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June 16, 2020

With a pause in economic activity due to the COVID-19 pandemic, businesses have come to a grinding halt. Insurance and reinsurance firms experienced early on the changes proposed by the International Accounting Standards Board (IASB); at the time when the World Health Organization (WHO) was still classifying COVID-19 as a pandemic, the Board announced an extension for the rollout of IFRS 17 with the new effective date being January 1, 2023.

Though the extension offers relief to entities, they are looking at a set of new challenges to address and mitigate, some of them being:

Actuaries and risk management models are needed for IFRS17 calculations (such as fulfilment cash flows (FCF), contractual service margin (CSM), and deferred acquisition costs (DAC)). With the pandemic and the consequent economic instability, the model parameters (assumptions, elements, yield curves, benchmark treasury rates, high frequency indicators, macro prudential parameters, and so on) have now become awry and volatile. Thus, the premise on which these models were devised, and their outputs consumed in IFRS17 calculations, have become topsy-turvy.

In order to remediate this, entities must continue to examine their models, review model assumptions (including, but not limited to mortality, lapse rates, and morbidity) and conjoin additional parameters to scale up a robust modelling and risk management solution. A case in point: the mortality table for a 25-year-old insured person would depict a completely different scenario in the post COVID era, as the modelling - from the list of all the causes of death - would not have included a global pandemic of the scale of COVID. That said, insurers are very good in stress testing, model validation and simulation of events. However, a catastrophic event like COVID-19 was an out-of-the-blue occurrence, with no parallels in a generation when data was available, and scenarios were modelled.

Product specific consequences: IFRS 17 provides for differential treatment and measurement of insurance contracts having an investment component, such as annuities and unit-linked insurance contracts. For such products, where the return is based on the market-linked rate, the insurance entity, during a pandemic, needs to factor in the changes in relation to the returns, and other impacts on the process and the system. Also, market volatility and unpredictability tend to prove detrimental, increasing losses to the insurer against those insurance contracts (especially in instances where the terms of the contract mandate guaranteed returns and the market returns drop precipitously).

Discounting is another touchpoint, marking the intersection of IFRS17 compliance with a pandemic of the gravity of COVID-19. Entities use discounting to perform IFRS17 FCF calculations and derive insurance liabilities. With COVID, financial markets are in deep flux, consequently the derivation basis of discounting rates (top down and bottom up approaches) gets sticky. Entitles must take conscious steps to disclose to regulators and statutory bodies the level of stickiness and consider inconsistencies as applicable in their disclosure reports and regulatory submissions. Changes would also be needed concurrently to their IT systems in pursuance of IBOR transition (based on the degree of dependency of IBOR on the entity’s discount rate calculations).

The litmus test would be the smooth roll-out of IFRS17 standard as per the designed schedule (when the pandemic has been relegated to history books).

Pertinent to note, IFRS17 is a watershed moment for insurance and re-insurance firms–. Can the industry form a central coordination mechanism - comprising insurers, re-insurers, policy makers, economists, modellers, regulators, standard setting bodies, et. al. - to pull out all stops, thus collectively evolving a comprehensive set of solutions to extenuate the pandemic impact, all with the end goal of ensuring a smooth rollout of IFRS17 accounting standard across more than 100 impact domiciles? The solutions agreed can be taken up by respective domiciles and appropriately amended to suit their insurance ecosystem. Some form of industry-wide initiative was conducted as part of the US SEC Regulation SCI and Reserve Bank Of Australia NPP Payments Initiative. However, this wasn't at the scale that a pandemic warrants.

The pharma industry has established a cohesive, industry-wide response to the pandemic (with competitors collaborating for the vaccine, regulatory bodies working closely with industry players, and local health departments sanctioning millions in emergency grant for research and speeding up clinical trials). Similarly, can insurance and re-insurance entities across the globe (in conjunction with regulators and standard setting bodies) collaborate and work in a more cohesive manner, focussed toward the common end target of the 2023 compliance deadline. What do you think?


Jm Kumar is a senior business consultant for banking and financial services with TCS. His area of focus includes finance, reporting, and compliance.

Abhijit Banerjee is an IFRS 17 domain consultant and Europe geography lead for TCS’ BFSI business unit. He is a qualified Chartered Accountant with more than 20 years of industry and IT experience in the finance and accounting space.


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