IFRS 17: Challenges, Opportunities and the Pressing Need to Automate

Hailed as the most significant change to insurance accounting requirement in over 20 years, IFRS 17 will have far reaching strategic implications which will affect organisations beyond their finance function. But before we branch off into the why and how, it is important that we understand the what part of IFRS 17, first.

What is IFRS 17 – In a Nutshell

The primary objective of IFRS 17 is to ensure that an enterprise or entity furnishes relevant and authentic information about insurance contracts. This is to determine and reflect an entity’s exact financial position, financial performance and cash flow based on the insurance contracts. It has been brought to effect to make the financial statement easier to compare across insurance companies and among industries.

These are some of the salient features of IFRS 17, which have presented insurers with strategic challenges.

Distinct Challenges presented by IFRS 17

As insurers adapt to this new insurance accounting standard, they will find the need to strategize and address some distinct challenges.

  1. Volatile balance sheets: Valuations of assets and liabilities will now be based on market, rather than historic or book value. This would lead to increased fluctuations in balance sheets.
  2. Uncertain and short timelines: Implementing IFRS 17 will be a burden on costs, as it would require quite a significant expenditure on external skilled resources to fill the capacity gap. There is also an element of uncertainty around the implementation deadline which could double the expenditure.
  3. Immense pressure from investors: Increased granularity in financial reports will lead investors to raise questions and build pressure on insurers.
  4. Chances of lower profits: IFRS 17 would require insurers to make a trade-off between post-implementation profitability and balance-sheet strength, consequently leading to reduced profit expectations
  5. lower granular data will cause policy administration to cope with more detailed information
  6. Risk engines would be needed to calculate the CSM and deal with all the different groups
  7. The general ledger system will have to change as new measurements are introduced
  8. The presentation will change and it will require the reporting systems to change
  9. The pricing model (of the actuaries) also needs to be made more transparent

Changes in data functions will be critical for the success of IFRS 17

One of the key requirements of IFRS 17 is the need to have high-quality and accurate data to support the financial reporting process. It also creates the need for better data integration and automation led by strong, flexible and scalable IT platforms. These platforms should be capable of supporting the financial reporting needs prescribed by IFRS 17 and operate in a controlled environment.

How can a platform based automation provide one-upmanship to insurers in IFRS 17 ?

Since IFRS 17 mandates a radical departure from current accounting standards, a good platform should be able to provide a realistic view of risk exposure, profitability, and financial status. A solution that incorporates risk into the business and drives profitability through extensive data-centric business insights, should be preferred above all else.

The ability to consolidate data from various sources

The solution must have the capability to consolidate data from many sources such as CRM, Policy Administration, Claims Management, Actuarial systems, market data providers, Enterprise data etc. It should also be able to standardise this data for CSM and Liability measurement. This solution should also extend to serve as a unified platform for sourcing and provisioning insurance related data.

Reconciliation of data and quality checks

A good solution should be able to validate input data through pre-configured business contextualized data quality checks and a reconciliation framework. This is to maintain balance between transaction and analytics before computing and reporting.

Enabling downstream accounting

The solution should also be able to enable downstream accounting by defining consistent posting rules, events and charts of accounts for Insurance revenue & PnL. It should maintain IFRS 17 sub-ledgers for reconciliation and transition and achieve compliant and auditable accounting, reporting and consolidation. Moreover, enterprises should also look to explore multiple deployment options ranging from On-Premise – Traditional Infrastructure, Cloud Machines, and Public Cloud

These could be some of the key features to look out for in an automation platform for IFRS 17.

In the quest for automation of IFRS 17, insurers should be mindful that there is no one size fits all solution and each one has to invest in a platform that encompasses and makes way for their business priorities. It is vital to invest in a DMS which enhances automation, integration and has the ability to work with the specific needs of a company leading to the successful implementation of IFRS 17.

What could be some ways to use the shift to IFRS 17 to catalyse transformation efforts?

Increase the use and value of automation

Rather than trying to get more out of employees who are already feeling the strain of implementation and fatigue due to continuous change, insurers need to explore automating new IFRS 17 processes. The first to migrate should be mission-critical processes and those with high data volume and low risk. Insurers need to use IFRS 17 to identify other long term opportunities to include digital workers in their employee mix.

Break organizational silos

IFRS 17 will require a good amount of collaboration between employees and across functions. This can go a long way in helping employees take more of an ‘enterprise view’ of their activities, impact and decisions. Insurers can develop the next generation of business leaders by engaging top talent from across the organization in the IFRS 17 implementation process.

Create a language that is common

IFRS 17 will need enterprise to focus on improving the quality of data, data normalization and work on cross-interpretation. This will help insurers to ‘speak a common language’ when reporting across jurisdictions and markets. This will not only improve collaboration on an enterprise level but also achieve much deeper levels of insight on financial through and operational performance.

Encourage new knowledge models

A single and uniform approach to financial reporting and accounting will allow insurers to centralize common processes and practices into a shared service or Centre of Excellence model. This will help alleviate some of the strain on the operating companies and allow organizations to create ‘knowledge communities’ that enable ideas and practices to be rapidly shared across the organization.

New skills and capabilities

Even without the implementation of IFRS 17, the traditional insurance capability set would need to change so as to meet the realities of the new business environment. Insurers should be using this shift to rework their core capabilities, assess the value of digital labour and start the transition towards their ideal workforce of the future.

In Summary

The IFRS 17 deadlines are coming, which means massive changes for the traditional insurance workforce. Insurers can either try to get through with minimum disruption, or they can see IFRS 17 as an opportunity to catalyse real and sustainable transformation within their workforce and their wider organization. We would strongly encourage the latter, please share your thoughts and feedback.