09 - Changes in Accounting Bases: The Technology Perspective

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Perspective:Performance ImprovementROBERT BARG, FSA, MAAA09: Changes in Accounting Bases: The Technology PerspectiveAugust 26, 2019

2

Workflow

Workflow ImpactAccounting Updates

• Assumption updates• Rollforward analysis

4

Technology Support

• Business Process Management

• Robotic Process Automation

Workflow Topics

Business Process

Management Robotic Process Automation

Business Process AutomationStart

Create in force file

Run Model

Create output file

Send notification email

End

Results Valid?

Yes

No

Send notification email

End

Robotic Process Automation

Practical Considerations

• Current process vs future state• Technology• Skills and resources• Stakeholder buy-in

Data Management

Data Management ImpactAccounting Updates

• Assumption updates• Disaggregated

rollforwards• Reporting “circularity”

11

Technology Support

• Distributed databases• Data storage

architecture

Data Storage Methods: How They Work

Core 1

Core 1,000

Core 2

Standard File ServerFile I/O is handled by the Windows file system.

Depending on the model, I/O can be more time consuming than calculations

Adding cores shares the compute load, but shifts the bottleneck to the file system

Distributing homogenous calculations evenly means many cores completing at same time

Simultaneous updates of data unique to actuarial models?

Distributed database technology created to address this (and other) problem

Data Storage Methods: How They Work

Core 1

Core 1,000

Core 2

Standard File ServerFile I/O is handled by the Windows file system.

Distributed DatabasesCompressed results are written to a network of database servers managed by a dedicated database manager. The architecture is designed to support parallel reads and writes.

Core 1

Core 1,000

Core 2

Data Storage Methods: How They WorkDistributed DatabasesCompressed results are written to a network of database servers managed by a dedicated database manager. The architecture is designed to support parallel reads and writes.

Core 1

Core 1,000

Core 2

Many different options available, each with different pros & cons

• Hadoop• MongoDB• ArangoDB

Most are open source, with varying levels of support for Windows & Linux

Can be interdependence with cloud provider, should be part of broader design decision

Data Storage Methods

Data Lake

Data Storage Methods

Data Repository

1

Data Repository

2

Data Mart A Data Mart C Data Mart D

Data Mart E

Data Mart F

Data Mart B

Practical Considerations

• Personally Identifiable Information• Legacy data and systems• Skills and resources• Reporting and analysis• Business benefits

August 26, 2019

Integrated Technical ArchitectureSession 09 –Changes in accounting bases: The Technology perspective

Impact of Accounting Changes

Prudential Financial, Inc. (NYSE: PRU), a financial services leader with more than $1 trillion of assets under management as of June 30, 2019, has operations in the United States, Asia, Europe, and Latin America. Prudential’s diverse and talented employees are committed to helping individual and institutional customers grow and protect their wealth through a variety of products and services, including life insurance, annuities, retirement-related services, mutual funds and investment management. In the U.S., Prudential’s iconic Rock symbol has stood for strength, stability, expertise and innovation for more than a century. For more information, please visit news.prudential.com.

• Single Global Financial Systems Architecture• Numerous Regulatory and Reporting requirements• Multiple Operating Divisions and Segments

Integrated Technical Architecture Accounting Changes2

Implementation Approach

Leverage Technology Investments• Common architecture across product lines

• “Pluggable” architecture

• Flexibility to accommodate unique constraints (Joint Ventures, local regulations, etc)

• Buy and Integrate “pre-packaged” vendor solutions if available (e.g. SAS Sub-ledger)

Automated Processing

• Design for automation (controls, proofs, etc)

• Gradually reduce manual intervention

• Varying process flows by product line / geography

Company-wide Reporting and Analytics

Integrated Technical Architecture Approach 3

Vendor Tools: Technical Considerations

Flexible Infrastructure• “Shared” and “Burstable” compute platform support

• Automated Failover, Backup, etc

• Monitoring

Automation APIs

• End to End automation across platforms and tools

• Error Detection

Support Complexity

Integrated Technical Architecture Key Vendor Tool Considerations4

Global Valuation Architecture

Integrated Technical Architecture Conceptual Architecture 5

AdminSystems

AdminSystems

AdminSystems

ETL

Staging

Staging

Custom Models

(US)Input

Warehouse

Liability Warehouse

Post Processing

SAS Workflow Manager

Prophet(Intl)

