double entry journals⁻ Inter-company⁻ Consolidation information ⁻ Company level disclosures

⁻ Align to your COA… or COAs⁻ Soft postings -> hard postings⁻ Allocation of grouped data to IFRS 17 group⁻ Multiple entities⁻ Forex capture and revaluation (IAS 21)

May 8, 2019 61

Moody’s RiskIntegrityTM IFRS 17

May 8, 2019 62

IFRS 17 Calculation & Reporting

Engine

Data Loading

» CSM , LC, LIC, LRC

» GMM, VFA, PAA

» Initial recognition

» Roll-forward

» Direct business, Reinsurance (proportional / non proportional)

» Out-of-the box reports

» Chart of Accounts

» Rules Engine (Preventive, posting, control, reconciliation)

» IFRS 17 Subledger

» Soft postings

» Journal entries: automatic, manual, reversal, backdated.

Reporting / Analytics

» Load Management

» Data Lineage

» Data Quality

» Data Dictionary

Workflow & AuditMarket data

Assumptions

Actuals

Expected

IFRS 17 Accounting

Engine

Postings

Disclosure

Financial Consolidation

General Ledger

» Transaction Files

» Collaborative Sign-off

» Hard Ledger

» Double Entry Postings

» Formal adjustments

» Aggregation / disaggregation of Journals

Actuarial Pre-

Processing

» Discounting (BEL)

» Risk Adjustment (RA)

» Aggregation

» Onerousness testing

» Assumptions manipulation (weighted locked in rates, forward rate conversion, …)

Actuarial view Accounting view

IFRS 17 Datamart

RiskIntegrity™ IFRS 17

May 8, 2019 63

Application HomepageProvides quick access to separates modules

May 8, 2019 64

Data Dictionary

Instant Access to the RiskIntegrity IFRS17 data dictionary

Data DictionaryAvailable directly from the Homepage

May 8, 2019 65

Projects Library

Each project is a combination of project name + time period. By default, the previous project refers to the project with the same project name, and the end date corresponds to the start date of the current project.

Open Project

Click on project name+ time periodto open the Project

Project LibraryContains current and archived projects

May 8, 2019 66

Supporting Data Dashboard

» Business Hierarchy

» Portfolios

» Cashflow Types

» Cashflow Mapping

» Product Types

» Runs

Supporting DataSummary dashboard

May 8, 2019 67

Actuarial Dashboard

» IFRS17 Groups

» Cashflows

» Discount Rates

» Locked-in Rates

» Variables

» Processes (Calculation & Reporting)

Calculation Engine

» Present Values

» Converted Locked-in Rates

» Converted Discount Rates

» Output Variables

Reporting Engine

» Reports

» Analysis

Actuarial ProcessSummary dashboard

May 8, 2019 68

Accounting Dashboard

» Chart of Accounts

» Exchange Rates

» Posting Rules

» Transaction Scope

» Processes (Accounting)

Accounting Engine

» Reports

» Transactions

» Journal Types

» Journal Entries

» Trial Balance

Accounting ProcessSummary dashboard

May 8, 2019 69

Accounting OutputsTransaction file

May 8, 2019 70

Accounting OutputsLedger postings with debits and credits

May 8, 2019 71

Accounting OutputsTrial balance

May 8, 2019 72

Custom BI

May 8, 2019 73

Custom BI

May 8, 2019 74

Custom BI

May 8, 2019 75

IFRS 17 Governance Use CaseIllustrative Production Cycle

VictorActuary

StéphaneSupervisor / CFO

FredAccountantPedroOps / Data MgmtJamesIT / Administrator

Data corrections & adjustments

DataManagement

Period RollForward

Create new Project

Prepare Workflow

Actuarial –Process

Actuarial –Results

Accounting –Soft Postings

Accounting –Process

Accounting –Sub Ledger

Accounting –General Ledger

Import Cashflows, Rates, Assumptions, IFRS17 groups, etc.

Data Standardization

Pre-Processing (PV, grouping, etc.)

IFRS 17 Liability Calculations

Initial Report & Disclosure Reviews

Analysis

Corrections / Adjustments

Review Soft Postings & Trial Balances

Analysis

Corrections / Adjustments

Sub Ledger Postings(Hard Postings)

Manual Postings

Review & Sign Off

General Ledger Postings

Generate Transaction File

Generate Journal Entries

Accounting and Actuarial processes can run parallel.

May 8, 2019 76

Brief View on IFRS 9 Solution

May 8, 2019 77

CECL/IFRS 9 – Operational ImplicationsWhat are the implications of changing any of the drivers?

Data

Models Economic Forecasts

Process Disclosures

Accounting Policy

Scenarios, Horizon, Reversion, Sensitivity

Asset classes, Defaults, History

Methodology, TTC vs PIT,Parameters

Roll-forwards, Attribution,

Management

OCI, Stage Allocation Criteria,

HTM, Intent to Sell

Integrate the parts to enable an agile process» Works across ALL asset classes» Supports multiple

methodologies allowed under ECL

» Ad-hoc segmentation and reporting

» Granular reporting to support audit – attribution, Disclosures and outputs

» Track progress/execution as you go in addition to showcasing governance and controls

May 8, 2019 78

Demo - ImpairmentStudioTM

A CECL/IFRS9 orchestration platform to ensure a well governed and efficient period end process for the new allowance for credit losses standard

SUPPORT FOR

R Risk, finance and accounting analysts

R Moody’s, Internal and external models

R Scenario weightingR Attribution analysisR Audit tracking at loan levelR Full disclosure setR Accounting entries (GL and

loan level)R Q-factor analysis support

for review challengeR SOC 1 Type 2 from Big 4

May 8, 2019 79

Moody’s Approach to Expected Credit LossOrchestration of the period end process for IFRS9/CECL

Institutions Information Systems

ImpairmentStudio

Models, Data and Economics

Data sources loans, leases, securities, off balance sheet commit.

Initial data quality and staging automation.

Upload to Cloud based data model and file preparation

Solution data quality and validation, input review and sign off

Data Load Data Validation Segmentation

Segmentation and assignment of models by portfolios

ECL Calculations

Configure analysis, select scenarios for both production and ad hoc runs

Internal models/rates retail, commercial and securities

Additional data, charge offs, recoveries, and specific assessment

Moody’s Economic Scenarios Retail Models CRE Models C&I Models Securities Models Data and Benchmarks

Results Review

Review results create committee review package and review for adjustments

Q-Factor adjustments

What if Analysis

Final Review

Final review and generate initial disclosures and audit report

Final Disclosure Pack

Final disclosure package and generation of journal entry file and close of books

Extract data for further analysis in excel or other tools

General Ledger upload of journal entries

Moody’s Available Models and Benchmark data

Data ManagementSegmentation, Models and Scenarios

Model Execution Engine Accounting Engine & Reporting

May 8, 2019 80

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