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

Accelerated evolution – M&A, transformation and innovation in the insurance industry

Strong appetite for deal activity

Today’s insurers know that maintaining the ‘status quo’ is not a recipe for sustainable growth. They feel the pressure of disruption in the market from

  • new competitors,
  • new technologies,
  • new customer demands
  • and new sources of capital.

They feel the pain of

  • continued low interest rates,
  • volatility in underwriting losses
  • and pressure on profitability,

as investment portfolio yields continue to decline.

Organic growth has been challenging across most of the mature insurance markets. Consider this: Since the start of this decade to 2016, global gross domestic product (GDP) increased by more than 20 percent. Yet the global premium market grew by just 9 percent over the same period. Insurers recognize that things must change if they want to maintain or grow their market share.

“In an era of anticipated disruption of legacy business and operating models, global insurance executives realize that their strategy cannot be about pursuing growth for growth’s sake. When it comes to growth strategy, more of the same is not necessarily the best answer. What may have been a core business in the past may not be in the future,” notes Ram Menon, KPMG’s Global Insurance Deal Advisory Leader.

Today’s insurance leaders are taking a more strategic view of the value of M&A. According to a recent global survey of 115 insurance CEOs conducted by KPMG International, more than 60 percent of insurers now see disruption as more of an opportunity for growth than a threat. And they are using their capital and their M&A capabilities to maximize those opportunities — often by strategically deploying capital towards emerging technology as a competitive advantage to

  • engage customers,
  • generate cash flows
  • and enhance enterprise value.

The good news is that — for the most part — capital and surplus levels are at record highs across life, non-life and reinsurance markets. And most insurers plan to tap into that capital to make deals. In fact, our survey suggests that close to three-quarters of insurers expect to conduct an acquisition and two-thirds expect to seek partnership opportunities over the next 3 years. Eighty-one percent say they will conduct up to three acquisitions or partnerships in the same period. More than 70 percent said they are hoping their deals will help transform their organization in some way. As a top priority,

  • 37 percent hope to transform their business models,
  • 24 percent want to transform their operating models,
  • and 10 percent are looking to acquire new innovation capabilities and emerging technologies

through their acquisitions.

“Insurers increasingly recognize their days of operating business-as-usual numbered. And it’s not small changes market going to be undoing — big ones,” says Thomas Gross with KPMG Germany. Auto insurers, for example, looking at rapid adoption of mobility models and wondering how they add value when car manufacturers or leasers own relationship customer.”

On their path to transformation, insurance companies expect to strategically deploy capital against a range of specific inorganic growth opportunities:

  • transforming their business models for sustainable growth;
  • modernizing their operating models for profitable growth;
  • enhancing customer engagement;
  • and gaining access to innovation and emerging technologies.

“The top factor that will drive insurance acquisitions will be the need for emerging technologies. Insurance companies are all looking at how to put their operations on digital platforms in order to save time and resources both for the company and the customers,” notes the Head of Finance at a China-based property and casualty (P&C) insurer. At the same time, a significant number of insurers also hope to rebalance their portfolio of businesses. Many plan to evaluate whether they should fix or exit businesses that are struggling to achieve returns in excess of their longterm capital rates. This should allow them to remain focused on transforming businesses they consider core for the future while freeing up additional capital for reinvestment into new lines of business and technology capabilities.

As the director of finance at a UK-based non-life insurer notes, “Units that are consistently performing poorly will be segregated to further analyze their positions and whether or not they still fit in the company’s planned structure. We discourage force-fitting any product or company unless it has great potential for generating revenue. If it does not, we look for suitable buyers for the business.”

Our data indicates, insurance executives expect to exit non-core businesses, enter new markets and gain access to new technology infrastructure and operating capabilities via M&A and partnerships, as a way to further diversify their global risks and earnings profile.

Looking beyond the borders

Our survey suggests that the majority of insurers will be involved in some sort of non-domestic deal: 68 percent say they expect to conduct a cross-border acquisition, partnership or divestiture over the next 3 years. Just 32 percent say their top priority will be on domestic activity.

“Over a period of 3 years, we expect to see a lot of M&A transactions overseas. We are looking to expand into regions that are new for us and with acquisitions, you can get going without having to set up a base from scratch or encounter a lot of unforeseen risks,” notes the senior VP for M&A at a global insurance brokerage firm. Perhaps not surprisingly, our data suggests that insurers expect to see the most activity in North America — the US in particular. Given that the US is still the largest insurance market in the world with around 30 percent of the global premium market share, many insurers see the US as a source of steady market growth and relative premium stability.

“The volume of M&A in North America will increase the most in the coming years. With the new tax reforms, insurance companies will pay lower taxes — these new regulations will provide insurers opportunities to grow. Companies from other markets will also want to take advantage of the lower tax rate and will look for ways to expand into the US market,” suggested the CFO at a Bermuda-based reinsurer. Changes to US tax laws will certainly create significant disruption and opportunity for insurers both onshore and offshore. “The reduction in the corporate tax rate to 21 percent makes US assets much more compelling,” notes Philip Jacobs, leader of the Insurance Tax practice with KPMG in the US. “The lower US tax rate has also eliminated some of the offshore tax advantage; the large Bermuda players may still be operating with relatively low effective rates, but the tax differential between operating in the US versus Bermuda has narrowed.”

