Actuaries provide advice on managing volatility under IFRS 17

Canadian Institute of Actuaries (CIA) fellows, Robert Berendsen and Catherine Sun have broken down several recommendations for managing heightened capital volatility under updated International Financial Reporting Standards (IFRS), in a new opinion note published by the CIA, entitled How to manage capital volatility under IFRS 17 and LICAT 2023. 

Effective January 1 this year, insurers reporting on IFRS basis have been required to apply IFRS 17 Insurance Contracts. To adapt, the Office of the Superintendent of Financial Institutions (OSFI) revised the Life Insurance Capital Adequacy Test (LICAT) 2019 guideline to publish LICAT 2023.

“OSFI intended for LICAT 2023 to not materially affect the industry-wide capital requirement for all insurers, and further believes that such aggregate requirements will not be more volatile over time than the previous requirements,” they write. “While that may be fair at the industry level, we certainly expect many insurers to experience increased volatility of their individual capital ratios, though primarily due to the IFRS 17 measurement framework rather than the LICAT 2023 construct.” 

The article focuses on total capital and core capital volatility under IFRS 17 and LICAT 2023 for products evaluated under the general measurement model. “Products evaluated under the variable fee approach typically experience lower capital volatility thanks to the pass-through feature. Products measured under the premium allocation approach are generally short-term and do not experience significant capital volatility either.” 

The article looks at notable changes when moving from IFRS 4 to IFRS 17 including the delinking of assets and liabilities. It looks at liability discount rates, the sensitivity of the IFRS 17 liability to changes in market conditions and impacts for insurers with both positive and negative fulfilment cash flows. They say the impact of market conditions on liabilities will, in most cases, be different under the new regime “and may no longer be as well aligned with the impact of those changes on assets. This will be particularly true if the insurer’s assets have significantly different liquidity characteristics than its liabilities.”

Following this, the article makes recommendations, discusses the navigation of core capital volatility changes and concludes saying capital management requires custom solutions.

“There is no one-size-fits-all solution to capital management in an IFRS 17 world, any more than there was in the IFRS 4 world,” they conclude. “Insurers should understand their situation and customize a solution after weighing the pros and cons of available options.”