Achieving Effective IFRS 17 Reporting – Enabling the right accounting policy through technology

Executive summary

International Financial Reporting Standard (IFRS) 17, the first comprehensive global accounting standard for insurance products, is due to be implemented in 2023, and is the latest standard developed by the International Accounting Standards Board (IASB) in its push for international accounting standards.

IFRS 17, following other standards such as IFRS 9 and Current Expected Credit Losses (CECL), is the latest move toward ‘risk-ware accounting’, a framework that aims to incorporate financial and non-financial risk into accounting valuation.

As a principles-based standard, IFRS 17 provides room for different interpretations, meaning that insurers have choices to make about how to comply. The explicit integration of financial and non-financial risk has caused much discussion about the unprecedented and distinctive modeling challenges that IFRS 17 presents. These could cause ‘tunnel vision’ among insurers when it comes to how they approach compliance.

But all stages of IFRS 17 compliance are important, and each raises distinct challenges. By focusing their efforts on any one aspect of the full compliance value chain, insurers can risk failing to adequately comply. In the case of IFRS 17, it is not necessarily accidental non-compliance that is at stake, but rather the sub-optimal presentation of the business’ profits.

To achieve ‘ideal’ compliance, firms need to focus on the logistics of reporting as much as on the mechanics of modeling. Effective and efficient reporting comprises two elements: presentation and disclosure. Reporting is the culmination of the entire compliance value chain, and decisions made further up the chain can have a significant impact on the way that value is presented. Good reporting is achieved through a mixture of technology and accounting policy, and firms should follow several strategies in achieving this:

  • Anticipate how the different IFRS 17 measurement models will affect balance sheet volatility.
  • Understand the different options for disclosure, and which approach is best for specific institutional needs.
  • Streamline IFRS 17 reporting with other reporting duties.
  • Where possible, aim for collaborative report generation while maintaining data integrity.
  • Explore and implement technology that can service IFRS 17’s technical requirements for financial reporting.
  • Store and track data on a unified platform.

In this report we focus on the challenges associated with IFRS 17 reporting, and consider solutions to those challenges from the perspectives of accounting policy and technology implementation. And in highlighting the reporting stage of IFRS 17 compliance, we focus specifically on how decisions about the presentation of data can dictate the character of final disclosure.

  • Introduction: more than modeling

IFRS 17 compliance necessitates repeated stochastic calculations to capture financial and nonfinancial risk (especially in the case of long-term insurance contracts). Insurance firms consistently identify modeling and data management as the challenges they most anticipate having to address in their efforts to comply. Much of the conversation and ‘buzz’ surrounding IFRS 17 has therefore centered on its modeling requirements, and in particular the contractual service margin (CSM) calculation.

But there is always a danger that firms will get lost in the complexity of compliance and forget the aim of IFRS 17. Although complying with IFRS 17 involves multiple disparate process elements and activities, it is still essentially an accounting
standard
. First and foremost its aim is to ensure the transparent and comparable disclosure of the value of insurance services.
So while IFRS 17 calculations are crucial, they are just one stage in the compliance process, and ultimately enable the intended outcome: reporting.

Complying with the modeling requirements of IFRS 17 should not create ‘compliance tunnel vision’ at the expense of the presentation and disclosure of results. Rather, presentation and disclosure are the culmination of the IFRS 17 compliance process flow and are key elements of effective reporting (see Figure 1).

  • Developing an IFRS 17 accounting policy

A key step in developing reporting compliance is having an accounting policy tailored to a firm’s specific interaction with IFRS 17. Firms have decisions to make about how to comply, together with considerations of the knock-on effects IFRS 17 will have on the presentation of their comprehensive statements of income.

There are a variety of considerations: in some areas IFRS 17 affords a degree of flexibility; in others it does not. Areas that will substantially affect the appearance of firms’ profits are:

• The up-front recognition of loss and the amortization of profit.
• The new unit of account.
• The separation of investment components from insurance services.
• The recognition of interest rate changes under the general measurement model (GMM).
Deferred acquisition costs under the premium allocation approach (PAA).

