IFRS 17: Waiting is not an option – The clock is ticking

IFRS 17 is a once-in-a-lifetime-change for insurance companies. It provides a set of new rules to improve the transparency of financial reporting in insurance companies, comparable to those of other industries. This will be a welcome change for analysts and other stakeholders.

There will also be a single international accounting standard for insurance contracts, instead of a wide range of national standards, and better information on real profitability. Even for countries, such as the US, where IFRS 17 is not adopted as the standard for valuation of insurance contracts, many insurers will be impacted through their foreign subsidiaries.

Most large insurance and re-insurance companies with an international reach, and typically listed on the stock markets, need to comply with the International Financial Reporting Standards (IFRS). IFRS is a universal business language covering reporting financial statements. The topic is valid for insurance companies that adopted (or plan to adopt) IFRS 17 under any geography.

For international insurance organizations that are accounting under generally accepted accounting principles (GAAP) – as is the case in the United States – the situation will be even more complicated because GAAP is a set of rules, conventions and procedures while the IFRS are principles based. A US-headquartered insurance group with business in IFRS countries, will need to support both these international standards in parallel. While efforts continue to bring together these two standards the differences mean that a coordinated application of both GAAP-related and IFRS-related standards will impact international insurers now and in the coming years, including the implementation of CECL in the US. Here are some quick facts about IFRS 17’s scope:

• Of the 140 jurisdictions whose profiles have been posted by the IFRS Foundation, 116 jurisdictions (83 percent of the profiles) require IFRS for all or most domestic publicly accountable entities (listed companies and financial institutions).
• All re-insurance companies in the European Union must comply with this standard. This also includes mutual insurers and subsidiaries of banking groups.
• Norway and Iceland, although not part of the EU, are committed to follow the EU directives, including the accounting directive.
• Although Japan and the US are not required to follow the IFRS standards, there is interest from many insurers in those countries to align their standards with IFRS 17. Why? Many of them belong to international insurance groups with business in IFRS countries.

 

That means about 450 insurers around the world will be affected by IFRS 17, and they all need to be ready to apply these new standards by January 2023 (previous effective date of January 2022 was recommended to be delayed by International Accounting Standards Board (IASB) in March 2020). However, while there is now one additional year before insurers need to comply with the new effective date, because of the complexity of an IFRS 17 implementation, there remains no time to stand and wait. The urgency remains because the need to collect comparison data and carefully consider how contracts are valuated today versus how they will be valuated in January 2023 means your IFRS 17 project start date is now if you are to be ready in time

In a nutshell, what will IFRS 17 mean?

Under the current accounting standards, the valuation of insurance contracts is often calculated using historical data and is based on data available at the beginning of the coverage period. IFRS 17, however, requires a future-oriented valuation using best-estimate cash flows. It focuses more on the profitability of portfolios or groups of contracts. It establishes guidelines for the recognition, measurement, presentation and disclosure of insurance contracts.

Changes at the enterprise level

IFRS 17 not only affects accounting or financial reporting, but it may impact the overall financial direction of insurers because there is the potential to influence product development, core processes, incentives and much more.

Regarding product development, IFRS 17 may lead insurers to ask whether their products are right for the future, or about the profitability of individual products. The end-to-end nature of IFRS 17 may also lead to questions about processes, such as how to support fast-close activities or about its impact on actuarial, accounting and feeder system processes. Staff and executive incentives may also need to change, depending on revenue changes. These are wide-ranging and sweeping issues.

Looking at the implementation of IFRS 17, its principle-based approach offers a lot of flexibility, but also requires intensive analysis. As insurers begin to answer some of the questions, they will need to think about how to interpret these principles and decide what will work best for them.

A solution-based approach

What needs to be considered in thinking about IT systems to implement IFRS 17? Below are some questions to answer as you contemplate compliance with IFRS 17.

What is your level of IFRS 17 aspiration?

What is important to you as an insurer? Is it pure IFRS 17 compliance, or are you at the other end of the spectrum and seeking a holistic approach for all internal and external requirements that covers all reporting and regulatory regimes? Many insurers, it seems, are currently aiming more at pure IFRS 17 compliance, but keeping an eye on what can be reused for other needs.