Staging

SASIFRS 17

Subledger

Vendor Models(US, JP)

On-Premise Grid

Azure Cloud

ETLGAAP, STAT,

Forecast, Valuation

Finance

Reporting

Forecast

General Ledger

Web Service Broker / Connector

k

Session 09 – Changes in accounting bases: The technology perspective

SOA valuation actuary symposium 2019

Monday, August 26, 2019

2© 2019 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 887476

Antitrust compliance guidelinesActive participation in the Society of Actuaries is an important aspect of membership. While the positive contributions of professional societies and associations are well-recognized and encouraged, association activities are vulnerable to close antitrust scrutiny. By their very nature, associations bring together industry competitors and other market participants.

The United States antitrust laws aim to protect consumers by preserving the free economy and prohibiting anti-competitive business practices; they promote competition. There are both state and federal antitrust laws, although state antitrust laws closely follow federal law. The Sherman Act, is the primary U.S. antitrust law pertaining to association activities. The ShermanAct prohibits every contract, combination or conspiracy that places an unreasonable restraint on trade. There are, however, some activities that are illegal under all circumstances, such as price fixing, market allocation and collusive bidding.

There is no safe harbor under the antitrust law for professional association activities. Therefore, association meeting participants should refrain from discussing any activity that could potentially be construed as having an anti-competitive effect. Discussions relating to product or service pricing, market allocations, membership restrictions, product standardizationor other conditions on trade could arguably be perceived as a restraint on trade and may expose the SOA and its members to antitrust enforcement procedures.

While participating in all SOA in person meetings, webinars, teleconferences or side discussions, you should avoid discussingcompetitively sensitive information with competitors and follow these guidelines:

Do not discuss prices for services or products or anything else that might affect prices

Do not discuss what you or other entities plan to do in a particular geographic or product markets or with particular customers.

Do not speak on behalf of the SOA or any of its committees unless specifically authorized to do so.

Do leave a meeting where any anticompetitive pricing or market allocation discussion occurs.

Do alert SOA staff and/or legal counsel to any concerning discussions

Do consult with legal counsel before raising any matter or making a statement that may involve competitively sensitive information.

Adherence to these guidelines involves not only avoidance of antitrust violations, but avoidance of behavior which might be so construed. These guidelines only provide an overview of prohibited activities. SOA legal counsel reviews meeting agenda and materials as deemed appropriate and any discussion that departs from the formal agenda should be scrutinized carefully. Antitrust compliance is everyone’s responsibility; however, please seek legal counsel if you have any questions or concerns.

Society of actuaries

3© 2019 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 887476

Disclaimer

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation.

4© 2019 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 887476

Panel and topic introduction

Performance improvement

Reporting and process considerations

Insurance company considerations

Questions

Agenda

5© 2019 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 887476

Key changes to accounting bases

U.S. GAAP Long-Duration Targeted Improvements — Effective 1/1/2021 for public entities, 1/1/2022 for all others— FASB proposed changes to the effective dates in its 7/17/2019 meeting

- Proposal: Effective 1/1/2022 for most, 1/1/2024 for smaller reporting entities- Details to be released in the future exposure draft

IFRS17— Effective 1/1/2022Other accounting changes that impact insurers— Principle-based reserving (new business)— CECL, IFRS9

6© 2019 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 887476

Technology impact

— Systems- Actuarial- Accounting rules engines- Aggregation and reporting

— Data— Process— Controls— Reporting— Ledger/bookings— Operating models (who does what)— Business/org change management— In-flight initiatives

Accounting change

7© 2019 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 887476

Top ten client questionsLDTI

Will the implementation date be deferred?

Is there anything else I can fix while I’m at it?1 6

How do I tell my story? How badly will this impact other initiatives?2 7

Are my existing financial and actuarial systems sufficient?

