SAP S/4HANA -Financial Services for Intelligent Enterprise - IFRS is possibility of a wider financial transformation rather short sight regulatory project

For the Banking, financial services and insurance (BFSI)- the risk modelling potential loss / risk is a complex task, and to be close to accuracy (probability), strong need of a correct quality data in shortest time frame is inevitable. 

Either it is the IFRS accounting standards (IFRS9, IFRS17), or internal business operational model simulation or meet the Capital Adequacy Directive or the IFRS`7 requirements in the Life or property or any other insurance policies valuations with changing market volatility. Major challenges is to climb fast with definite targets/ milestone stipulated by external  standard-setting bodies. 

There are clear indication that current climate is changing, natural  disastrous situation like wildfires, hurricane, storms, Covid job losses or the health hazards issues need further a better (revised) Risk assessment including allocation of provisions and claim stress testing to meet operational capital. these Key Challenges  need IT solution to meet shortest time frame implementation requirements.

A prefect answer is ready to deploy product with minimum development/customisation need such as like S4 HANA with Add on FSPL, (SAP Bank/ Insurance analyzer with Model company-The SAP company is pre packaged, ready to use, end to end reference solution tailored to industry or line of business ), the HANA in-memory( A column-oriented relational database with improved automation, efficiency, through  he machine learning  has validated the  Answers. 

The actuarial risk analytics or the finance instrument impairment modelling such as loss potential using complex models, like coverage (PD, EAD, LGD, predicated modelling, regression, time series with loss simulation with in depth data is enabling population of business operation risk assessment. the key figures for behavioural aspects of individuals data is ready to inject in ready to use Model Company business contents importing business partner and finance transactions data. 

The S4 HANA solution for the finance and insurance with IFRS17 HAS a STRONG possibility of a FULL financial transformation with intelligent enterprises, meant capacity for a logical finance transformation with industry best practices from quick quote underwriting to full finance planning, problem-solution for the regulation harnessing data more effectively, improving the structure of finance function and to better informed decision making. 

The S4HANA with FSPL using using historical data (SAP Financial Services Data Management) will help regulatory Estimated Cash Flow Preparation (ECP) as well as business development context; 

Let’s understand how the S4 HANA solution enterprise (product) are simplifying the challenges. The Fundamental for the predicative risk analyse is the need of the multi dimensional data and flexible systems processes.  the data administration, financial presentation and actuarial calculations needs data, and in minimum time to evaluate disclose(r) information to group contracts to simulate tests. As per the IFRS17, the group is a managed (often a product) of contracts as Profitable, onerous, or may become onerous (decided at inception) with a certain inception year. in the SAP HANA ( or FSPL) can use the the Master Data, Reference Data items that are required to support the transnational Grouping of the contract data at reconsideration (recognition) phase . Insurance contract life cycle data (or finance Trading and non-trading) financial data need in SAP per master contracts post classification configuration. This is data that is set up on SAP during the build and configuration process.  This type of data is not part of the migration process, as it will be transported to the production system through the SAP transport procedure is  required for valuation/ cash flows. 

I am sure organisation which were short-sighted historically with transformation has opportunity to correct system (Data) with IFRS17 programme. 

he Fundamental S4/HANA data management across product portfolio (In recognition / classification of instrument/contract  phase) will be used post measurement/valuation for validating the quality of data from lineages, historical data storage (actuaries, risk, accounting consequences figures / characteristics and operational data from any system used in solvency II or internal actuaries systems). This data is being REUSED  so that teams can asses risk dimensions using necessary required inputs for IFRS17 modelling . Here the S4 HANA, SAP Analytics with add-on of the SAP FSPL (sub ledger) can be used to migrated/import data along with Master records so that an Integrated Finance and Risk Architecture (IFRA) could be achived. 