What level of standardization is appropriate?

Imagine an insurance group with several units doing business in several different countries. How much standardization is required? You could choose a one-size-fits-all model, which would also provide a chance to harmonize and standardize accounting and actuarial processes. Alternatively, at the far end of the spectrum, you could implement entity-specific solutions. This might not be the best choice in the long term, but it could be a pragmatic short-term solution. A hybrid approach might also work well in the short-to-medium term.

What level of freedom is appropriate for individual business units?

At the moment, actuarial systems are mostly local, but new IFRS 17 platforms are likely to be centrally implemented by corporate IT.

You could say that IFRS 17 is mostly about a central calculation engine and a central process, and it is also too complex for individual business units. Smaller business units would need to expend a lot of effort and resources to get up to speed on IFRS 17 and the new requirements. So, it makes sense for everything to be managed centrally using common processes. However, there is also an argument for having more freedom for the individual business units to make the process work better for them. The ideal approach would probably balance strong central governance with a certain level of freedom at the business unit level.

Business transformation or IT upgrade?

You need to decide how you will position the IFRS 17 project. It could, for example, be a trigger for finance transformation. At this stage, given the timeline, insurers are most likely to concentrate on reworking their financial and actuarial end-to-end processes and leave additional transformation for later.

What is the right funding and governance approach?

Finally, what would the right project governance model for IFRS 17 look like? And what is the right funding approach? Again, the choice is between centralized governance or mostly local projects and local budgets, drawing on a central source of information and standards. A pragmatic approach would involve collaborating to create end-to-end processes across the whole organization. This would include the IT architecture and changes in the actuarial systems. Communication from stakeholders to analysts should also be handled centrally.

A systems approach

Insurers need to determine how to apply IFRS 17. Its principle-based approach requires some time to clarify a standard interpretation that will also allow some flexibility for the future. Different regional perspectives (e.g., EU or Asia) need to be integrated, and insurers need to define how IFRS 17 can be implemented in a way that supports your company’s fast-close deadlines.

Defining an IFRS 17 platform

The IFRS 17 platform will be the new, significant, architectural component. It will need to include central data storage to cover all necessary central calculations, detailed audit trails and postings. To be successful it will need to address five key requirements, bearing in mind that this infrastructure will be used for at least the next 10-15 years:

• Full coverage of regulatory and business requirements, including all the calculation methodologies (BBA/GMM, PAA and VFA approaches).
• Predefined models or content for finance and risk.
• Flexibility and scalability.
• Seamless integration with the existing architecture.
• Powerful and reliable solution provider.

Developing a project road map

Although the current effective date is now recommended to be 2023, it would seem sensible to aim to be ready during 2021. This will allow companies to avoid a sudden, last-minute approach. It is particularly helpful in managing the risk of things going wrong without time to put them right. There is, after all, no Plan B should implementation take longer than you thought. Early implementation will also allow for a learning curve and provide time to gather comparative data.

In purely pragmatic terms, it makes a huge amount of sense to think about keeping the current closing calendar. This means that you can define end-to-end processes early on and do early testing. On the subject of testing, strong end-to-end integration testing is most definitely recommended, as is joint ownership of the global integration test and transition, involving business, actuarial, accounting and IT.

Key recommendations

Perhaps the most important thing to remember is that there is a very clear time constraint on implementing systems to manage IFRS 17.

It is worthwhile to plan for an early end-to-end test to get your individual first lessons learned. This should help to motivate the project teams, which is important because this is a long journey and it will be essential to keep them going. The other advantage of an early end-to-end test is that it gives more time to make changes as a result.

A long-term investment

IFRS 17 implementation means making a long-term investment in a system that will be used for the next 10-15 years. It will be worth going for an integrated approach, based on an open and scalable platform. This should be designed to be able to manage both today’s and possible future requirements of IFRS 17. It will also help in orchestrating the entire end-to-end process, without too many sleepless nights. It represents the best in pragmatism.