How IFRS 17 impacts CSM - Actuaries vs Finance
22 September 2017
- The contractual service margin (CSM) is a significant part of IFRS 17
- How are insurance companies factoring this into their IT strategy?
As all insurance companies are probably aware by now, the introduction of IFRS 17 comes with many new requirements. One of these new requirements is a contractual service margin (CSM). The CSM is the unearned profit of an insurance contract. While technical experts are still considering what methodology should be used to calculate the CSM, CTOs and other IT experts such as heads of systems are investigating what technology should be used to calculate the CSM.
Where should you calculate your CSM?
One question insurance companies need to address is where they will calculate their CSM. This is because the decision will impact the technology platform they focus on. There are two different schools of thought surrounding calculations such as CSM – one arising from the Americas and the other from Europe, Africa & Asia.
In the Americas, it is generally accepted that the CSM calculation will be an extension of financial modelling platforms (eg. finance data warehouse). In Europe, Africa & Asia however, it is generally accepted that the CSM calculation will be an extension of actuarial and risk platforms.
Technology platform conundrum...
These conflicting ideas pose something of a technology conundrum to international insurance companies – where should you calculate your CSM? Unfortunately, there is no ‘one size fits all’ answer to this question, as you need to understand what your organisation is doing on a global scale. There are several options to explore.
The first question insurance companies should address is, where does your organisation’s thinking start? Typically the answer is headquarters. In which case the location of headquarters may dictate how and what you use to calculate your CSM.
Once you have established whether your organisation is best suited to a financial modelling or an actuarial and risk platform, your company should consider how to proceed with updating your technology platform. If your CSM calculation is actuarial and risk led, you should have conversations around how to upgrade your actuarial and risk platform technology. On the other hand, if your CSM calculation is finance led, it is possible that external ERP & EPM (Enterprise Resource Planning & Enterprise Performance Management - general ledger and consolidation reporting) vendors may be brought in to help the extension of financial modelling platforms.
This will not be a straightforward decision process, so it is worth bearing in mind the following 3 key messages:
- Both groups of technology vendors (actuarial and ERP/EPM) are still field testing their solutions...and it is likely to be some time before there are any solid offerings.
- The CSM calculation is a complex and untested area – your units of account, management of portfolios and the size & scale of data that needs processing will challenge existing technology infrastructure.
- The changing classification of what constitutes an onerous contract (ie one that is not profitable or aligned to core strategy) will change over time and this adds another level of amorphous complexity. You will need to analyse the change in real time and adapt accordingly.
To conclude, my advice to you is to consider what will challenge your existing technology infrastructure and review how your classification of onerous contracts might change in future. You’ll then be in a position to assess the technology solutions available when they’re released.