As a principles-based standard, IFRS 17 affords a degree of flexibility in how firms approach valuation. One of its aims is to insure that entity specific risks and diverse contract features are adequately reflected in valuations, while still safeguarding reporting comparability. This flexibility also gives firms some degree of control over the way that value and risk are portrayed in financial statements. However, some IFRS 17 stipulations will lead to inevitable accounting mismatches and balance-sheet volatility.

Accounting policy impacts and choices – Balance sheet volatility

One unintended consequence of IFRS 17 compliance is balance sheet volatility. As an occurrence of risk-aware accounting, IFRS 17 requires the value of insurance services to be market-adjusted. This adjustment is based on a firm’s projection of future cash flow, informed by calculated financial risk. Moreover, although this will not be the first time firms are incorporating non-financial risk into valuations, it is the first time it has to be explicit.

Market volatility will be reflected in the balance sheet, as liabilities and assets are subject to interest rate fluctuation and other financial risks. The way financial risk is incorporated into the value of a contract can also contribute to balance sheet volatility. The way it is incorporated is dictated by the measurement model used to value it, which depends on the eligibility of the contract.

There are three measurement models, the PAA, the GMM and the variable fee approach (VFA). All three are considered in the next section.

The three measurement models

Features of the three measurement models (see Figure 2) can have significant effects on how profit – represented by the CSM – is presented and ultimately disclosed.

To illustrate the choices around accounting policy that insurance firms will need to consider and make, we provide two specific examples, for the PAA and the GMM.

Accounting policy choices: the PAA

When applying the PAA to shorter contracts – generally those of fewer than 12 months – firms have several choices to make about accounting policy. One is whether to defer acquisition costs. Unlike previous reporting regimes, under IFRS17’s PAA indirect costs cannot be deferred as acquisition costs. Firms can either expense these costs upfront or defer them and amortize the cost over the length of the contract. Expensing acquisition costs as they are incurred may affect whether a group of contracts is characterized as onerous at inception. Deferring acquisition costs reduces the liability for the remaining coverage; however, it may also increase the loss recognized in the income statement for onerous contracts.

Accounting policy choices: the GMM

Under IFRS 17, revenue is the sum of

  • the release of CSM,
  • changes in the risk adjustment,
  • and expected net cash outflows, excluding any investment components.

Excluding any investment component from revenue recognition will have significant impacts on contracts being sold by life insurers.

Contracts without direct participation features measured under the GMM use a locked-in discount rate – whether this is calculated ‘top down’ or ‘bottom up’ is at the discretion of the firm. Changes to the CSM have to be made using the discount rate set at the initial recognition of the contract. Changes in financial variables that differ from the locked-in discount rate cannot be integrated into the CSM, so appear as insurance service value.

A firm must account for the changes directly in the comprehensive income statement, and this can also contribute to balance sheet volatility.

As part of their accounting policy firms have a choice about how to recognize changes in discount rates and other changes to financial risk assumptions – between other comprehensive income (OCI) and profit and loss (P&L). Recognizing fluctuations in discount rates and financial risk in the OCI reduces some volatility in P&L. Firms also recognize the fair value of assets
in the OCI under IFRS 9.

  • The technology perspective

Data integrity and control

At the center of IFRS 17 compliance and reporting is the management of a wide spectrum of data – firms will have to gather and generate data from historic, current and forward-looking perspectives.

Creating IFRS 17 reports will be a non-linear process, and data will be incorporated as it becomes available from multiple sources. For many firms, contending with this level of data granularity and volume will be a big leap from other reporting requirements. The maturity of an insurer’s data infrastructure is partly defined by the regulatory and reporting context it was built in, and in which it operates – entities across the board will have to upgrade their data management technology.

In regions such as Southeast Asia and the Middle East, however, data management on the scale of IFRS 17 is unprecedented. Entities operating in these regions in particular will have to expend considerable effort to upgrade their infrastructure. Manual spreadsheets and complex legacy systems will have to be replaced with data management technology across the compliance value chain.

