With the IFRS 17 deadline fast approaching, firms have little time to adapt to a massive increase in data volumes, as well as perform calculations and generate reports. A panel of industry leaders discusses the main challenges to implementation and how processes are being adapted accordingly, how technological solutions can aid firms looking to change the way they measure financial performance, and the likelihood of the industry meeting the January 2022 implementation deadline
- Ulrich Gröbel, Head of Markets Insurance, Europe, IFB
- Yannick Cortese, Global Practice Leader for IFRS 17, Moody’s Analytics
- Sufyan Khan, Head of Analytics Solution Consulting, Emea, Oracle
- Stefan De Lombaert, Global IFRS 17 Lead, SAS
What is IFRS 17 and how would the proposed deferral of its deadline impact implementation?
Stefan De Lombaert, SAS: IFRS 17 is scheduled to be applied on or after January 1, 2022. It will have implications on financial disclosures and profound operational impacts on all aspects of the organisation.
The industry faces tough challenges in understanding the operational impacts on data, systems and processes:
- Data management, storage, data quality and archiving
- Systems architecture
- Actuarial and accounting processes that will support the future reporting process.
Insurers will soon need to implement significant technical and practical changes to appropriately respond to these challenges.
SAS believes the most efficient way to approach this will be via an integrated operating model and technology platform for actuarial and finance, enabling insurers to work as a unified team with a single seamless calculation and reporting system.
What IFRS 17 implementation challenges are firms currently facing?
Yannick Cortese, Moody’s Analytics: The main challenges fall into six categories: data granularity, modelling, disclosure, transition, technology
IFRS 17 requires more granular data, given that cashflows are required to be split into ‘units of accounts’, and cashflow variations must be segmented by type. It introduces new calculation elements such as the contractual service margin (CSM), with several methodologies according to contract type and risk adjustment. With the new standard being principles-based, companies will need to translate the principles into detailed interpretive models. The current reporting environments and reports will also need to be changed to fulfil the new disclosure requirements.
Calculating the remaining profits on the existing portfolio using one of the three possible methods – full retrospective, modified retrospective, fair value – will pose significant transitional effort. The technical challenge mainly relates to the huge increase in data volumes required and the time needed to perform calculations and generate reports. The two-year timeline to project completion is tight, leaving no provision for a break.
Sufyan Khan, Oracle: IFRS 17 replaces IFRS 4 – the previous standard. Though the timeline has been extended, the road ahead does not undermine the challenges insurers face.
Some of the key challenges are as follows:
- Data – The amount of data required under IFRS 17 is immense and is required from all functions, covering current and historical information such as policy data, premium information, reference data or investment data. A holistic approach needs to be taken to address the data management issues at a more enterprise level to reach a target operating model.
- Measurement – To compute CSM, metrics such as best-estimate cashflows, risk adjustments and discounting – including allocations – need to be put in place to measure results and large volumes of data, including granularity and the complexity of calculations.
- Reporting – Day-one reporting for measurement standards is a key challenge under IFRS 17. Since data is fragmented, automation is lacking and, in the absence of an integrated data model, the reporting process can be time-consuming, prone to human error and not cost-efficient. Once CSM, fulfilment cashflows and other metrics have been calculated, they need to be reported within the financial statement, including movement analysis. In addition, the frequency of internal and external reporting should not be underestimated. Insurers also need the flexibility to audit results to the data’s point of origin.
- Postings – Results of CSM under different measurement approaches, including best-estimate cashflows and adjustment, need to be translated into general ledger (GL) postings, which should seamlessly translate into financial statements.
- Process automation – For the process to be successful, it is important to automate the end-to-end process as much as possible. The entire way from data capture to data quality checks and from management of cohorts to calculation of CSM and CSM release – including GL postings and report generation – should be part of an automated process/workflow.
Ulrich Gröbel, IFB: IFB looks predominantly at the implementation challenges, based on project experience with insurers from the European and North American markets.
