The South Korean financial regulator (FSS) has recently introduced new solvency regulations, due to take hold in 2021. In a world first, it is basing these regulations on a new international accounting standard IFRS 17. Mr Sung Lim Suh of Aon Benfield discusses how actuarial modelling software is being used to help insurers in South Korea comply with the new Standard.
IFRS 17 is the International Financial Reporting Standard that was issued by the International Account Standards Board (IASB) in May 2017 to establish the principles for the recognition, measurement, presentation and disclosure of insurance contracts. The objective of IFRS 17 is to ensure that insurers provide relevant and representative information for users of financial statements to assess the effect that insurance contracts have on the entity’s financial position, financial performance and cash flows.
So what does this mean for insurers and how is South Korea leading the way?
The new standard may become effective for annual reporting periods from 1 Jan 2021, but now is the time for insurers to take action to achieve full benefits while being compliant.
In South Korea, for the new Standard, insurers’ liabilities are being replaced by market valuations instead of existing cost estimates. As insurance liabilities are valued as market prices, the valuation of insurers’ liabilities may change. In particular, in the case of insurers that have sold a large amount of high-yield products in the past, the gap between the time of sale and the current point may be larger due to changes in account standards.
Actuarial modelling software used
After the introduction of IFRS 17, life insurers are expected to be the first to be impacted. According to the Financial Supervisory Service (FSS), life insurers who are selling high-yield products would be hit by KRW23 to 33 trillion (US$20.5 to 29.5 billion) in debt.
Insurance companies are either undertaking this process in-house or have appointed external consulting companies to assist in the building of IFRS 17 reporting. Actuarial modelling software is being used to efficiently perform various tasks such as financial estimation, pricing, calculating embedded value and risk management.
The market valuation of insurance liabilities requires this sophisticated software to measure the value of the liabilities as well as the cash flows. Aon Benfield provides two platform solutions to assist both life and non-life insurance companies and consultants to achieve these objectives.
PathWise Solution Group/ReMetrica
Recently, Aon Benfield announced the launch of its PathWise Solution Group – an integrated enterprise High Performance Computing (HPC) business platform for this life and non-life business which can assist in the emerging financial reporting framework. The platform has already been adopted for IFRS 17 in South Korea.
In addition to Pathwise, in the non-life insurance arena ReMetrica has been used for many years by over 200 insurance and consulting companies globally, specifically for this type of financial risk assessment and reporting.
As insurers strive to enhance economic capital, optimise reinsurance and improve business planning, the platform models all types of risk including underwriting, reserving, catastrophe, investment, credit and even operational risk to create a full economic capital model.
Similar to Solvency II
The advent of the new IFRS 17 reporting standards brings new urgency and new challenges to companies and has heightened the need for risk and capital modelling using sophisticated and robust modelling platforms.
The architecture of ReMetrica enables additional logic to be seamlessly added to existing models so that companies will be able to produce IFRS17 compliant accounts with minimal investment or disruption. ReMetrica is able to produce GAAP and IFRS17 compliant reports simultaneously, as companies typically want to view their results in multiple ways.
The change to the Korean market is similar to the shift in Europe from GAAP to Solvency II fair value reporting. In fact the IFRS17 standard has many similarities with Solvency II fair value reporting standard. This experience is helping Aon Benfield to support Korean companies as they make the leap to IFRS17.
Case Study: How Aon’s PathWise platform transformed Kyobo Life‘s IFRS 17 capabilities
In May this year, Aon Benfield’s PathWise® Solutions Group licensed its PathWise IFRS 17 business solutions package to Kyobo Life Insurance Co, Ltd – one of the three largest life insurance companies in South Korea.
The new IFRS 17 accounting standard for insurance contracts requires companies to significantly enhance their valuation systems and processes, specifically in areas such as data management, model management, and computational power for actuarial and asset and liability projections.
PathWise has replaced Kyobo’s existing reserve valuation tool with an end-to-end fully automated system that handles inforce conversion, assumption transformation, scenario generation, stochastic-on-stochastic calculations and financial report generation.
Mr Bae Woo Soon, Chief Actuary at Kyobo Life, said: “PathWise has greatly reduced the requirement for manual operations, while improving accuracy and efficiency. Prior to implementing PathWise as our company-wide IFRS 17 actuarial system, we relied on multiple solutions to support our financial reporting processes. Using PathWise, we have been consolidating these components into a single controlled system, resulting in huge gains in speed and efficiency for the models that have been migrated. In fact, the PathWise platform proved hundreds of times faster than our legacy CPU solution for valuing traditional blocks of business, reduced variable block valuation run times from 18 hours to less than two hours compared to our legacy GPU-based solution, and consolidated more than 200 products into three concise models. We now have the aim of eventually transferring all our products onto PathWise.”
PathWise, an integrated enterprise High Performance Computing (HPC) business platform, allows businesses to model assets, liabilities, and scenario generators at the same time, thereby providing a complete solution for the managing and reporting of complex financial and biometric risks. The HPC software runs on Graphics Processing Units (GPUs), giving it a speed advantage over other legacy systems which run on Central Processing Units (CPUs), for all the new calculations required under the IFRS 17 standard.
Mr Peter M. Phillips, President and CEO of PathWise Solutions Group, said: “Delivering value and investing in analytics is a core working principle at Aon Benfield. PathWise, with all these unique advantages, has become a fast-growing global business, and the IFRS 17 platform was the first of its kind in the insurance industry. Having been recently licensed by Kyobo Life, PathWise is enabling Kyobo to achieve significant gains in the speed and efficiency of its financial reporting, risk management processes, new product development and variable product hedging activities.” A
Mr Sung Lim Suh is an Actuarial Analyst at Aon Benfield.
Aon Benfield is the 2016 winner for Reinsurance Broker of the Year at the 20th Asia Insurance Industry Awards.