57 NTU Management Review Vol. 31 No. 2 Aug. 2021 the severity of the impact and achieve smooth integration. We also find that after implementation of IFRS 9, volatility of both the life insurance industry’s profits and losses and owners’ equity has risen. And the willingness of the industry to hold stocks offering high dividends is also up, which has made recognition of bond benefits more flexible. At present, life insurance companies generally invest in a large number of bonds in nonactive markets to obtain fixed returns. Therefore, the two interviewed life insurance companies believe that most of these investment tools can pass the contract cash flow test and conform to the business model; these investments are also likely to be classified as “Amortised Cost” (AC). Even if changes in interest rates will affect the value of these investments, because based on the new standard, most of the existing positions can be classified as “AC,” the impact on profit and loss fluctuations is relatively limited. On the other hand, IFRS 17 may have two possible impacts on profit and loss of life insurers. First, it should become necessary to re-evaluate the future cash flows, discount rate, risk adjustment and contractual service margin. The results of the re-evaluation will reflect immediately in current income statements, which leads to the increase of the range of changes in profit and loss. Second, since within the contract boundary, all premiums and claims are regarded as future cash flows of insurance contract liabilities rather than profit and loss; the profit and loss will decrease. Third, to assess insurance contract liabilities, life insurance companies should also greatly expand the establishment of actuarial and financial models. There are also certain difficulties when dealing with valuation of in-force polices on transition date in practice. For example, the compulsory dividend payment of participating policies cannot be calculated retrospectively. Last, for insurance companies, the content and structure that can be used to calculate insurance contract liabilities based on investment products and portfolios and business units will undergo major changes. Therefore, insurance companies will have to modify or substantially update their financial consolidations and reporting systems. Our results of quantitative simulation analysis show that after solving the optimal asset allocation and classification, about 90% of the FVOCI should be in bonds and 10% in stocks. This configuration will bring about 5% return on owners’ equity and a standard deviation of 16%, corresponding to a 0.06% probability of insolvency. Since the optimized result is not allocated to FVTPL, the net income and its changes are very small. But the key to this seemingly reasonable risk lies in the extremely high ratio of owners’ equity to total assets (over 90%). However, it is impossible to achieve such a high proportion under current situation of the industry. Thus no matter how funds are allocated to different
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