My working experiences in IFRA experiences and in S4 HANA implementation using SAP Bank analyzer (ver 7.0.8.0) and now the FSPL- SP3 with Model Company on S4 HANA is clearly proving me that 'SAP knows the pain point of industry' and come-up with an intelligent solutions. The SAP BA consultants/ business users can tell how slow and painful used to be running the SAP BA function in the traditional database for calculating the cash flows, (KDV), when there is changes through movement type or assess effect of new contracts (some time overnight 2-4 hrs) with new dimensions. Now with S4 HANA, it is possible in minutes.  I remember one changes in the master data records with second + primary business transactions used to take 2-5 hrs to calculable, 

with S4 HANa and FSPL updates / simulating results using changing variable such as interest rate and few other economical variable to business transaction inputs,  taking max 35 minutes (1m policy records), shorted EOD /period end not only with logic but also with performance. 

The Data ageing in the Bank Analyzer to move large volumes of data in the Results Data Layer (RDL) from the Source Data Layer (SDL) within a database changes has also been improved with more working memory in the FSPL (HANA DB). Now with HANA DB this is inbuilt for the controls,  the movement of data by specifying a data temperature scenarios. (Data that is only used rarely or that is no longer accessed can be moved from a "hot area" (partition in the working memory) to a "cold area" (partitions on storage). Data that is frequently used remains in the hot area.  The Running Business Events Analytical with adjustment (update) accruals and deferrals providing  up-to-date interest and commission on the FLY NOW or at least in shortest time (this is true intelligent and agile)....I can tell FSPL on the HANA a is the answer for the Risk and finance to meet the need of complexity...

Key process challenges are addressed with well defined business contents..: 

https://help.sap.com/viewer/6efb236dcca1451cbff97314d2334762/1809.001/en-US/2976728383bd42e6bb2cd86a83b1bc02.html

Please ping me for further documentation or  architects if there is any requirement or considerations for the IFRS9 /regulatory or  IFRS17 with Insurance Model company business contents and other Detail end to end ECL (expected cash flow approaches)  

TO be Logical ..

The Insurance industry has a big hill to climb whilst implementing the IFRS17. The IFRS is certainly a possibility (opportunity) of a wider financial transformation rather a short sight regulatory project. The SAP S4HANA solution for the Financial Services such intelligent BFSI with FSPL (sub ledger) and Finance database with analytics using SAP Profitability and Performance Management (PaPM) has the answer for a future ready FI transformation, It is not only to meet the regulation reporting but also deliver a combined financial statements in and/or carve-out cases, or the Covid 19 impacted FI statements or the drive the CFO decisions running parallel ledger.  As well said, every challenge gives opportunities, and the IFRS is opportunities to transform finance enterprises, revamping entity model or have a improved digital ready IT systems, an improved ML/AI operational data to ease future business in emerging complexities. Top 5 Cs have already rolling -up sleeves’  interpreting the IFRS, same time SAP has delivered Financial products with Sub ledger accounting ‘Old wine in new bottles’ but using more intelligence, more digitally improved crossword solution between risk/ actuaries and applying an integrating IFRA risk and finance structure......

TO  BE Landscape (used for this  study) 

https://help.sap.com/viewer/6efb236dcca1451cbff97314d2334762/1809.001/en-US/2976728383bd42e6bb2cd86a83b1bc02.html

@Rajesh Sharma

The SAP implementation, delivery and methodology approach for the SAP BA/ IA Analyser techniques to achieve the IFRS Regulatory reporting using SA(FSPL) with HANA

SAP techniques applicable at a basic level on sap package / component solution customization –I call this Vision of Finance Transformation From daily routine to supporting growth and new business models

 Not applicable for the  SAP upgrade but to the new/ greenfield implements new SAP Bank analyser, or insurance analyser - on HANA, (FSPL).  The three keys to be successful -IFRS 9 and IFRS 17 implementation. How the SAP Activate approach (HANA with Solution Manager) Delivery approach can help in Close alignment of all project streams. See Diagrem below.. 

 There are many Opportunities for alignment between both (IFRS9 and IFRs17) implementations can be identified in the early project phases starting from the FIT Gap analyses, the Analyse and classify instrument and contracts affected by both standards to Full end to end testing. Pease contact me for any consultation requirement, or formal engagement to provide lesson learned...  