According to a 2018 survey by Deloitte, 87% of insurers believed that their systems technology required upgrades to capture the new data they have to handle and perform the calculations they require for compliance. Capturing data inputs was cited as the biggest technology challenge.

Tracking and linking the data lifecycle

Compliance with IFRS 17 demands data governance across the entire insurance contract valuation process. The data journey starts at the data source and travels through aggregation and modeling processes all the way to the disclosure stage (see Figure 3).

In this section we focus on the specific areas of data lineage, data tracking and the auditing processes that run along the entire data compliance value chain. For contracts longer than 12 months, the valuation process will be iterative, as data is transformed multiple times by different users. Having a single version of reporting data makes it easier to collaborate, track and manage the iterative process of adapting to IFRS 17. Cloud platforms help to address this challenge, providing an effective means of storing and managing the large volumes of reporting data generated by IFRS 17. The cloud allows highly scalable, flexible technology to be delivered on demand, enabling simultaneous access to the same data for internal teams and external advisors.

It is essential that amendments are tracked and stored as data falls through different hands and passes through different IFRS 17 ‘compliance stages’. Data lineage processes can systematically track users’ interactions with data and improve the ‘auditability’ of the compliance process and users’ ‘ownership’ of activity.

Data linking is another method of managing IFRS 17 reporting data. Data linking contributes to data integrity while enabling multiple users to make changes to data. It enables the creation of relationships across values while maintaining the integrity of the source value, so changing the source value creates corresponding changes across all linked values. Data linking also enables the automated movement of data from spreadsheets to financial reports, updating data as it is changed and tracking users’ changes to it.

Disclosing the data

Highlighting how IFRS 17 is more than just a compliance exercise, it will have a fundamental impact on how insurance companies report their data internally, to regulators, and to financial markets. For the final stage of compliance, firms will need to adopt a new format for the balance sheet, P&L statement and cash flow statements.

In addition to the standard preparation of financial statements, IFRS 17 will require a number of disclosures, including the explanation of recognized amounts, significant judgements made in applying IFRS 17, and the nature and extent of risks arising from insurance contracts. As part of their conversion to IFRS 17, firms will need to assess how data will have to be managed on a variety of levels, including

  • transactions,
  • financial statements,
  • regulatory disclosures,
  • internal key performance indicators
  • and communications to financial markets.

Communication with capital markets will be more complex, because of changes that will have to be made in several areas:

  • The presentation of financial results.
  • Explanations of how calculations were made, and around the increased complexity of the calculations.
  • Footnotes to explain how data is being reported in ‘before’ and ‘after’ conversion scenarios.

During their transition, organizations will have to report and explain to the investor community which changes were the result of business performance and which were the result of a change in accounting basis. The new reporting basis will also impact how data will be reported internally, as well as overall effects on performance management. The current set of key metrics used for performance purposes, including volume, revenue, risk and profitability, will have to be adjusted for the new methodology and accounting basis. This could affect how data will be reported on and reconciled for current regulatory reporting requirements including Solvency II, local solvency standards, and broader statutory and tax reporting.

IFRS 17 will drive significant changes in the current reporting environment. To address this challenge, firms must plan how they will manage both the pre-conversion and post-conversion data sets, the preparation of pre-, post-, and comparative financial statements, and the process of capturing and disclosing all of the narrative that will support and explain these financial results.

In addition, in managing the complexity of the numbers and the narrative before, during and after the conversion, reporting systems will also need to scale to meet the requirements of regulatory reporting – including disclosure in eXtensible Business
Reporting Language (XBRL) in some jurisdictions. XBRL is a global reporting markup language that enables the encoding of documents in a human and machine-legible format for business reporting (The IASB publishes its IFRS Taxonomy files in
XBRL). But XBRL tagging can be a complex, time-consuming and repetitive process, and firms should consider using available technology partners to support the tagging and mapping demands of document drafting.

