Actuarial Notes

IFRS 17 and Navigating Financial Condition Testing

By Robert Berendsen, Bernice Lim, Narissa Dedhar and Roxane Veillette · Oliver Wyman · 2023 · ILA201-607-25

Study guide: Exam ILA-201I

An Oliver Wyman article on how IFRS 17 changes financial condition testing (FCT), the risk management tool insurers use to assess their forecasted capital and solvency position over a three- to five-year horizon. It looks at the impact of IFRS 17 on FCT, how it compares to FCT performed on an IFRS 4 basis, and how insurers can adjust. It focuses on Canadian insurance business measured under the general measurement model.

On the syllabus

Design and presentation of adverse scenarios

  • The design of the FCT base scenario should be largely unchanged under IFRS 17.
  • The severity of an adverse scenario should be based on its inherent loss distribution, not on how an accounting or capital regime presents the results in time.
  • Adverse non-financial shocks are in many cases absorbed by the contractual service margin, yet because the CSM counts as available capital under the Canadian capital regime, the impact on the CSM still has an immediate adverse effect on capital ratios.

Putting new business profitability in focus

The roll-forward of liabilities gets more granular

Taxes are certain, but future tax provisions do change

  • Non-deductibility of CSM: under IFRS 17, 90% of most CSM is non-deductible, creating a temporary difference between the tax and statement reserves and an associated future tax asset.
  • Transition rules phase in the change in the maximum tax actuarial reserve from IFRS 4 to IFRS 17 over five years.

Impacts of IFRS 17 on financial condition testing

Sources