How do I utilize internal and external resources?3 8

New models and data: Adapt, build or partner?

Isn’t it just a compliance exercise?4 9

How will roles and responsibilities in my organization change?

How much should I budget?5 10

Direct impact on technology Indirect impact on technology

8© 2019 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 887476

Impact on the production process

— Granularity— Presentation— Period over Period

Change— Disclosures and roll

forwards— Management

Commentary— Solvency and Tax

Reporting— Review and Sign-Off

(Workflow) — Solvency and Tax

Reporting, Management Reporting, Analytics and Analysis of Change

Transaction data/sourcing detail Actuarial platform Accounting platform

Reporting and analysis platform

— Common data collection template

— Granularity— Policy/Claims Linkage— Grouping/Cohort Linkage— Location/Entity Linkage— Level of Aggregation -

Data Collection & Delivery

— Consolidated Data Store— Comprehensive Data

Governance and Control Framework

— Actuarial Calculations (Configurable)- Measurement Methods- Calculation Models- Discounting Cash

Flows- Best Estimate

Assumptions & Experience Analysis

- Sensitivity— Level of Aggregation –

Data Collection & Delivery

— Model Results Data Store

— Accounting Calculations (Configurable)

— Accounting and Disclosure Data

— Acquisition Cost/Allocation

— Accounting Rules/JE Generation

— Mapping/Posting Rules— Financial Controls and

Reconciliations— Sub-ledger— Multi-GAAP Enabled

General Ledger— Multi-GAAP Enabled

Close

Higher impact area Higher impact area Higher impact area

Data governance/hierarchy management, data management, data quality & reconciliations— Standard source of data and controls— Auditability and detailed lineage based on materiality

— Alignment with data standards and hierarchy rules— Data quality and reliability across accounting bases

9© 2019 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 887476

Impact on the technology landscapeThe implementation of U.S.-GAAP LDTI and IFRS17 impacts the end-to-end process from sourcing of data through financial reporting and analytics. The degree of impact various across the different process components and not all would require an application change.

Actuarial data store— Assumptions— Contract Grouping

(cohorts)

Source data— Policy data— Premium— Claims— Expense— Investments— Interest/FX rates

Account & posting rules

CoA & General ledger

Integrated data source— Consistent/Norm

alized Data— Historical Data

Financial sub-ledger

Actuarial modeling— Unlocking— Net premium ratio— Market risk benefits

Model results & data management

Management reporting & analysis

Consolidation & disclosures

System and process impact areas:

A

B

— Source data requirements (Data, assumptions & MPFs)

— Integrated data layer to normalize data for consumption by finance and actuarial applications

C — Changes in modeling (and for other bases)— Actuarial modeling and projected cash flow

generation— Actuarial model results store and data

management

D — New Accounting logic — Journal entry generation— CoA mapping and posting logic

E — Historical data for transition and on-going comparatives analysis

F — Financial sub-ledger — Books and records data, reconciled and

controlled

G — U.S. GAAP/IFRS Reporting & Disclosures

— Re-evaluation and production of Management Reporting, KPI’s and Analytics

H — Multi-basis General Ledger required — Revisions to Chart of Accounts

A

E

B E

C C

E

DF

E

G

H

G

Flow/system Key systems &process impact areas Data Sources Data Storage ReportsKey:

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation.

© 2019 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 887476

The KPMG name and logo are registered trademarks or trademarks of KPMG International.

kpmg.com/socialmedia

Some or all of the services described herein may not be permissible for KPMG audit clients and their affiliates or related entities.

2019 Valuation Actuary SymposiumJIM ZHANG - SESSION #9

IFRS 17/US GAAP LDTI Reporting/Process Considerations

Aug 26, 2019

SOCIETY OF ACTUARIESAntitrust Compliance Guidelines

Active participation in the Society of Actuaries is an important aspect of membership. While the positive contributions of professional societies and associations are well-recognized and encouraged, association activities are vulnerable to close antitrust scrutiny. By their very nature, associations bring together industry competitors and other market participants.