Overview on EIOPA Consultation Paper on the Opinion on the 2020 review of Solvency II

The Solvency II Directive provides that certain areas of the framework should be reviewed by the European Commission at the latest by 1 January 2021, namely:

  • long-term guarantees measures and measures on equity risk,
  • methods, assumptions and standard parameters used when calculating the Solvency Capital Requirement standard formula,
  • Member States’ rules and supervisory authorities’ practices regarding the calculation of the Minimum Capital Requirement,
  • group supervision and capital management within a group of insurance or reinsurance undertakings.

Against that background, the European Commission issued a request to EIOPA for technical advice on the review of the Solvency II Directive in February 2019 (call for advice – CfA). The CfA covers 19 topics. In addition to topics that fall under the four areas mentioned above, the following topics are included:

  • transitional measures
  • risk margin
  • Capital Markets Union aspects
  • macroprudential issues
  • recovery and resolution
  • insurance guarantee schemes
  • freedom to provide services and freedom of establishment
  • reporting and disclosure
  • proportionality and thresholds
  • best estimate
  • own funds at solo level

EIOPA is requested to provide technical advice by 30 June 2020.

Executive summary

This consultation paper sets out technical advice for the review of Solvency II Directive. The advice is given in response to a call for advice from the European Commission. EIOPA will provide its final advice in June 2020. The call for advice comprises 19 separate topics. Broadly speaking, these can be divided into three parts.

  1. Firstly, the review of the long term guarantee measures. These measures were always foreseen as being reviewed in 2020, as specified in the Omnibus II Directive. A number of different options are being consulted on, notably on extrapolation and on the volatility adjustment.
  2. Secondly, the potential introduction of new regulatory tools in the Solvency II Directive, notably on macro-prudential issues, recovery and resolution, and insurance guarantee schemes. These new regulatory tools are considered thoroughly in the consultation.
  3. Thirdly, revisions to the existing Solvency II framework including in relation to
    • freedom of services and establishment;
    • reporting and disclosure;
    • and the solvency capital requirement.

Given that the view of EIOPA is that overall the Solvency II framework is working well, the approach here has in general been one of evolution rather than revolution. The principal exceptions arise as a result either of supervisory experience, for example in relation to cross-border business; or of the wider economic context, in particular in relation to interest rate risk. The main specific considerations and proposals of this consultation paper are as follows:

  • Considerations to choose a later starting point for the extrapolation of risk-free interest rates for the euro or to change the extrapolation method to take into account market information beyond the starting point.
  • Considerations to change the calculation of the volatility adjustment to risk-free interest rates, in particular to address overshooting effects and to reflect the illiquidity of insurance liabilities.
  • The proposal to increase the calibration of the interest rate risk submodule in line with empirical evidence. The proposal is consistent with the technical advice EIOPA provided on the Solvency Capital Requirement standard formula in 2018.
  • The proposal to include macro-prudential tools in the Solvency II Directive.
  • The proposal to establish a minimum harmonised and comprehensive recovery and resolution framework for insurance.

A background document to this consultation paper includes a qualitative assessment of the combined impact of all proposed changes. EIOPA will collect data in order to assess the quantitative combined impact and to take it into account in the decision on the proposals to be included in the advice. Beyond the changes on interest rate risk EIOPA aims in general for a balanced impact of the proposals.

The following paragraphs summarise the main content of the consulted advice per chapter.

Long-term guarantees measures and measures on equity risk

EIOPA considers to choose a later starting point for the extrapolation of risk-free interest rates for the euro or to change the extrapolation method to take into account market information beyond the starting point. Changes are considered with the aim to avoid the underestimation of technical provisions and wrong risk management incentives. The impact on the stability of solvency positions and the financial stability is taken into account. The paper sets out two approaches to calculate the volatility adjustment to the risk-free interest rates. Both approaches include application ratios to mitigate overshooting effects of the volatility adjustment and to take into account the illiquidity characteristics of the insurance liabilities the adjustment is applied to.

  • One approach also establishes a clearer split between a permanent component of the adjustment and a macroeconomic component that only exists in times of wide spreads.

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  • The other approach takes into account the undertakings-specific investment allocation to further address overshooting effects.

