How ILS implemented EV under IFRS 17

How the estimated value of shareholders’ interests in long-term insurance business, should be calculated under the new reporting regime.

Christelle Oosthuizen

Image by AI on Freepik

In a nutshell

The introduction of IFRS 17 has raised the question of how Embedded Value (EV), the estimate of the value of shareholders’ interests in long-term insurance business, should be calculated under the new reporting regime.

Our client, a medium-sized life insurer, historically based their EV calculation on their IFRS 4 balance sheet. Given that they phased out IFRS 4 from the financial year ending 31 December 2023, they needed to adopt a new approach to calculating EV that was not dependent on the IFRS 4 balance sheet. They engaged Insight to assist in recommending and implementing an appropriate IFRS 17 methodology for calculating EV.

 

How we did it

Our main focus was ensuring that the PVIF model, the EV component expected to change the most between IFRS 4 and IFRS 17, worked as expected.

Existing Prophet models were in place to perform cash flow projections and calculate the liability components required for IFRS 17 purposes. Instead of rebuilding the various components required to calculate the PVIF, Insight built an “overlay” Prophet model:

Using the existing Prophet model structures:

  • Our overlay Prophet model can read in results from the different underlying IFRS 17 models, depending on the accounting measurement used for each product (GMM, VFA or PAA).

Incorporating additional Prophet products, which include:

  • Input products – which read in results from the underlying IFRS 17 models.
  • PVIF products – which read in the values from the input product, apply the CSM and RA for each IFRS group and generate the PVIF output.

Performing additional projections where required (e.g. CSM) 

Generating the PVIF outputs.

The model was built with flexibility in mind. This ensured that it would work even if the underlying IFRS 17 models were changed or adjusted. The mapping between the underlying IFRS 17 models and the PVIF model was table-driven to allow for variable name changes if needed.

 

The flexibility was a major advantage since it allowed Insight to adapt the model to various scenarios, which included the ability to:

  • Easily adjust the model not only to work on GMM products but also work on VFA products.
  • Calculate the EV for the client’s third-party cells with only a few minor adjustments.
  • Calculate the Value of New Business (VNB).

Additional checks

An important part of the project was to ensure we could explain how the EV is built up, and our sense checks included the following:

  • A step-by-step buildup explaining how the various IFRS 17 components, such as the CSM, RA, etc., contribute to the IFRS 17 PVIF.

  •  A second build-up to explain the differences between the IFRS 4 and IFRS 17 PVIF, such as model point files, cash flows, discount rates used, etc.

  • Sense checks on the CSM and RA runoffs.

  • Comparison of BEL, RA and CSM output from the IFRS 17 PVIF model to the reported numbers.

Benefits of outsourcing IFRS 17 EV implementation to Insight

  • We use systems and approaches that our clients already have in place and build from there. In this case, we built an overlay IFRS 17 PVIF model based on existing underlying IFRS 17 models, which was used to collate all the necessary information and do the required PVIF calculations.
  • We perform sufficient sense checks to explain the workings to our clients, and to give them comfort that the IFRS 17 PVIF and, consequently the EV is calculated as required.
  • We prioritise flexibility in our model developments, which allows them to be used for various purposes (e.g. calculating PVIF from a cell’s perspective or to calculating VNB).
0

0 Comments

Get an email whenever we publish a new thought piece

Topic:

By signing up you consent to our terms and conditions

More from Christelle Oosthuizen

Email

Subscribe