IFRS 17 introduces a valuable level of transparency for Risk Managers within the Insurance sector, assisting them in more effectively overseeing risks and adopting proactive measures to mitigate them.  Risk managers play a vital role in identifying, analysing, assessing and addressing risks for the insurer. The mitigation of risks aids the company in achieving their objectives.  Effective risk management enables companies to withstand crises and even use them as opportunities for advancements in their businesses. It is important for insurers to ensure that their Risk Managers are well trained on the impact of IFRS 17 on their day-to-day function in the industry.  Let us now delve into the way IFRS 17 rewrites insurance risk management. 

IFRS 17 and Risk Management 

IFRS 17 places greater emphasis on insurers attaining regulatory compliance and for clarity with regards to the timing and uncertainty of future cash flows. All relevant detail pertaining to insurance risks and financial risks need to be disclosed on the company’s financial statements in both a qualitative and quantitative manner. This article Considerations from an African Risk management Perspective shares the following: 

With IFRS 17, it will be more difficult to cross-subsidise within the financials, this will allow entities to better isolate poor-performing business from the rest of the book and put remedial actions in place faster for specific areas. If every entity can reflect on this and use the standard for what it is truly intended, overall, we will end up with much healthier (re)insurance companies across the continent, giving the insurance industry a much-needed boost.” 

Insurers’ risk professionals can document, track and address risks using dashboards, risk management plans or other software programmes available on the market. IFRS 17 expects companies to measure insurance contracts using updated estimates and assumptions to reflect cash flows and any uncertainties related to insurance contracts. 

Guidance on Risk Management under IFRS 17 

One of the requirements of IFRS 17 is for companies to be transparent regarding the financial standing of their businesses and for risks to be disclosed in specific detail.  The article further explains as follows, 

The risks usually expected during the course of insurance and reinsurance business for which the IFRS 17 disclosures are concerned include Insurance risks (pricing, reserving, catastrophe risk) and Financial risks (market, credit, liquidity risk). Now for each type of risk identified, IFRS 17 requires each entity to disclose both quantitatively and qualitatively: 

  • its exposure and how the exposure arises,
  • its objectives, policies and processes for managing the risk, and the methods used to measure the risk,
  • any changes in the above compared to the previous period.”

 The IFRS 17 document states the following pertaining to the Risk adjustment for non-financial risk, 

” An entity shall adjust the estimate of the present value of the future cash flows to reflect the compensation that the entity requires for bearing the uncertainty about the amount and timing of the cash flows that arises from non-financial risk.” 

The use of a tool to track risks would prove be a good source of reference for the disclosure of financial reporting on risks and the steps taken to address them. Risk management goals and the insurers financial statements must be in sink. The greater transparency of risks will lead to greater level of accountability by insurance companies in managing their risks. 

 In an article on Key Ways Insurers can better Manage Risks the following helpful points were shared: 

  • Adopt Precision Underwriting 
  • Optimise Portfolio Mix and Limits 
  • Forecast Reserves with Predictive Analytics 
  • Digitise and Automate Processes 

Precision underwriting uses more data sources to structure pricing to suit the client. Advanced machine learning models access this data to optimise pricing accuracy. 

Analytical tools help model a client’s portfolio and the scenario analysis quantifies potential losses. Insurers can rebalance exposures or purchase reinsurance to mitigate anticipated losses. Portfolio optimisation places more control of insurance contracts in the hands of the insurer. 

Incurred but not reported (IBNR) claims refers to the amount owed by the insurer to claimants who have had losses but haven’t claimed against them yet. With IBNR being an unknown, insurers have an estimate reserve gap for this to cover claims that may come through. Modern analytical tools can assist insurers to ensure the company’s liquidity keeps pace with actual claim volumes. 

IFRS 17 expects for risk adjustments to be reflected on the company’s financials to disclose the uncertainty in timing and cash flows with regards to insurance contracts. 

ResearchGate proposes a model for risk adjustment for surrender risk. The model is explained as follows: 

“Surrender rates are assumed to follow a stochastic process, underpinned by data. The distribution of the present value of future individual cash flows is calculated. Using well-known techniques from the theory of convex ordering of stochastic variables, we present closed formula approximations of risk measures, such as quantiles, for the total portfolio. These formulas are easy to program and enable an insurance company to calculate its risk adjustment without time-consuming simulations.”  

A well-organised Risk Management system in place plays a vital role in the success of businesses. With early identification and mitigation of risks insurance organisations can protect their bottom line. IFRS 17’s expectations forces insurers to prioritise effective risk management to avoid costly setbacks and to improve profitability over time.  

 

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