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Regarding the matching adjustment to risk-free interest rates the proposal is made to recognise in the Solvency Capital Requirement standard formula diversification effects with regard to matching adjustment portfolios. The advice includes proposals to strengthen the public disclosure on the long term guarantees measures and the risk management provisions for those measures.

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The advice includes a review of the capital requirements for equity risk and proposals on the criteria for strategic equity investments and the calculation of long-term equity investments. Because of the introduction of the capital requirement on long-term equity investments EIOPA intends to advise that the duration-based equity risk sub-module is phased out.

Technical provisions

EIOPA identified a larger number of aspects in the calculation of the best estimate of technical provisions where divergent practices among undertakings or supervisors exist. For some of these issues, where EIOPA’s convergence tools cannot ensure consistent practices, the advice sets out proposals to clarify the legal framework, mainly on

  • contract boundaries,
  • the definition of expected profits in future premiums
  • and the expense assumptions for insurance undertakings that have discontinued one product type or even their whole business.

With regard to the risk margin of technical provisions transfer values of insurance liabilities, the sensitivity of the risk margin to interest rate changes and the calculation of the risk margin for undertakings that apply the matching adjustment or the volatility adjustment were analysed. The analysis did not result in a proposal to change the calculation of the risk margin.

Own funds

EIOPA has reviewed the differences in tiering and limits approaches within the insurance and banking framework, utilising quantitative and qualitative assessment. EIOPA has found that they are justifiable in view of the differences in the business of both sectors.

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Solvency Capital Requirement standard formula

EIOPA confirms its advice provided in 2018 to increase the calibration of the interest rate risk sub-module. The current calibration underestimates the risk and does not take into account the possibility of a steep fall of interest rate as experienced during the past years and the existence of negative interest rates. The review

  • of the spread risk sub-module,
  • of the correlation matrices for market risks,
  • the treatment of non-proportional reinsurance,
  • and the use of external ratings

did not result in proposals for change.

Minimum Capital Requirement

Regarding the calculation of the Minimum Capital Requirement it is suggested to update the risk factors for non-life insurance risks in line with recent changes made to the risk factors for the Solvency Capital Requirement standard formula. Furthermore, proposals are made to clarify the legal provisions on noncompliance with the Minimum Capital Requirement.

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Reporting and disclosure

The advice proposes changes to the frequency of the Regular Supervisory Report to supervisors in order to ensure that the reporting is proportionate and supports risk-based supervision. Suggestions are made to streamline and clarify the expected content of the Regular Supervisory Report with the aim to support insurance undertakings in fulfilling their reporting task avoiding overlaps between different reporting requirements and to ensure a level playing field. Some reporting items are proposed for deletion because the information is also available through other sources. The advice includes a review of the reporting templates for insurance groups that takes into account earlier EIOPA proposals on the templates of solo undertakings and group specificities.

EIOPA proposes an auditing requirement for balance sheet at group level in order to improve the reliability and comparability of the disclosed information. It is also suggested to delete the requirement to translate the summary of that report.

Proportionality

EIOPA has reviewed the rules for exempting insurance undertakings from the Solvency II Directive, in particular the thresholds on the size of insurance business. As a result, EIOPA proposes to maintain the general approach to exemptions but to reinforce proportionality across the three pillars of the Solvency II Directive.

Regarding thresholds EIOPA proposes to double the thresholds related to technical provisions and to allow Member States to increase the current threshold for premium income from the current amount of EUR 5 million to up to EUR 25 million.

EIOPA had reviewed the simplified calculation of the standard formula and proposed improvements in 2018. In addition to that the advice includes proposals to simplify the calculation of the counterparty default risk module and for simplified approaches to immaterial risks. Proposals are made to improve the proportionality of the governance requirements for insurance and reinsurance undertakings, in particular on

  • key functions (cumulation with operational functions, cumulation of key functions other than the internal audit, cumulation of key and AMSB function)
  • own risk and solvency assessment (ORSA) (biennial report),
  • written policies (review at least once every three years)
  • and administrative, management and supervisory bodies (AMSB) ( evaluation shall include an assessment on the adequacy of the composition, effectiveness and internal governance of the administrative, management or supervisory body taking into account the nature, scale and complexity of the risks inherent in the undertaking’s business)

Proposals to improve the proportionality in reporting and disclosure of Solvency II framework were made by EIOPA in a separate consultation in July 2019.