One of the challenges is the interpretation of the principles-based standard and the company-specific adoption of valuation methods for the group-specific business portfolio with its core and niche products. Based on early impact assessments for the company-specific business portfolios, decisions are needed on measurement models to provide solid ground for designing functional requirements.
Another challenge is to generate the increasing amount of data required and to significantly increase the quality and lineage of that data to ensure proper valuation results. Depending on the option chosen for transition, this might require additional effort to retrieve historical data for far-reaching business periods. Ideally, IFRS requirements are used to define a data architecture to
serve integrated finance and risk requirements, such as Solvency II, to prepare
for future developments of regulatory standards.
IFRS 17 affects almost the entire business IT system landscape of insurance companies, which has often been developed over time with little integration. A future-oriented business and IT system architecture lays the foundation for a complex project environment, where architectural decisions are needed early on to enable the required progress in IFRS 17 transformation. There is no one-size-fits-all target architecture. It needs to be designed based on middle- and long-term objectives for business transformation, such as a single or multiple Generally Accepted Accounting Principles (GAAP) solution, finance and risk integration, or a centralised-versus-decentralised approach. In addition, it requires close collaboration of various group functions and interaction with local subsidiaries.
This contributes to a complex project environment with a large number of different participants that need a joined-up and transparent approach to integrate functional and technical requirements. Significant budgets are required just to adhere to regulatory standards. Tangible benefits beyond regulatory compliance can be achieved by aligning the target operating model, target architecture and target IT system landscape to additional future-oriented business objectives. Such benefits might focus on quality, cost, business insights, and planning and simulation capabilities.
Stefan De Lombaert: IFRS 17 will have several impacts on insurance groups, causing uncertainty around the following:
- Which technological solution to employ to best meet the standard. In this regard, firms have two options:
- Build out the new capabilities by extending actuarial tools or GLs, or both.
- Introduce an end-to-end solution comprising a process orchestration tool, a strong data management platform, a CSM calculator, a sub-ledger and a set of disclosures.
- Where to find staff to successfully implement the new standard, considering that:
- Implementation teams require the full-time attention of a multidisciplinary internal team, assistance of external subject matter experts and personnel from its technology provider.
- Companies moving faster will have access to better resources, while slow deciders will face difficulties in ensuring the necessary resources.
- How to marry the finance requirements with the performance deep-dive analysis, the planning and budgeting needs, and the what-if requirements before and after transition:
- A recent survey found that 84% of insurers expect much more than complete compliance from their IFRS 17 projects, including:
- A review of planning and budgeting needs.
- Testing various options during transition.
- The ability to analyse profitability on a highly detailed level.
- A recent survey found that 84% of insurers expect much more than complete compliance from their IFRS 17 projects, including:
What are businesses required to do to change their processes to meet IFRS 17?
Yannick Cortese: First, accountants and actuaries will need to sit down together. Their collaborative efforts are of critical importance in meeting calculation and reporting execution timelines of five to seven weeks from the closing date. Second, firms must get on top of data accuracy and quality to avoid process inefficiencies. Third, IFRS 17 is designed to bring more transparency and comparability – therefore chief financial officers (CFOs) will need to set up reliable internal audit and control processes. And fourth, CFOs will need to put robust processes in place to better forecast and control future financials, given that insurance companies now need to assess assets and liabilities at market value. Loss components will need to be incorporated into the profit and loss (P&L) during the current reporting period without any deferral, which means financial results will tend to be more volatile.
Sufyan Khan: Based on feedback from clients, changes are being made by businesses in the following areas:
- Clients are increasingly adopting technology platforms and innovative systems to transform their business and finance processes. With the huge volumes being processed, deployment over big data platforms is imperative.
- Many insurers are adopting a control framework over financial reporting along with strong capabilities around auditing to meet the minimum requirements as per the standard while mitigating risk during the reporting process.
