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February 11, 2021

The IFRS17 Standard is a very complex compliance initiative for all insurers across life, non-life and reinsurance business. It is also the most significant change for the insurance industry, especially for those underwriting the contracts, as it introduces new concepts, like the contractual service margin (CSM), the non-finance risk adjustment (RA), discounting of the best estimate future cash flows (BECF), and different measurement model of insurance liability for contracts covering different risks, among others. Additionally, it introduces grouping of contracts based on risk portfolios, and the concept of initial and subsequent measurement and experience adjustment due to the change in market parameters. A product portfolio comprising life, auto insurance, and retirement annuities, for instance, will need calculations on General Measurement Model and Premium Allocation Approach for life & auto, respectively. All of these being new IFRS17 calculations, the focus of testing relates to cohort grouping, deciphering onerous contracts if any, deriving BECF & RA, and finally CSM calculations. On the other hand, annuities face an additional impact from IFRS9, which also needs to be functionally tested. Due to these variables, it becomes imperative to focus on testing right now.

IFRS17 Testing & Validation: Key challenges

It is important to note that the IFRS17 compliance initiative has its own set of challenges, which have added to the complexity of testing and validation activities. Some of the key issues include the use of multiple approaches and measurement models for insurance liability based on risk portfolio. However, there is a lack of domain competency and functional specialized resources for testing the new functional concepts like BECF, CSM.

In addition, we are faced with the two-pronged data challenge of multiple data input sources required for calculation, including new source feeds with policy contract information, and the large volume of data with legacy contract information dating back to policy inception. The standard permits entities to decide the transition approach based on legacy data availability.

Two additional factors that have a bearing on IFRS17 testing and validation include the standard permits compliance to IFRS9 (for impacted entities) concurrently with IFRS17 timelines, January 2023 Go Live and limited off the shelf ready to use functional testing tools for the validation of IFRS17 & CSM calculations.

Being a compliance standard, it is imperative for the CFO organization to ensure calculations and the resultant reporting submissions generate reliable and correct data for all stakeholders including the external auditors.

Preparing to face the challenges

The listed challenges should be viewed as coherent indicators of the quantum of work required going forward. The collective success of the initiative will depend on meaningful investments in upskilling the domain knowledge of the testing team, tools and team readiness to start testing in 2021 and beyond. The teams will also need to be ready to conduct functional and non-functional testing to ensure compliance with the accounting standard.

We also believe the testing principally calls for two broad milestones, Milestone Zero ‘M-0’ (pre-test activities) and Milestone One ‘M-1’ (test execution).

Stage M-0 comprises early intervention and automation first approach to define a strategy concurrent to the key requirements. Chief pursuits will involve strategizing on domain upskilling, tooling, data management & masking, high level test scenarios and regression. We believe, this is the time to conduct IFRS17 functional training, upskill the knowledge of the testing team, grooming the test leads and preparing for the best-in-class assembly of trained associates. The stage M-1 will involve engaging in functional testing (business scenarios for IFRS17 calculations), nonfunctional testing (database, ETL, web services, usability, performance, automation, security, vulnerability, resilience etc.) culminating in preparation for final regression pack and its automation scripts.

Going forward

We believe institutionalizing the two-phase approach within the organization with relevant customizations can help ensure a smooth transition towards standardization. The firms will need to invest in M-0 to ensure strong groundwork is laid out for the transition. Given the January 2023 deadline, the time is right to cement a tooling strategy, cloud approach, availability of en-masse IFRS17 trained associates, and building an automation tool configured with IFRS17 business scenarios. The tooling strategy must encompass negative scenarios, simulate what-if sensitivity analysis, regression pack automation, reporting (regulatory, disclosures, internal, MIS), and parallel run activities.

By securing these tasks and considering appropriate future actions the entities will be better prepared to address the challenges in the run up to the implementation deadline.

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Jm Kumar is a Senior Business Consultant with TCS’ Banking and Financial Services unit and has over 10 years of experience in the finance, reporting, and compliance space. Kumar holds an MBA degree in Finance from the Sri Sathya Sai Institute of Higher Learning, Andhra Pradesh, India, and is a Certified Associate of the Indian Institute of Bankers.

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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