Group supervision

EIOPA proposes a number of regulatory changes to address the current legal uncertainties regarding supervision of insurance groups under the Solvency II Directive. This is a welcomed opportunity as the regulatory framework for groups was not very specific in many cases while in others it relies on the mutatis mutandis application of solo rules without much clarifications.

In particular, there are policy proposals to ensure that the

  • definitions applicable to groups,
  • scope of application of group supervision
  • and supervision of intragroup transactions, including issues with third countries

are consistent.

Other proposals focus on the rules governing the calculation of group solvency, including own funds requirements as well as any interaction with the Financial Conglomerates Directive. The last section of the advice focuses on the uncertainties related to the application of governance requirements at group level.

Freedom to provide services and freedom of establishment

EIOPA further provides suggestions in relation to cross border business, in particular to support efficient exchange of information among national supervisory authorities during the process of authorising insurance undertakings and in case of material changes in cross-border activities. It is further recommended to enhance EIOPA’s role in the cooperation platforms that support the supervision of cross-border business.

Macro-prudential policy

EIOPA proposes to include the macroprudential perspective in the Solvency II Directive. Based on previous work, the advice develops a conceptual approach to systemic risk in insurance and then analyses the current existing tools in the Solvency II framework against the sources of systemic risk identified, concluding that there is the need for further improvements in the current framework.

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Against this background, EIOPA proposes a comprehensive framework, covering the tools initially considered by the European Commission (improvements in Own Risk and Solvency Assessment and the prudent person principle, as well as the drafting of systemic risk and liquidity risk management plans), as well as other tools that EIOPA considers necessary to equip national supervisory authorities with sufficient powers to address the sources of systemic risk in insurance. Among the latter, EIOPA proposes to grant national supervisory authorities with the power

  • to require a capital surcharge for systemic risk,
  • to define soft concentration thresholds,
  • to require pre-emptive recovery and resolution plans
  • and to impose a temporarily freeze on redemption rights in exceptional circumstances.

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Recovery and resolution

EIOPA calls for a minimum harmonised and comprehensive recovery and resolution framework for (re)insurers to deliver increased policyholder protection and financial stability in the European Union. Harmonisation of the existing frameworks and the definition of a common approach to the fundamental elements of recovery and resolution will avoid the current fragmented landscape and facilitate cross-border cooperation. In the advice, EIOPA focuses on the recovery measures including the request for pre-emptive recovery planning and early intervention measures. Subsequently, the advice covers all relevant aspects around the resolution process, such as

  • the designation of a resolution authority,
  • the resolution objectives,
  • the need for resolution planning
  • and for a wide range of resolution powers to be exercised in a proportionate way.

The last part of the advice is devoted to the triggers for

  • early intervention,
  • entry into recovery and into resolution.

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Other topics of the review

The review of the ongoing appropriateness of the transitional provisions included in the Solvency II Directive did not result in a proposal for changes. With regard to the fit and proper requirements of the Solvency II Directive EIOPA proposes to clarify the position of national supervisory authorities on the ongoing supervision of propriety of board members and that they should have effective powers in case qualifying shareholders are not proper. Further advice is provided in order to increase the efficiency and intensity of propriety assessments in complex cross-border cases by providing the possibility of joint assessment and use of EIOPA’s powers to assist where supervisors cannot reach a common view.

Click here to access EIOPA’s detailed Consultation Paper

Navigating the new world – Preparing for insurance accounting change (IFRS 17)

If implementation of the forthcoming insurance contracts standard is to reach the best possible outcome for your organization, we believe it needs to be seen as more than just a compliance exercise. This will entail

  • combining multiple strands into a common program,
  • identifying linkages
  • and addressing dependencies

across the business in a logical sequence and thinking strategically about possible effects on the organization and its stakeholders. A well-developed and ‘living’ plan assigns clear accountabilities and breaks down objectives into manageable tasks for delivery to realistic time-scales in order to establish an effective blue-print for success.

