The IFRS 17 standard for Insurance Contracts, published in 2017, has triggered significant implementation projects worldwide. One crucial aspect of IFRS 17 is the concept of risk adjustment, which plays a vital role in measuring the compensation that the entity requires for bearing the uncertainty about the amount and timing of the cash flows that arises from non-financial risks of insurance contracts.
As IFRS 17 is intended to be principle based, also for the risk adjustment the standard does not specify a concrete estimation technique to be used compulsory. Accordingly, an entity needs to apply judgement when determining an appropriate estimation technique for the risk adjustment.
As experience shows, the implementation of the methodologies and concepts used to determine the risk adjustment under IFRS 17 requires active involvement of actuaries. In addition, the principle-based requirements of IFRS 17 lead to a number of different measurement and accounting concepts used for IFRS reporting, like Cost-of Capital- and Value at Risk-Approaches.
Actuaries have been responsible for making key fundamental decisions and performing of regular assessments and judgements, that impact the amount of the risk adjustment and accordingly its development. They play a key role in explaining these assessments and judgements, the impact on valuation, and the corresponding consequences for financial statements to top management.
