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Article Title: AXIS and IFRS
Article Type: General Actuarial  
Article ID #: 1555
GGY Contacts: GGY Client Support (416-250-6777)
Last Modified: 04 Dec 15

Article Summary:

GGY has been following the developments on International Financial Reporting Standards (IFRS) for a number of years. International approaches to solvency assessment such as Solvency II are also being tracked.

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Article Detail:

These developments are of particular interest to GGY because we have clients with operations and head offices around the world, who are subject to these evolving requirements. Note that effective January 1, 2011 clients reporting under Canadian GAAP are subject to IFRS reporting standards because the Canadian Accounting profession has moved to the use of IFRS for Canadian GAAP reporting. To this end, Canadian GAAP adopted IFRS recognition and measurement requirements for assets in late 2006 and AXIS was updated to support these changes at that time.

However the most important impact on actuarial software will not be felt until Phase II of IFRS 4 for valuation of the liability for insurance contracts is implemented. A final standard is expected in 2016.

The central principle of IFRS 4 Phase II is a comprehensive measurement approach. This implies the need for a valuation capability reflecting a true market value based on all material risks and benefits and current market assumptions as to interest rates and other contingencies. Since AXIS is a flexible, comprehensive cash flow based system as is required to support principles based reserving, we feel that the overall system architecture of AXIS supports the expected requirements of IFRS.

By way of example, certain types of options and derivatives, stand-alone or embedded in other contracts, may require stochastic techniques to evaluate, and we believe these can be handled by the stochastic functionality we have introduced and enhanced in AXIS over the past several years.

AXIS has flexible scenario generators and flexible ways of linking discount rates to whatever yield curves the user selects for the scenarios used, so we don't think the choice of risk neutral yield curves vs. real world curves, or the inclusion of margins in individual assumptions to meet a specific standard, will be a problem for AXIS.

The issue of how margins should be calculated and incorporated in the liability for insurance products may however require a new approach that reflects the cost of capital over the duration of the product. GGY has already added a feature to AXIS to support the investigation of adopting reserves based on the "present value of cash flows plus the cost of capital" approach at the request of one of our clients. Another potential issue is the proposed requirement to avoid negative reserves at issue through the application of an additional contractual service margin. GGY has already added functionality to support a similar margin as required by reporting requirements in the Peoples Republic of China.

There are a number of other details with respect to valuation of insurance contract liabilities that will not be known until final standards for insurance accounting are released. GGY will be watching closely to see how these contentious issues get resolved.

The current draft standard requires a new presentation format for the Statement of Comprehensive Income. GGY's current thinking on how to generate this presentation can be reviewed in the document attached.

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