·     How to Address organizational responsibilities aligning actuaries, risk, finance, ALM and accounting etc (Worksop, Q&A, Show and tell session etc)

·         How to Identify shared risk and actuarial data and Conduct parallel analyse (SDL, DDL) and RDL, testing and pilot phases for increased efficiency (POC of FSPL business contents using KDV, and other valuation run)

2) Harmonized data collection inside the FSPL (SDL using reuse of Business partner)

Designing a harmonized data management strategy an efficient and reliable outputs, which can be achieved for the harmonization of IFRS 9 and IFRS 17 requirements (single version of truth)        

A profitable ALM strategy to implement using agile integrated transformation approach is our proved methodology in an integrated transformation approach for IFRS 17 and IFRS 9 provides multiple benefits and allows raising synergies (expert consultancy around):

·         Early identification and mitigation of dependency risks (business model review – e.g. FVOC- SPL)

·         Quick responsibility clarification (actuarial, risk, accounting department) of the existing risk models

·         Consistent accounting principle interpretations against the business model

·         Avoidance of Accounting mismatches

·         Easier Golden Source identification and data harmonization

·         Consistent auditor approvals

2) Harmonized data collection inside the FSPL (SDL using reuse of Business partner)

AS IS - disintegrate, too many small systems , no harmonisation of data... too risky to manage change,, 

TO BE 

SAPs IFRS17 Subledger, Data Management and Finance and Risk Calculation Engines. the S4HANA FSPL -Clint can choose a single-instance installation (one software stack) or a dual instance installation (two software stacks) as illustrated below. In a single-instance deployment, you deploy the back-end and front-end together, whereas in a dual instance installation, you deploy them separately.

 The IT architecture and infrastructure harmonization for valuations and CSM calculations using SAP HANA, BW/BI – and FPSL add on and Joint source for market and valuation data, such as interest rates and risk assessments on the FSPL// 

How Does the IFRS9 and IFRS17 interact each other and /or does both standard provide valuation for the asset and liability using same principles?

 

IFRS 9 introduced a situation whereby satisfying both criteria, insurers can use the measurement options of amortised cost and the fair value through other comprehensive income (FVOCI).

In the ongoing global economical climate, the volatility situations are impacting the IFRS9 and IFRS17 principles and overall asset and liability management, note the IFRS9 approach that was implemented in 2017/18, in operational need adjustment, provisions in the credit risks model for the valuations precision of expected cash flows.. 

Lets, look my point of views. the IFRS9 classified and measured investment on the assets side of the balance sheet.  This predominantly allowed account for the investment using (at) Fair value on the balance sheet, further more it allowed more dynamic / forward looking views of the impairments of the investments. The impact of the different treatments of changes in assets and liabilities resulting from interest rate movements on the P&L, OCI and Balance Sheet of Insurer. Insurance entities, particularly those who currently hold amortised cost based assets or make use of the Available for Sale category (“AFS”) under IAS 39 will need changes.

In contracts of IFRS9, the IFRS17 cater more on the Liability side of the Balance sheet that will be measured at fulfilment value of insurance contracts by 2022/23. What does that meant, on the insurance contract is that what is promised to end client, the coverage the insurance claim, (obligation of payment made in future (many year), As we know the value of liability changes as a result of impact of changes in interest rate on the discount rate (change goes through OCI).

The challenge coming here when the Interest rate is a quite important factor of volatility, however the Accounting value of asset not affected by interest rate movements is/ being valued (impacted by amortisation/impairment principles) on the balance sheet.The insurance liability (IFRS 17) is closely connected to the financial instruments (IFRS 9) within insurers. When a individual buys an insurance, the insurance liability is created and with the paid premiums is a financial instrument (purchased). the Insurers want to reduce the volatility in earnings hence there are some choices within IFRS 9 and IFRS 17 that can make which impact the volatility. Under IFRS 17 insurers can decide whether results of changing financial risk assumption go through OCI or through the profit and loss account in recognition phase.