The United States antitrust laws aim to protect consumers by preserving the free economy and prohibiting anti-competitive business practices; they promote competition. There are both state and federal antitrust laws, although state antitrust laws closely follow federal law. The Sherman Act, is the primary U.S. antitrust law pertaining to association activities. The Sherman Act prohibits every contract, combination or conspiracy that places an unreasonable restraint on trade. There are, however, some activities that are illegal under all circumstances, such as price fixing, market allocation and collusive bidding.

There is no safe harbor under the antitrust law for professional association activities. Therefore, association meeting participants should refrain from discussing any activity that could potentially be construed as having an anti-competitive effect. Discussions relating to product or service pricing, market allocations, membership restrictions, product standardization or other conditions on trade could arguably be perceived as a restraint on trade and may expose the SOA and its members to antitrust enforcement procedures.

While participating in all SOA in person meetings, webinars, teleconferences or side discussions, you should avoid discussing competitively sensitive information with competitors and follow these guidelines:

• Do not discuss prices for services or products or anything else that might affect prices• Do not discuss what you or other entities plan to do in a particular geographic or product markets or with particular customers.• Do not speak on behalf of the SOA or any of its committees unless specifically authorized to do so.• Do leave a meeting where any anticompetitive pricing or market allocation discussion occurs.• Do alert SOA staff and/or legal counsel to any concerning discussions• Do consult with legal counsel before raising any matter or making a statement that may involve competitively sensitive information.

Adherence to these guidelines involves not only avoidance of antitrust violations, but avoidance of behavior which might be so construed. These guidelines only provide an overview of prohibited activities. SOA legal counsel reviews meeting agenda and materials as deemed appropriate and any discussion that departs from the formal agenda should be scrutinized carefully. Antitrust compliance is everyone’s responsibility; however, please seek legal counsel if you have any questions or concerns.

2

Presentation Disclaimer

Presentations are intended for educational purposes only and do not replace independent professional judgment. Statements of fact and opinions expressed are those of the participants individually and, unless expressly stated to the contrary, are not the opinion or position of the Society of Actuaries, its cosponsors or its committees. The Society of Actuaries does not endorse or approve, and assumes no responsibility for, the content, accuracy or completeness of the information presented. Attendees should note that the sessions are audio-recorded and may be published in various media, including print, audio and video formats without further notice.

3

Introduction to IFRS 17 What is changing ? EVERYTHING ! • Measurement of contract carrying values on Balance Sheet (asset and liabilities) • Elimination of earnings at recognition

Introduction of the contractual service margin (CSM) and Risk Adjustment (RA) Revenue recognition are presented by the release of CSM and Risk Adjustment

• Level of Aggregation introduction of hierarchies of I-17 Group, portfolio and entities

Implementation date: Jan 1st, 2022• Original target date of Jan 2021, already delayed • Parallel run required for each quarter of 2021

4

IFRS 17 Measurement – Carrying Value

5

Contractual Service Margin (CSM)

Represents the unearned profit the insurer will recognize as it provides services under the insurance contract

Risk Adjustment

(RA)

An explicit estimate of the effects of the uncertainty about the amount and timing of future cash flows that arises from non-financial risks

CashflowAn explicit, unbiased and probability-weighted estimate of the future cashflows (outflow less inflows) that will arise as the entity fulfills the insurance contract

Time value of money Discounting at a rate that adjusts future cash flows for the time value of money

Prob

abili

ty w

eigh

ted

disc

ount

ed e

xpec

ted

CF

Fulfi

llmen

t Cas

hflo

w

Carr

ying

Am

ount

(Ins

uran

ce C

ontr

act L

iabi

lity)

6

Contractual Service Margin (CSM)

Represents the unearned profit the insurer will recognize as it provides services under the insurance contract

Matching principleAttempt to amortize the profit over the life of the contract

Additional buffer for assumption update/Impact of ExperienceCSM is “adjusted” to absorb impact of insurance related assumption update, and certain impact of experience

CSM released into P&L based on Coverage Unit (CU) Coverage Unit modulate the amount of CSM released into P&L over the life of the contract, based on the amount of service provided

