The new International Financial Reporting Standard IFRS 17 is the most significant change to insurance accounting requirements in more than two decades. In the coming years, Asian insurers will need to implement significant technical and practical changes to entirely overhaul their published financial statements by 2021. Mr Martyn van Wensveen of EY focuses on the data, systems and process changes Asian insurers will need to implement to comply with the new standard.
Insurers will soon need to interpret, understand and apply the new Standard to their in-force insurance contracts, actuarial models and financial reporting – a complex change process involving significant time and effort.
But this major change programme will extend beyond finance and actuarial teams, challenging insurers’ data availability, granularity and quality, resulting in a large impact across data, systems and processes (DSP).
At issue is the fact that the new Standard uses three profit measurement approaches - building block approach, premium allocation approach and variable fee approach - that will fundamentally change current financial reporting practices and KPIs.
The detailed new requirements are markedly different from existing models in a number of critical aspects that will:
- Change profit emergence patterns over the duration of the contract;
- Accelerate the recognition of losses on contracts that are expected to be onerous;
- Add complexity to valuation processes, data requirements, assumption setting and analysing and communicating financial results.
In particular, greater granularity in contract groupings for valuation purposes will create additional complexity in valuation models, and in the subsequent DSP requirements. For most insurance companies, this will present significant operational challenges:
IFRS 17 will require insurers to ensure consistent data governance, lineage and transparency across the entire actuarial modelling and financial reporting chain. This includes a wide spectrum of more granular data that will be used, from historic or current data (eg policy and premium data or data to produce the risk adjustment) to forward-looking data (eg data used to produce cash flow projections).
For insurers, the content and structure of data captured from products, portfolios and business units to support IFRS 17 reporting will change significantly, depending on the new accounting policy choices made by them.
This will require changes to financial (sub) ledgers, consolidation and reporting systems and the interfaces between them. In addition, changes to the primary financial statements and disclosures will impact the GL structure and chart of accounts at both the group and business unit/entity level.
The underlying financial processes, such as the quarterly financial close (actual) and the yearly financial planning (budget) will also need a major overhaul to keep up with the new reporting requirements of IFRS 17, as highlighted in the Diagram 1.
Change the challenges into opportunities
It may seem overwhelming, but IFRS 17 also provides a significant opportunity for insurers to introduce efficiencies into their DSP. In building IFRS 17 capabilities for compliance purposes, insurers can also make processes and systems more efficient and transparent by automating manual activities, reducing complexity, creating fast close capabilities and removing the need for late adjustments. This is also a good moment to integrate data storage for finance, risk and actuarial systems.
Rather than simply adding workarounds to meet the immediate needs, IFRS 17 challenges will be best met by building greater integration between finance, risk and actuarial data through a common vision around the new target operating model for Finance and Risk.
The most efficient way to approach this is through an integrated operating model and supporting technology platform for finance and actuarial, enabling these two units to work together as one unified team with one seamless calculation method and reporting platform.
Choose the right approach
Insurers have three broad solution approaches to meet the new DSP challenges (See Diagram 2).
- Actuarial driven IFRS 17 solution – Leverage existing data, system and processes for IFRS 17 and build on MCEV/Solvency II tools and models wherever sensible.
This is the easiest and fastest solution to implement, because it is built on existing tools and processes.
However, this solution typically leaves in manual steps that results in a less than efficient set up. It also may not fit the future IFRS 17 reporting timelines and additional requirements, especially disclosures and controls.
- Integrated IFRS 17 subledger solution – Build IFRS 17 capabilities through introducing an integrated subledger solution that connects the finance and actuarial systems to satisfy all IFRS 17 reporting requirements.
This option offers an important opportunity to implement a new, more efficient financial reporting system setup while leaving old systems intact. It has a shorter time to benefits realisation than option 3, delivers information at a more granular and sustainable level than option 1 and offers ancillary benefits in areas outside IFRS, such as data analytics.
However, multiple data sources and end-to-end process complexity associated with this solution means higher implementation risks. This option also comes with a rather large upfront investment for a new solution with a potentially limited lifespan, if the insurer eventually plans to migrate to option 3.
- GL embedded finance solution – Provide a single IFRS 17 platform through a central finance system built into the GL system.
This option offers the greatest level of flexibility, enabling insurers’ multi-GAAP capabilities that easily add other functionality requirements such as IFRS 9 and Solvency/RBC. It creates a single-source of truth for Finance, Actuarial and Risk. But it has a higher critical path risk than option 1 and 2.
This solution is very expensive and generally takes longer to realise benefits from migration and will likely have some manual steps and solutions resulting in higher operating costs. Also, some of the underpinning technology is still unproven and only a few GL vendors are capable of developing this functionality.
The ultimate solution choice will be the one that combines what is needed to comply with the IFRS 17 requirement and what is needed to meet your business objectives and finance strategy.
Before embarking on an expensive implementation exercise, insurers need to assess the IFRS 17 options and impact on DSP:
- Data – work with internal and external stakeholders to assess the current data flows and identify potential gaps with IFRS 17. Data management capabilities also need to be reviewed at the enterprise level, including the end-to-end data architecture and flow, data governance process and policies, and the target operating model to ‘manage data as an asset’.
- Systems – understand the systems target state by analysing the current state systems architecture and designing the best mix of systems to support the companies’ IFRS 17 choices.
- Processes – focus on fast-close initiatives and other major changes to reporting, planning and forecasting processes. Consider the design of specific controls for the new processes that can be integrated into the existing control framework.
Once the best system option and implementation route has been decided, insurers should be careful to test the system functionalities before they buy. Vendors are at various stages of development for supporting the new IFRS 17 requirements. European providers are repurposing their Solvency 2 assets; whereas North American and Asian providers are rapidly advancing more bespoke solutions in line with local requirements.
Finally, be aware that the “devil is in the detail” in these kind of projects. Use a proven approach to structure the project in the most efficient (phased) way, so teams can focus on the most important issues in each phase and not be overwhelmed by the complexity of the total end-to-end solution.
Clearly, an experienced consultant can help insurers make the best choices and guide them on the implementation path. A
Mr Martyn van Wensveen is APAC IFRS 17 Implementation Leader for EY. This is a curtain raiser to the Asia CFO Insurance Summit jointly organised by AIR & EY.
This publication contains information in summary form and is therefore intended for general guidance only.
It is not intended to be a substitute for detailed research or the exercise of professional judgment.
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