- To avoid manual intervention and have a better governance framework in place, many insurers are adopting process automation to automate workflows within their business processes.
- Training and development of skill sets within the workforce are key to explaining the key accounting changes and how this would impact key performance indicators (KPIs) and successful delivery of the standard.
Stefan De Lombaert: The new standard will require, at the very least, IT, actuarial and finance departments to work much more closely together, eliminate manual procedures, store data at a very detailed level and undertake the process in a much shorter time than they are used to.
- Actuaries will have to run models more often, redefining modelling granularity.
- Finance will have to become acquainted with a new chart of accounts, and work with both a GL and a sub-ledger.
- Everybody will have to take a fair share of responsibility in a more complex process.
Ulrich Gröbel: It is not sufficient to simply redesign existing processes. New aspects are needed under IFRS 17, and processes require a more intense collaboration of various functions within insurance groups. The standard enforces a deeper interaction between actuaries and accountants, and closer co‑operation on preparation work from related functions within the business units. This includes preparing data for various ‘estimates’ and ‘actuals’, and within reporting functions such as accounting and actuary – both on a legal-entity level as well as group-wise. This is because IFRS 17 vastly increases calculation and measurement efforts within the sub-ledger compared with non market value-oriented or time value of money-oriented local GAAP.
Although IFB has been practising this type of co-operation by adapting the Solvency II requirements, different requirements are involved, such as for designing portfolios or preparing cashflow information. Co-operation will be more intense for the evaluation of portfolios that affect the attractiveness of business segments.
A common understanding of modelling assumptions and insurers’ interpretations of standard principles will enable control over measurement results to be reported under IFRS 17. Insurers that design a target solution for future co-operation that is based not only on current understanding of responsibilities but on future needs will gain an advantage in harvesting a
better quality of results and ongoing analysis and interpretation.
The focus of process design should be not only on how to generate valuations but also on how to interpret and analyse them. From benchmarking studies we know that most of the manual effort driving capacity within group functions is caused by insufficient support of this type of analysis – such as reconciliation work, change reason analysis, comparison between different GAAP and so on.
How likely is it that the industry will meet the January 2022 implementation deadline?
Sufyan Khan: The tentative extension of the deadline by the International Accounting Standards Board (IASB) has given insurers some breathing space. At the same time, it has given insurers the opportunity to implement IFRS 17 as a strategic approach instead of taking a tactical view. The industry needs to take this as an opportunity to avoid the mistakes made during Solvency II, and adopt a view to extracting long-term benefits from IFRS 17 implementation. According to the most recent Deloitte survey, around 35% of insurers expect to spend around €50 million on IFRS 17, with large insurers anticipating around €100 million.
Yannick Cortese: This will vary according to the degree of preparation and choice of approach. Developing an internal solution might put deadlines at risk and impose high long-term maintenance costs. Investing in a configurable solution from an experienced vendor will accelerate development and provide structure for internal efforts.
Ulrich Gröbel: Some of IFB’s current projects with international insurance groups started in the second half of 2017, and some started later in 2018. Considering the IFRS 17 compliance deadline being extended by one year – an additional extension might be granted by the European Financial Reporting Advisory Group at the end of 2019 – IFB believes insurers will remain under pressure to complete IFRS 17 compliance projects in terms of time, budget and quality.
For those that started early, the deadline extension allows room for dry runs with real data within the renewed system and process landscape. This will help align portfolio segmentation choices and measurement methods to company-specific interpretation of IFRS 17 standard and to improve reporting figure quality. This phase is to take place in the second half of 2020 and early 2021. Companies that have already set up a project environment and selected an IT tool to support IFRS 17-specific valuation have the chance to describe functional requirements based on the options the target architecture and landscape offers in relation to the scope of functionalities of the chosen IT tool. It will still be a challenge to meet the extended timeline.
Is consensus emerging from the industry on interpreting the principles-based approach?