Our methodology groups activities into four manageable phases:

  1. assess the change
  2. design your response
  3. implement your design
  4. sustain your new practices, securely embedding them in business as usual.

Key success factors

Our experience shows us there are many factors that will contribute to successfully implementing insurance accounting change, including:

  1. Dedicated staff: In our experience the single biggest factor contributing to program success is the presence of full-time staff dedicated to the project, with a wide range of skills including data management, IT implementation and project management and who know your business.
  2. Spend sufficient time and energy on the initial impact phase: It is essential that an insurer plans for this critical phase and allows for sufficient time to perform a gap analysis on a line-by-line basis through the income statement and balance sheet and supports disclosures.
  3. Consider fundamental questions surrounding core business drivers: earnings trends, growth opportunities and target operating models. The earlier effects are identified, the more time an insurer will have to develop and implement a strategic response.
  4. Training staff: Many organizations underestimate the amount of personnel training required. Designing a comprehensive training strategy and program is highly complex and requires careful planning.
  5. Robust project planning: The plan must be achievable and continuously refined with formal tracking and monitoring.
  6. Clear communications: Communication needs to be both formal and informal and applied throughout the life of the program.
  7. Careful change management: IFRS conversion will lead to significant changes in how people do their jobs. Some of the biggest challenges have arisen when the cultural issues have not been acknowledged and addressed.
  8. More than just an accounting and actuarial project: Implementing the forthcoming insurance contracts project will undoubtedly be a multi-disciplinary effort.
    1. IT specialists consider the functionality of source systems and enterprise performance management (EPM) systems;
    2. Change management specialists focus on behavioral change and communication;
    3. specialists in commercial functions (tax, data management, executive incentives, etc.) bring a holistic approach to the program.

Robust project management helps to bring everything together coherently.

Assessing what the forthcoming standard will mean for you

Accounting, actuarial, tax and reporting

Q1. What are the key accounting, actuarial, tax and disclosure differences between our current generally accepted accounting principles (GAAP) and the new standards? What are the key decisions that need to be made by management regarding the alternative treatments that are available?

Data, systems and processes

Q2. What will the impact be for our data requirements, and on the systems and processes used for

  • data collection,
  • actuarial projections,
  • calculating and accruing interest on the contractual service margin
  • and consolidation and financial reporting systems?

Are there quick fixes that we can use? Can we leverage recent investments in infrastructure or will we need a major overhaul?

Q3. How will the group‘s close and other processes be impacted?

Business

Q4. What is the estimated directional impact on profit and equity and what are the key decisions and judgments that this will influence?

Q5. What are the key impacts for my business and how will these be influenced by the choices open to us? Who will need to understand results and metrics on the new basis?

People and change management

Q6. Who will be impacted by the conversion, what skills and resources are likely to be needed and what training needs can we identify?

Program management

Q7. What would a high-level conversion plan look like and what is its likely impact on resources?

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Click here to access KPMG’s methodology paper

A Transformation in Progress – Perspectives and approaches to IFRS 17

The International Financial Reporting Standard 17 (IFRS 17) was issued in May 2017 by the International Accounting Standards Board (IASB) and has an effective date of 1st January 2021. The standard represents the most significant change in financial reporting for decades, placing greater demand on legacy accounting and actuarial systems. The regulation is intended to increase transparency and provide greater comparability of profitability across the insurance sector.

IFRS 17 will fundamentally change the face of profit and loss reporting. It will introduce a new set of Key Performance Indicators (KPIs), and change the way that base dividend or gross payments are calculated. To give an example, gross premiums will no longer be recorded under profit and loss. This is just one of the wide-ranging shifts that insurers must take on board in the way they structure their business to achieve the best possible commercial outcomes.