In the balance sheet under 17, these payments claim / payments valued according to their time values, essential, discounted current interest rate,

As results P&L will be based on current measurement and will be recognised as insurance provided to customer  ... Not sure in this circumstance, How both contract accounting standard (IFRS9 and IFRS 17) intact each, though both based use the Fair value approach, how come the ‘asset and liability’ on the balance sheet match accounting unless Assumption applied, Provision are allowed. These clearly diminish the criteria / objectives of the regulation.

How both IFRS 9 and IFRS 17 approaches will be able to continue measures asses when there is increase in the  interest rate (consistently affecting the market value of both sides (A&L) balance sheet. 

The IFRS17 is more on Liberality impacts, The Asset side market side value will decrease and the Liability side fulfilment value decreased due to the higher discount rates. isn't insurers must consider the expected impact of this new Insurance Standard, they need to be aware of the interrelationship with the Financial Instruments Standard – IFRS 9 – which impacts the valuation of insurers’ assets for accounting purposes???

As the P&L statements will be impacted due to Covid19, (changing situations), In contrast effects in the balance sheet, the Recognition in the statement P&L is going to be bit tricky,  Under the IFRS9, effective interest rate (long term market fluctuation), such as simple bond for assets were reflected considering all market fluctuation, Now, Let’s look in isolation, the  association if asset classified in  fair value thru the P&L account caused volatility, the P&L treatment under the 17 differ depending upon applicable measurement model’ like General Model (GM), Premium Allocation Approach (PAA) and the  ... Fee Approach (VFA) . This Applies to contracts with direct participation features, as defined by three criteria for the P&L side, based on policyholders sharing in the profit from a clearly identified pool of underlying items.. I see this is CLOSE TO IFRS9 APPROACH....

the market fluctuation, we should look in association to 'Asset F&L, P&L causing the volatility .The P&L treatment in the IFRS17 also differ depending upon the measurement model, Like property causality, non participating Life business the  interest (accretion) in the P&L account will be quite stable as it is based on historical Interest rates, the compounding with the historical interest rates, providing here more stability as no market changes to reflected in the interest rates whilst valuation.

  From system perspective, both standards, the IFRS 9 and IFRS 17 require organisations to ensure data governance, lineage, quality and transparency, integration of data flows across the entire reporting chain. This includes a wide spectrum of data that will be used, from historic or current data (e.g. policy , instruments positions, and premium data or data to produced the risk adjustment etc) to forward-looking views data (e.g. data used to produce cash flow projections in the CRR, probability).

this new Insurance Standards are focusing on insurance liability reporting, MUST have far-reaching consequences for an insurer in terms of modelling, data, processes and IT systems; ultimately resulting in a different statement of OCI comprehensive income and more onerous disclosure requirements

 In conclusion: the Insurance Earnings are a Consequence of both Liability and Asset Movement.

 With IFRS 17 making significant changes to the valuation of liabilities of insurers, Less on assets as being used (current measurement and will be recognised as insurance provided to custome. the  IFRS 9 has made changes to the valuation and income recognition of assets. especially when classification categories have been redefined in IFRS 9 and consideration is being given to whether the entity’s business model is evaluated as one held to collect contractual cash flows, one where the intention is to hold to collect and sell or one where the intention is just sales. 

This assessment, combined with the assessment of the contractual cash flow characteristics were impacted the measurement option available to insurers.

The IFRS 17 introduces a situation where by satisfying both criteria, insurers can use the measurement options of amortised cost or fair value through other comprehensive income (FVOCI). The introduction of the FVOCI category to IFRS 9 was seen as a positive development and represented a significant improvement to the standard, in combination with the use of FVOCI in IFRS 17, for insurance companies. The IFRS9 and IFRS 17 insurance contracts accounting standard considerations for data, systems and processes having similar impact, the Large enterprise in Finance, insurer MUST start looking for an integrated data management, reusable risk assessment model. 

More robotics process systems, The AI and Machine learning model to support business operation and regulatory reporting....

• A good on IFRS17 read here :  
• https://ifrs17explained.com/2018/10/24/ifrs-17-model-summarized/
• and 
• https://home.kpmg/content/dam/kpmg/xx/pdf/2020/07/ifrs17-first-impressions-2020.pdf