IFRS 17 Level of Aggregation

Portfolio - Consist of contracts that are subject to similar risks and managed together Group - Further break down a portfolio based on issue year and level of profitability

IFRS 17 Group Represents the lowest level of granularity for the measurement and reporting of IFRS 17

Definition of I-17 group is principle driven and subject to interpretation

Other Highlight of select changes of IFRS 17

End-to-End Process I-17 impacts all aspect of the business

IT/Data Actuarial Finance

Extensive Data Mgmt

ETL Process

Initial

Recognition

Measures

Subseq.Measures

GenerateJournalEntries

Adjust &Review

Posting to General Ledger Data Load

Input Data Flow Calculation FlowAccounting and Reporting Flow

What to Report – Calculated Metrics Extensive logic update for the calculation and

roll-forward of CSM and RA Incorporates both prospective (projected) CF

and past experience (actual CFs) Changes to the level of granularity (grouping)

at which Insurance Contract Liabilities are calculated

Reporting Changes to reporting granularity, at the

I17 group/entity levels Changes to earnings release pattern,

shifted focus to CSM and RA roll-forward disclosures

Mismatch between Reg. and Mgmt. reporting basis

Sourcing Input for I-17 cal. Challenge to source both actual

and expected CF at the I-17 Group level

Revised calculation logic may require changes to the number and nature of valuation runs during QE

What To reportBreakdown of Reserve/CSM movement

8

Prior Period ProjectedExpected CF

+ NB CF

+ Actual Claims

+ Actual Lapse

+ Actual Expense

+ Basis change

.. …

.. …

Current Period ProjectedExpected CF

Current Period AvE CF

Knock on ∆Liabilities

CSM

P&L CSM

CSM CSM

P&L CSM

CSM number and order of risk

drivers

What to report (process consideration):

The desired reporting granularity of CSM movement due to different drivers heavily depends on the order and number of the valuations runs

Accounting and Reporting Flow

Calculation Flow

10

Accounting and Reporting Flow

Calculation Flow

Input Data

IT/Data Actuarial Finance

End-to-Ent Process Results Driven/Reverse Engineered Process

11

Existing Data Sources

Actuarial Engine

Admin Systems

Subledger/General Ledger

Optional Data Mgmt. layer

5

IFRS 17 Calculator

ETL – Data Processing

Grouping Logic

(onerousity Test)

Allocation/Aggre

Calculation Flow

Sourcing for the right type of data

Depending on the current complexity of your IT landscape, sourcing for the right actuarial and accounting input at the IFRS 17 group level may be the heaviest lift of the IFRS 17 project

Input Data Flow

Sourcing for the Data at the correct level of granularityChallenge to obtain I-17 group level data

12

Existing Data Sources

Actuarial Engine

Admin Systems

Subledger/General Ledger

Optional Data Layer

5

IFRS 17 Calculator

Reporting Workflow

Non-Calculated Metrics for I-17 Reporting

In addition to acting as an input source to the IFRS 17 calculation. Actual Data also is also required to generate disclosure mandated by IFRS 17. (Ex. Actual Investment income)

Accounting and Reporting Flow

Input Data Flow

Sourcing for both Actual and Expected Actuarial DataA story of two tales: Calculated VS Non-Calculated

Pulling it all together Key considerations on the reporting process

13

Universe of IFRS 17 Data Increasing Level of Aggregation

Input: Calculated I-17 Metrics

Input: Non-Cal. I-17 Metrics

Increasing granular break down of I-17 calculation

Portfolio Group

Increasing granular breakdown of Risk Drivers

Key Consideration for reporting Tool The ability to ingest both calculated and non-calculated IFRS 17 metrics Flexibility to drill-down and consolidate I-17data at all three level of aggregation Flexibility to handle addition risk drivers that explains the IFRS 17 reserve movementReg. VS Mgmt. Reporting (Multi-GAAP) Functionality to allocation/aggregate I-17 metrics to align with current mgmt. reporting requirements

1

12

3

2

3

4

Reporting Workflow

Regulatory Reporting

Internal Mgmt Reporting

4

Thank you

Cover pageBargBelenkiyZaidlinZhang