Latin America, however, expects relatively lower levels of deal activity. “It’s a sellers’ market in Latin America,” notes David Bunce, Senior Client Partner with KPMG in Brazil. “Lots of international insurers want to get into certain Latin American markets, but nobody is really ready to sell.”

At the other end of the spectrum — and the other side of the world — Asia-Pacific is widely viewed as a region of massive growth potential and innovation. China has already become the world’s second largest insurance market (with around 10 percent of
global premium market share) and premiums have more than doubled since 2010. Singapore and Hong Kong have long been key centers of insurance innovation growth.

Asia-Pacific was identified as the geographic region where insurers would most likely seek partnership opportunities. “As insurers seek to expand outside of their traditional distribution networks in Asia, digital partnerships are emerging as a fairly quick way to tap into new customer segments without significant upfront capital investment,” adds Joan Wong with KPMG China. “A digital partnership could unlock significant new growth, which would tip the balance for those making a ‘go or grow’ decision about their businesses.”

The director of investment at a Korea-based international insurer agrees. “Asia has become one of the biggest markets for insurers, and the region’s growing population along with changes in capital regulations will give insurers the backing they need to grow. In China alone we have seen a major increase in the number of companies seeking out new ventures in the insurance sector.”

While the majority of our respondents say they are looking across their borders for growth, those in Asia-Pacific are much more likely to be focused on domestic acquisitions instead. “Most of the markets in Asia are still fairly domestically oriented and there is still significant fragmentation and inefficiency that could be eliminated,” adds Stephen Bates with KPMG in Singapore. “Given the growth potential across the region, it’s not surprising that Asian insurers are thinking about taking advantage of opportunities at home before investing further into foreign markets.”

Somewhat tellingly, insurers expect most of the divestiture activity to originate from Western Europe. As the head of finance and investments at a large French insurer argues, “The persistent compression in global interest rates continues to be a challenge for the insurance industry, and many companies in Europe are aiming to divest in part to cope with this. When you add in the factors of changing regulation and customer demographics, it means that insurance business models have evolved and companies are reshaping themselves accordingly.”

“Insurers in Europe are very interested in diversifying their risk and see adjacent markets as an opportunity to do just that,” notes Giuseppe Rossano Latorre, Head of Corporate Finance at KPMG in Italy. “There are a number of life insurers that are looking at the asset management business, for example, as a potential growth opportunity in the future.”

Our data indicates that in the Life sector, acquisitions will likely focus on finding lower-risk, higher-growth, higher-return assets, particularly around capital-light retirement, investment management and group benefits businesses. However, greater levels of activity should be expected in the Nonlife sector, driven by a growing appetite for more profitable specialty risks and commercial risks, with a preference for commercial risk in the small- and medium-sized enterprise (SME) sector.

What this survey makes clear is that global insurance companies recognize they now have a window of opportunity to strategically allocate their capital across the globe towards achieving and accelerating their transformation strategy.

MandA_Innovation

Click here to access KPMG’s detailed study

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

 

Risk Dashboard for fourth quarter of 2017: Risk exposure of the European Union insurance sector remains stable

Risks originating from the macroeconomic environment remained at a high level in Q4 2017, although most indicators improved slightly comparing with Q3. Positive developments in forecasted real GDP growth and increased expected inflation closer towards the ECB target contributed somewhat to a decrease in risk, as well as a slight reduction in the accommodative stance of monetary policy. Swap rates recently increased but remained low by historical standards. The credit-to-GDP gap was the only indicator to deteriorate since the previous assessment, moving further into negative territory.

Credit risks remain constant at a medium level in Q4 2017. Since the last assessment spreads have decreased across all bond segments, except for unsecured financial corporate bonds. Concerns about potential credit risk mispricing remain.

Market risks were stable at a medium level in Q4 2017. Most market indicators changed only little when compared to the previous risk assessment, except for investments in equity. Volatility of equity prices increased, with a temporary peak in February. A slight decline was reported for the price-to-book value ratio (PBV). In addition, Q4 Solvency II data seems to indicate a slight increase in median exposures to bonds and property and an increase of exposures to equity for insurers in the upper tail of the distribution.

Liquidity and funding risks remained constant at a medium level in Q4 2017, with most indicators pointing to a stable risk exposure.

Profitability and solvency risks remained stable at a medium level in Q4 2017. Annual figures for some profitability indicators show a slight deterioration when compared to annualised Q2 indicators, but are broadly at the same level as in Q4 2016. Solvency ratios remain well above 100% for most insurers in the sample. A slight increase in the quality of own funds has also been observed.

EIOPA1

Risks related to interlinkages and imbalances remain stable at a medium level in Q4 2017. Main observed developments relate to a slight decrease in median exposures to domestic sovereign debt and to a mild increase in the share of premiums ceded to reinsurers. Investment exposures to banks, insurers and other financial institutions remained broadly unchanged.

Insurance risks remained stable at a medium level when compared to Q3 2017. The impact of the catastrophic events observed in Q3 on insurers’ technical results still weights on the risk assessment.

EIOPA2

Market perceptions remained stable at a medium level since the last assessment. Positive developments related to the performance of insurers’ stock prices relative to the overall market and a decrease in the upper tail of the distribution of price-to-earnings ratios contributed to decreased risk, but this was partially compensated by a deterioration of some insurers’ external rating outlooks. Other indicators, such as insurers’ CDS spreads and external ratings remained largely unchanged.

Summary

Click here to access EIOPA’s detailed Risk Dashboard – April 2018

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