Stefan De Lombaert: The Transition Resource Group (TRG) within IASB is closing the gap between this principles-based approach and the remaining divergences in the industry. The big four auditors play an important role; unless they are in accord, it will be difficult to achieve rapid consensus between insurance companies active in different markets.
The proposed deferral from 2021 is subject to public consultation, which is expected in 2019. IASB has been discussing potential amendments to IFRS 17 in December 2018.
Over the coming months, SAS will monitor the extent of any proposed amendments to the standard and make changes to its solution, though no
major changes are expected.
Yannick Cortese: The TRG has acknowledged there are still 21 issues that require a resolution. Risk adjustment and reinsurance are particular areas of concern. Professional services firms are making efforts to provide interpretations and solutions that at least provide best practices to insurance companies, even if not a single method of applying those principles. Certainly, there is a strong desire within the industry to establish a consensus.
Sufyan Khan: There has been much more clarity from IASB on the premium allocation approach (PAA) and variable fee approach (VFA) in recent months. Insurers definitely see a benefit in the standard, which has taken 20 years. The fact it is principles-based brings it in line with IFRS 9, which – along with IFRS 17 – insurers need to be live by January 2022.
How advanced are the technological solutions helping firms change the way they measure financial performance?
Ulrich Gröbel: Various software providers offer IT solutions to support IFRS 17 requirements of valuation and sub-ledger accounting. Solutions differ in terms of the technical maturity of systems architecture; the range of functionality, such as for valuation, accounting, analysis, simulation, forecasting and planning; the scope of valuation support, such as single versus multi-GAAP, multicurrency, and so on; and the level of performance, such as memory and data handling.
The maturity and quality of standard content data models is also a differentiating factor. All aspects are usually validated within a proof-of-concept phase, based on selected typical requirements from a group and/or legal entity perspective. Yet the scope and quality of functionality provided need to suit the mid- and long-term architectural objectives and current state of the system landscape to select the most appropriate tools for the insurance group. Since none of the tools have been used in a live working environment, and the functionality will improve with future releases, it is helpful to learn from practical implementation experience in related working environments, such as IFRS 9.
The experience and capacity of existing implementation consultants also helps minimise risk in achieving project milestones and deliverables.
Yannick Cortese: There are multiple target operating models that have been developed. Firms must select the one that best fits their current IT architecture and provides the required functionalities. Performance will be a challenge – a few vendors provide software-as-a-service solutions that will enable firms to increase their IT process performance significantly within given timeframes.
Stefan De Lombaert: SAS considers this a major game-changer, only achievable with an integrated operating model and technology platform for actuarial and finance.
There are two approaches to this, both of which we support. A company can decide to run a second calculation at a level below the contract group or can allocate down the CSM from contract group level to a more granular level. Going forward, all analytical techniques can consequently be used to deep-dive into all (combinations of) dimensions available.
Sufyan Khan: Many insurers have been burdened with multiple legacy systems – either for historical reasons or because of a merger or acquisition. The next challenge is aligning the data across multiple silos. It is important to have an integrated data model covering both actuarial and finance systems to ensure not just the teams but the technology – as well as the data – is aligned. From an IFRS 17 perspective, the same set of results under the different measurement approaches can be viewed by both actuarial and finance teams, ensuring both the teams are looking at the same number with full lineage. The other fact that needs to be considered is how the results can flow seamlessly into the accounting hub as postings.
What is the impact of the calculation and disclosure requirements?
Yannick Cortese: Processes must be developed to enable the collection –
or creation – of data at the required level of granularity. For valuation methods requiring a CSM calculation, a new calculation engine will be critical, and this might not be easy or even possible with existing tools. For many insurers, the necessary roll-forward, analysis and explanation of IFRS 17 liabilities will introduce significant processing overhead. The new standard introduces the risk of accounting mismatches, which can make financial management more difficult in the future.