In early 2018 SAS asked 100 executives working in the insurance industry to share their opinions about the standard and strategies for compliance. The research shed light on the sector’s sentiment towards the regulation, challenges and opportunities that IFRS 17 presents, along with the steps organisations are taking to achieve compliance. The aims of the study were to better understand the views of the industry and how insurers are preparing to implement the standard. The objective was to share an unbiased view of the peer group’s analysis of, and approach to, tackling the challenges during the adjustment period. The information garnered is intended to help inform insurers’ decision-making during the early stages of their own projects, helping them arrive at the best-placed strategy for their business.

This report reveals the findings of the survey and provides guidance on how organisations might best achieve compliance. It provides a subjective, datadriven view of IFRS 17 along with valuable market context for insurance professionals who are developing their own strategies for tackling the new standard.

SAS’ research indicates that UK insurers do not underestimate the cost of IFRS 17 or the level of change it will likely introduce. Overall, 97 per cent of survey respondents said that they expected the standard to increase the cost and complexity of operating in insurance.

Companies will need to

  • introduce a new system of KPIs
  • and make changes in management information reports

to monitor performance under the revised profitability metrics. Forward looking strategic planning will also need to incorporate potential volatility and any ramifications within the insurance industry. To achieve this, firms will need to ensure the main parties involved co-operate and work together in a more integrated way.

The cost of these measures will, of course, differ considerably between organisations of different sizes, specialisms and complexities. However, the cost of compliance also greatly depends on

  • the approach taken by decision-makers,
  • the partners they choose
  • and the solutions they select.

Perhaps more instructive is that 90 per cent believe compliance costs will be greater than those demanded by the Solvency II Directive, aimed at insurers retaining strong financial buffers so they can meet claims from policyholders.

The European Commission estimated that it cost EU insurers between £3 and £4 billion to implement Solvency II, which was designed to standardise what had been a piecemeal approach to insurance regulations across the EU. Almost half (48 per cent) predict that IFRS 17 will cost substantially more.

Respondents are preparing for major alterations to their current accounting and actuarial systems, from minor upgrades all the way to wholesale replacements. Data management systems will be the prime target for review, with 84 per cent of respondents planning to either make additional investment (25 per cent), upgrade (34 per cent), or replace them (25 per cent). Finance, accounting and actuarial systems will also see significant innovation, as 83 per cent and 81 per cent respectively prepare for significant investment.

The use of analytics appears to be the most divisive area for insurers. While 27 per cent of participants are confident they will need to make no changes to their analytics systems or processes, 28 per cent plan to replace them entirely. A majority of 71 per cent still expect to make at least some reform.

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Click here to access SAS’ Whitepaper

 

Achieving Optimal IFRS 9 Compliance

IFRS 9 will have a substantial financial impact on banks and create implementation challenges. By taking an optimal approach to compliance, banks can balance the financial impact and the effort required and still ensure compliance. To achieve this goal, banks will need significant support from technology. In this paper, we explore the software functionality needed to support optimal IFRS 9 compliance for banks.

Across the globe, large financial institutions are working to understand the implications of the latest impairment requirements introduced by IASB1 as part of the IFRS 9 package. According to a recent Deloitte industry survey, this single, forward-looking “expected loss” impairment standard will have a significant financial impact for the majority of large banks.

Given that IFRS 9 requirements will be effective Jan. 1, 2018, banks are beginning to pay greater attention to this new accounting standard; IFRS 9 implementation budgets doubled during the last 12 months. But as discussed in this paper, any steps they take toward IFRS 9 compliance should not be taken in isolation, but rather in the context of existing regulatory pressures. With Basel III, CCAR, stress testing, BCBS 239 and other requirements, banks are already exposed to high levels of regulatory scrutiny and devoting substantial attention to compliance efforts.

Finally, it is expected that key jurisdictions will implement similar impairment approaches to IFRS 9, with the most relevant being the FASB’s Current Expected Credit Loss project. These initiatives will combine to broaden the scope of banks that need to implement ECL-based impairment approaches.

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Click here to access SAS’ detailed analysis.