January 13, 2021

Are you ready for IFRS 17?

IFRS 17 represents one of the biggest and most significant insurance accounting changes in several decades. This standard is much more than a simple accounting change or a regulatory compliance exercise. It is a radical change whose impacts will run wide and deep across finance, risk, actuaries, and IT. We see this as we work on transformation projects and IFRS has become an important part of our engagement with clients.

Our clients tell us IFRS 17 compliance is complex

You hear things when you’re an insurance platform provider. As we help insurers modernize and update their legacy IT systems, we recently saw that much of these efforts had been aimed at achieving or supporting IFRS 17 compliance. Since our consulting activities and technology solutions support these initiatives, we are in the thick of it.

Over the past two and a half years, we saw that a majority of insurance companies already have IFRS 17 transformation projects underway. However, only a small share of them was confident of achieving compliance at the originally planned timeline. During their projects, almost all of our clients have encountered resource, budget, knowledge, and other internal capability constraints. This is one of the major reasons the industry was granted a 24-month extension.

The common refrain heard from our clients is that compliance was difficult enough on its own and many are concerned that adding other complex transformation projects on top might further complicate compliance requirements. IFRS 17 budgets are already under huge pressure and some clients cannot afford to spend more they have initially planned. In response, they want to keep changes as simple or as limited as possible in order to reduce IFRS 17 delivery costs.

Band-aid fixes and temporary workarounds will not work

IFRS 17 is the end result of two decades of negotiations and its ambitious goals reflect that. It aims to introduce a comprehensive principle-based framework to account for all types of insurance contracts, to drive improved transparency and standardisation in financial statements and to ensure a better alignment of the insurance industry accounting with IFRS accounting principles.

It was created to provide all stakeholders with the ability to review insurance companies with transparent and comparable financial information. The benefit of insurers using the same standard across the world is improved understanding of insurance companies’ current activities, future objectives and global position. This allows insurance customers as well as investors to better understand the financial strength of individual insurance companies by analysing a unified financial report.

IFRS 17 requires insurance companies to overhaul processes across their operations. This requires a comprehensive approach. Band-aid fixes or short-term solutions will not work. The failure to adopt the new processes will lead to bottlenecks and errors, while the worst is that companies will not achieve the long-awaited compliance.

The main pain points of insurers

As we work in the market and with our clients, we see the insurance industry is making progress with their plans for IFRS 17, but this progress is happening at different speeds. This process is so very complex that the effective date for IFRS 17 rollout has been deferred from 1 January 2021 to 1 January 2023.

And what are the main issues shared by our clients? Their analyses in preparation for IFRS 17 reveal the following issues when it comes to providing data from source systems on which insurance companies are running.

Multiple source systems for individual core modules. Legacy technologies often mean that core business modules, such as Policies, Claims, Commissions and others are running on separate systems that might not deliver standardized data or could be difficult or costly to integrate.
Lack of granularity. IFRS 17 requires granular data models that support the measurement of homogenous groups with shared attributes. Legacy systems do not provide this making it difficult for insurance carriers to achieve compliance.
Traceability and audibility. IFRS 17 requires all data and calculations to be transparent and auditable. In practice, this means that every step in a process should be documented consistently and across the entire system.

The two questions that will direct IFRS 17 efforts

When it comes to technology solutions, the IFRS 17 journey usually starts with understanding the expected outputs of IFRS 17 and working backward through the systems to identify the key dataflows that form the basis of the final disclosure and reports. The most important thing then is to understand the end game, which is what IFRS 17 Disclosure and Reporting means.

As a technology company, we had to adapt to the new reality. On the consulting side, we help clients scope the range of activities, while on the technology side, much data is generated by the business modules of our solution. This means we needed to read up on IFRS 17 to understand its impact and our role in it.

In the end, we had focused our thinking and efforts on two simple questions: What data do we need in order to meet IFRS 17 requirements and, more importantly, what data do we have?

The key to success lies in finding answers to these two questions. While simple, these questions allow insurers to clearly formulate their vision and then gather relevant requirements and analyse them to be able to provide accurate and validated inputs in proper form.

AdInsure as the core system driving IFRS 17 compliance

As a modern system, AdInsure overcomes the above-mentioned problems by making all source modules (Policy management, Billing, Claims, Reinsurance, Commission, Cash flow management, and Accounting) integral parts of a single core solution, which produces unified data and eliminates data redundancy. This capability is necessary for data preparing, validating, posting and reporting data.

In addition to delivering a predefined IFRS 17 data model and flexible approach to data storage, AdInsure provides robust data feeds, a set of predefined rules to aggregate and post data and the ability to both integrate with the IFRS 17 engine, general ledger and actuarial models to load all relevant data and create an audit trail to track results.

Here is a graphic showing an overview of how AdInsure and IFRS 17 come together.

A graphic showing an overview of how AdInsure and IFRS 17 come together

Do not delay

To produce IFRS 17 outputs, insurers will need to collect and process a high volume of data coming from different sources (premiums, claims, reinsurance and cash flow) with increasing levels of granularity and depth.

This means they will need to do lots of extra work. For example, under IFRS 17, insurance companies will create portfolios of insurance contracts and split them according to whether they are profitable or onerous at initial recognition. In addition to this, insurance companies will have to separate contracts issued more than a year apart into a different group and then divide the portfolio based on the originating year and determine its profitability while ensuring the ability to audit data at the same time.

Without automated software features that track the data history, insurance employees will have to invest enormous manual effort and investigation. Don’t get me wrong, spreadsheets are great, but relying on spreadsheets alone is a great way to get into trouble.

So, where are we today?

We see insurers who want to be ready a year in advance and do a dry run over the complete 2020 financial statement. Others may opt for the “big bang approach” and wait until the last moment. Whatever the strategy, there is a trade-off between certainty and cost.

A word of warning for laggards. No insurer should hold back any longer and leave the compliance efforts until it is too late. IFRS 17 is not going to be ready overnight and now is the time to start. When it comes to IFRS 17 implementation, right now, standing still means moving backward. DON'T DELAY.