Australian insurers are behind international counterparts in readiness for new major new accounting standards, according to a new report by KPMG.
The report, In it to win it, is based on a KPMG survey of 160 global insurance executives and covers insurers’ preparation for IFRS 17 (Insurance Contracts) and IFRS9 (Financial Instruments)— two major standards which apply for insurers from January 2021, but for which two years of parallel running are recommended.
Minority of insurers expect to be in time
The survey revealed that just 7% of insurers expect to be ready in time for this, and more than half (56%) anticipate just one year of parallel running before going live.
KPMG Australia insurance partner Scott Guse said “IFRS 17 is the most significant accounting change for over 20 years in the life and general sector. 10% of the insurers surveyed were Australian and they do seem to be slightly behind their global counterparts when it comes to commencing and implementing their transition to the requirements of the new standard.
“IFRS 17 brings in different ways of valuing insurance contracts and assets and so will make profit and loss (P+L) accounts more volatile – this will primarily arise through the ‘choices’ allowed in the new standard when re-measuring claim liabilities.”
He said that IFRS 9 will add to the volatility in insurers P+L accounts as it allows more choices to be made in recording valuation gains or losses on their investment portfolios. In this sense, both IFRS 17 and IFRS 9 standards are inter-related, and this is why insurers have been given the option to delay IFRS 9 in order to align it with the implementation of IFRS 17 – whereas for banks it is already in force.
Given the significant investment holdings by insurers, which are subject to the new requirements of IFRS 9, it is not surprising that three-quarters of insurers globally have taken advantage of this deferral option.”
Major hurdles still remain
KPMG’s survey shows major hurdles remain in making IFRS 17 and IFRS 9 operational. An overwhelming majority (90%) of insurers foresee difficulties in securing sufficient skilled people to do the job and half are worried about securing the necessary budget.
With the numbers of people required for this complex work, securing sufficient talent is becoming an increasingly acute challenge. Nearly half (45%) of the largest insurers already have teams of 50 or more and half of the mid-size insurers have up to 25 people assigned. Increased training is also a critical need, and the majority of insurers have so far delivered training only for members of their implementation teams.
Mr Guse said: “Ironically, the survey found that organisations which are furthest along with their projects were feeling the greatest time pressure. The more they do, the more they realise how challenging implementing the new standards will be. For many this has meant significant investment in systems, processes, data, controls, education, communication with stakeholders and changes to asset-liability management. Profit profiles and product offerings may also have been impacted.”
Despite challenges, new standards offer transformation opportunities
Despite the challenges ahead, virtually all (97%) of the largest insurers surveyed viewed implementing the new IFRS standards as an opportunity to transform their business, with a focus on process optimisation (identified by 77%), actuarial process enhancement (65%) and system modernisation (58%).
“The costs of implementing IFRS 17 and IFRS 9 may be very significant, but the transition can be a catalyst for innovation and to develop your talent and emerging business leaders,” said Mr Guse.
“Ultimately, it is critical for insurers to be alert to evolving matters of interpretation so that the impacts on financial statements can be fully understood and there can be a dialogue with investors about what changes they can expect. But two years of parallel running is definitely preferable, and not many insurers look like achieving that.”