Millennium

Billed as a once-in-a-generation reporting overhaul, the move to IFRS 17 was never going to be completely glitch-free.

The topline aim of the new regime seems simple enough: i.e. boosting comparability and increasing transparency, by establishing “unified standards for insurance contracts, related accounting, valuation and reporting for enterprises’ assets and liabilities”.

In reality however, becoming compliant has meant an overhaul in multiple areas, from accounting and actuarial methodologies, new reporting solutions to get to grips with, through to reconfiguration of existing data management processes. It’s meant a significant spend in terms of time, effort, and financial resources.

A year on from its effective date, have insurers successfully absorbed these changes? Evidence suggests that it’s still a work in progress. A recent survey from WTW indicated that 70% of first-time IFRS 17 reporters anticipated the new regime leading to a longer working-day timetable (WDT), with the majority saying that substantial work is still required until they reach a “business as usual” state.

KPMG found that post-implementation, insurers are encountering the following:

• Resource-intensive processes and longer close cycles
• Significant manual workarounds
• Data preparation and cleansing
• Large columns of spreadsheets
• Significant process and control gaps
• High resource turnover
• Errors and potential restatements
• Regulatory risk, including non-compliance with filing deadlines

Deloitte found that early implementers of IFRS 17 have encountered a range of challenges, including problems around data capture, the performance/suitability of dedicated IFRS 17 solutions, and issues surrounding integration.

Here are some of the ways in which further IFRS 17 process optimisation may be achieved…

IFRS 17 introduces several new moving parts into the methodology used by insurers to communicate their finances. The ‘contractual service margin’ (CSM) is the most notable novel addition; a complex way of measuring returns that demands the ability to collate, validate, and utilise vast amounts of data at a granular level.

On top of CSM, insurers now have a long list of calculations to grapple with, including present value of future cash flows, liability for remaining coverage (LRC) including all the related effects, liability for incurred claims (LIC), disaggregation (OCI, PL etc.), and an onerous contract test.

More than a quarter (27.2%) of insurers told Deloitte that ‘calculation capabilities’ is one of the areas that has given them trouble with achieving IFRS 17 compliance. KPMG highlights some of the difficulties this has caused on the ground: process and control issues, an increase in errors, and the risk of potential misstatements.

It seems that many insurers are making do with the modifications they have made to existing technology systems. In reality however, comprehensive, easy-to-use modelling and computing capabilities are a must if businesses are going to handle the various cash flow, risk adjustment, discounting and CSM calculations necessary under IFRS 17 in a sustainable way.

For businesses still tied to legacy (albeit minimally modified) processes, the need for constant workarounds – along with the very real risk of misstatements – isn’t going to go away.

For many businesses, the answer comes in the form of a dedicated solution: one that boasts features such as pre-configured standard IFRS 17 calculations and end-to-end reporting and disclosures.

The trouble is that ‘all singing, all-dancing’ out-of-the-box solutions can sometimes fall short of expectations. And in fact, 42% of businesses told Deloitte that packaged software solutions proved to be substantially inadequate for their organisations’ IFRS 17 needs.

As Deloitte points out however, the problem usually isn’t really with the solution itself, but the practicalities surrounding implementation. As with any major software project, it has to be tailored to company-specific requirements. And with IFRS 17 there were added complications, in that changes were made to the standard after it was first issued, so businesses and software vendors were both having to deal with a moving target.

Millennium Consulting is no stranger to complex change management and software implementation projects – so all of this sounds very familiar to us. Close collaboration is essential between you, your software vendor and any implementation partner. There needs to be proper consideration given to your existing architecture to ensure the appropriate flow of data between different areas of the business. This is on top of appropriate onboarding and user-focused configuration tweaks to ensure the right people can put the solution to work in the right way.

In short, there is no such thing as plug and play for a project of this nature. It helps explain why insurers cite ‘Technology design and implementation’ as the most in-demand skillset for achieving successful IFRS 17 compliance.

If you are yet to implement a dedicated solution, it is worth planning early to bring on board suitable external expertise (and avoid expensive mistakes later on!). Likewise, if your new solutions are so far failing to meet expectations, don’t underestimate the value of a fresh pair of eyes for highlighting areas to optimise.

When insurers were asked by Deloitte to list their biggest IFRS 17 implementation problems, ‘Capturing data inputs at the required level of granularity’ came top, cited by more than a third of insurance leaders.

The new standard means that no longer can the financial, actuarial and risk aspects of operations be treated as separate areas. The quantity and quality of historical data available to you feeds directly into your ability to calculate CSM and other metrics in a timely, efficient way. This is in addition to the ability to sort insurance contracts into appropriate groupings based on product type, degree of profitability and year of issue.

In many businesses, data architecture has evolved organically; e.g. separate accounting, actuarial and risk department datasets – each with their own solutions in play. More widely, data may be stored in a host of different locations, without a harmonised data model.

The upshot? No matter how powerful or feature-rich your IFRS 17 solution happens to be, it is always bound to fail in meeting expectations unless the data integration essentials are addressed.

You need an approach that aligns and centralises data company-wide, along with the ability to drill into the details, right down to policy-level, as and when required. Scalability is also key: the new standard means that insurers will be capturing, managing, and processing ever-increasing volumes of granular data, so it’s vital to have the capacity necessary for this.

There is, however, more to this than just staying on the right side of the regulators. In the Deloitte survey for instance, a sizeable number of businesses recognised that the changes they had made – or were planning on making – in response to IFRS 17 could have a number of valuable business benefits.

The removal of data silos can deliver a much clearer picture of enterprise-wide performance. As a few examples, this can help drive efficiency, strengthen fraud detection and prevention measures, optimise pricing and even deliver better, more personalised customer service.