Disclosure under IFRS 17 is more extensive, which means producing the reports will be more time-consuming. Sometimes consolidation can become more complex, and existing consolidation systems will need revision. Accounting systems will also need significant development with the introduction of a revised chart of accounts.
Sufyan Khan: Following discussions with clients, Oracle sees significant challenges for insurers in two main areas. One is on the calculation of CSM and CSM release along with unlocking the coverage units. The other is the representation of financial statements, including representation of revenue and expenses. Insurers would like to see a clear link between the assets held and the benefits payable to the respective policyholders. This is where data and data lineage become fundamental. The objective is not just to link the associated policies and portfolios with the investments, but also to have the flexibility to analyse the results of the different measurement approaches, as well as to compare movement analysis across multiple timeframes, including projection analysis.
Stefan De Lombaert: The most important impact is that many extra data items are generated – CSM, loss components, risk adjustments and present values of cashflows, plus all their movements from contract inception to contract derecognition. All of these items need to make it to accounts to be stored, analysed and disclosed.
However, since the changes introduced by IFRS 17 are so important and fundamental, it is anticipated that multiple what-if questions will need to be answered: the impact of a PAA versus a building-block approach (BBA), other comprehensive income (OCI) or P&L amortisation schemes, increase/decrease of reinsurance, more internal or external reinsurance, the impact of an increase in lapses, and so on.
What is the capacity in the industry to disclose deeper insurance and financial risks arising from the business that insurers write?
Yannick Cortese: IFRS 17 makes some allowance for the risks borne, including risk adjustment, which is defined to provide necessary compensation for accepting non-financial risks. However, it could be argued that, fundamentally, IFRS 17 is not a metric designed to take account of risks.
Many insurers already produce alternative significant disclosures about their risks under capital reporting metrics. Solvency II requires insurers to produce publicly available annual solvency and financial condition reports, which disclose the risk profile in some depth.
Sufyan Khan: There is an internal and external impact. For internal assessment, IFRS 17 would require adjustment to performance management and KPIs. For external reporting, IFRS 17 would have a significant impact on net assets/equity resulting in capital volatility which would be visible in the first year when results are reported by insurers. Also, the impact would be on first-year profits, which are anticipated to be lower and would have to be disclosed to the board and shareholders. These results would need to be audited and validated to portfolio and policy level with full data lineage before they are finally disclosed.
What will be the impact of P&L volatility on IFRS 17?
Sufyan Khan: Under IFRS 17, insurance firms will see an impact on their net assets or equities. One of the main reasons for this is the significant increase in the value of the insurance liabilities under IFRS 17. However, as per the third survey run by Deloitte, around 53% of insurers expected profit volatility to be lower as per the new standard. The other half expected the profits to emerge slowly. Nevertheless, earning volatility, including capital volatility, is a matter of significant concern. In the first year, insurers expect profits to be lower after the implementation of the standard compared with the previous year. One of the main reasons is that, as per the standard, any new business losses are realised upfront while any gains are deferred. The other related impact is the tax implications associated with earnings.
Yannick Cortese: Volatility is likely to increase once IFRS 17 is implemented. More volatility can be expected on the assets side because assets will be assessed based on their fair value. Accounting policy choices – such as P&L or OCI – will impact how fair-value variations impact P&L and balance sheet.
Liabilities will also be subjected to increased volatility for many reasons, including the unit of account granularity, which does not allow the same mutualisation; the rule to incorporate loss components in the P&L without any possibility of deferral; the choice of coverage units that will impact the level of volatility; changes to economic assumptions, such as discount curves and/or liquidity premia; changes to non-economic assumptions; and differences between expected and actuals and reinsurance modelling through the BBA and excluding the VFA.
CFOs will need insight into volatility sources and related impacts so they can anticipate outcomes. Since the timeframe will always be short, they will require automated and high-performing solutions with stochastic scenarios.
The panellists were speaking in a personal capacity. The views expressed by the panel do not necessarily reflect or represent the views of their respective institutions.