Insight Life Solutions: IFRS 17 Benchmarking Survey

Insight Life Solutions conducted a series of five surveys in Q3 2022 to seek South African life insurers’ views on specific IFRS 17 topics. The surveys aimed to summarise the progress made to date on IFRS 17 implementation and industry thinking on topics where the Standard allows discretion.

A total of 11 entities, mostly life insurers and bancassurers, participated in the series, with between 6 and 10 respondents responding to each survey.

It is hoped that readers will use the results to benchmark their approach against the rest of the market, as well as against their own future decisions as implementation draws nearer, discussion around these topics settles, and industry consensus is reached.

This report sets out the survey responses. In summary:

Progress

For most topics, respondents were generally between considering an approach/producing indicative numbers and finalising an approach internally. All respondents had made a start on each of the topics, with transition being the only area where some respondents  were still discussing an approach internally. These respondents generally have a June financial year-end, which means that their implementation date is 6 months later than those with a December year-end, potentially explaining the slower progress.

The reinsurance survey had fewer respondents than other surveys, which is a reflection of the uncertainty still felt in this regard. Those who did respond tend to be relatively advanced compared to the rest of the market, so the apparent good progress reflected in the survey responses may not necessarily be representative of the market as a whole.

Transition (10 respondents)

Progress appears slower regarding transition than for other topics, with 60% of respondents not having finalised an approach internally or completed a dry run. Progress tends to be correlated with financial year end: those with a December year-end (i.e. transitioning on 31 December 2023) are further ahead than those transitioning later.  Most respondents are using a combination of all three transition approaches, with internal consistency around the earliest year of application of the full retrospective approach across product lines, usually indicating a model or system change that makes acquiring historic information beyond that point impracticable.

Risk Adjustment (8 respondents)

A combination of approaches is likely to be implemented across the industry, with value at risk, margins for adverse deviations and cost of capital approaches all being popular.  These selections were largely informed either by their ease of calculation or their similarity of existing processes, which indicates a desire for pragmatism in this regard. The most popular targeted confidence level is 85%, with some respondents going as low as 75% and others as high as 96%.

Discount Rates (8 respondents)

The bottom-up approach is more popular than the top-down approach to calculating discount rates, with most respondents assuming illiquidity premiums of zero. Interestingly, most respondents plan to use the start of period yield curves as their locked in yield curves rather than a weighted average. Operational simplicity seems to be the driving factor for this decision. Most respondents plan to lock in inflation rates, even those that may not be directly linked to an observable index (e.g. expense inflation).

Grouping and Level of Aggregation (9 respondents)

All respondents plan to use annual cohorts for most of their product lines and all respondents indicated that their IFRS 17 cohorts align with their financial year. Most respondents plan to have three profitability groups per cohort, with stress and scenario testing being the most popular method for determining which contracts have no significant possibility of becoming onerous.

Reinsurance (6 respondents)

The number of respondents to this survey was lower than for the other surveys (6 respondents). Conversations with industry players revealed that the reason for this was the uncertainty still felt by many insurers regarding this topic. Those who responded, therefore, probably represent the segment of the market that is more advanced in its progress relating to reinsurance. Of the insurers who did respond, none expect major changes to their reinsurance arrangements. Where changes are foreseen, they are relatively minor, and relate to the updating of treaty terms to better align the grouping and contract boundaries of insurance and reinsurance contracts. All respondents are calculating the risk adjustment for reinsurance as the difference between the gross and net risk adjustments. Most respondents are experiencing modelling challenges in relation to measuring the loss-recovery component.

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