Over recent months, there has been growing pressure on the International Accounting Standards Board (IASB) to push back the introduction of the IFRS 17 accounting standard for insurance contracts. Now, with the board voting to delay the implementation date until 1 January 2022, how can you use the deferment to your advantage – and gain additional business value from compliance? With practical advice and firsthand insights, follow FIS' guide to getting more from IFRS 17 by transforming your operations.
Step #1 – Keep time on your side
For insurers grappling with the complexities of implementing IFRS 17, the IASB's new deadline calls for a fresh plan of action that makes the most of the delay. FIS has thought hard about how firms should best respond – and we've distilled our considerations into four recommendations.
Don't delay your implementation
One thing is certain – IFRS 17 is not going away. So, it is critical to avoid the temptation, strong as it may be, to lay down tools and catch a breath. The underlying challenges of how to implement the standard and interpret its uncertainties clearly remain. And firms should use every moment of the extended timeline to surmount these obstacles.
IFRS 17 amplifies the need for insurers to better integrate their finance and actuarial functions, and consolidate and modernise data management, systems and processes. The delayed deadline will not eradicate this requirement – and, in fact, it will never be too early to start the arduous journey of transformation that
IFRS 17 entails.
Overhaul operations to add value
Many early implementers of IFRS 17 have found that existing practices and processes run deeper through systems and resources than they first believed. The good news is that overcoming these entrenched barriers represents a major step forward in adding value to the business.
Rather than merely meeting new reporting requirements, insurers should view IFRS 17 as an opportunity to improve both reporting timelines and insight into business performance, as well as reduce operational risks by increasing automation and governance of the entire reporting process.
Take time to reap business benefits
An important upside of the delay to IFRS 17 is that a more phased approach can be taken to implementation. First, insurers should focus on data management and system updates that adopt the latest technological advancements and best practices. Next should come the layering of process automation and other governance initiatives, all in time for the go-live date.
In other words, the delay gives you more time to look beyond the minimum requirements of compliance – and consider additional investments that will provide greater business benefits.
Secure the right expertise right now
Insurers should also learn from previous experience of regulatory initiatives. The delayed introduction of Solvency II, for example, resulted in a scrabble for resources as the new, later deadline approached. Many firms had dispersed their teams when the delay was announced, and then had significant problems re-staffing their projects as they competed for their own, vendor and consultancy resources.
It is just as likely that insurers who hesitate now to implement IFRS 17 will struggle with securing the right talent and skills to restart their programs. Also, some insurers may have been anticipating a delay of more than one year so assumed implementation timelines could still turn out to be shorter than expected. The new accounting standard needs a multi-disciplined approach to meet the varying needs of insurers' actuarial, finance and IT functions. The skills required are numerous and already we see demand for them increasing – a trend that is unlikely to change.
Overall, the delay to IFRS 17 gives insurers the chance to deliver maximum business benefit through their implementation program – and, for those willing to keep up the momentum, to get ahead of the competition, too. Conversely, firms that see the delay as a reason to pause risk falling behind and missing a window of opportunity to add real value and transform their operations for the better.
And the question is now: how should you go about achieving that positive transformation?
Step #2 – Bridge the actuarial and finance divide
In stark contrast to existing accounting methods for insurance contracts, IFRS 17 puts actuarial calculations at the core of reporting requirements. So, as you set about transforming your operations, it makes sense to locate IFRS 17's additional calculations within the actuarial space. But first, actuarial and finance teams must learn to work more closely and effectively together.
To close the gap between two historically disparate functions, actuaries need to:
Take responsibility for the quality of financial reporting data
The powerful calculation engines of actuarial systems are a perfect fit for not only IFRS 17 reporting but also more complex projections for forecasting, scenario testing and pricing. By performing all calculations within a single platform, actuaries can reduce data complexity and review and validate IFRS 17 results before passing them to finance, avoiding costly corrections.
Understand finance's own reporting needs
With a thorough understanding of IFRS 17's accounting requirements, actuaries will be better placed to provide information in a suitable format for finance. This means providing a breakdown of actuarial results to the level at which journal entries can be generated, reflecting the newly updated chart of accounts and providing enough granularity to populate the required disclosure tables.
Calculate more efficiently
IFRS 17's multiple reporting dependencies create significant time pressures. For example, the risk adjustment calculation may depend on cash flow projection models while the contractual service margin, if necessary, relies on results from multiple sources. At the same time, the presentation of financial information may also depend on cash flow projections, such as when you disaggregate the financing effect into other comprehensive income.
All these interdependencies require actuaries to define robust processes with appropriate controls and a fully transparent view of approvals and status. For firms with multiple actuarial modelling systems, this will be an opportunity to consolidate and achieve greater efficiency – by establishing a single platform and core calculation engine for all business lines.
Make results meaningful to finance
As financial statements and disclosures will now be made up of actuarially calculated values, finance teams also need a greater understanding of actuarial models and processes. Actuarial results must therefore be both explainable and defensible, which in turn requires a thorough understanding of source data, the calculations involved – and what the results say about the performance of the business. In other words, actuarial systems need to pass data to finance in a meaningful way, presented in a business context and allowing reuse for internal reporting and management information.
In summary, a mutual understanding of the needs of the actuarial and finance teams is critical to not only the successful implementation of IFRS 17 but also the effective long-term management of the business. With the right systems and processes in place, actuaries and finance can optimize the efficiency of the financial reporting process and provide maximum business value.
But first, insurers need the best possible operating environment for risk management – which for many firms will require a move from installed, on-premise solutions to increasingly cloud-based operations.
Step #3 – Look to the cloud
There are many reasons to move your insurance risk management systems to the cloud. Most obviously it offers potential to save both time and costs, by concentrating resources on key calculations in the main reporting periods. The need to comply with IFRS 17 adds one more motivation, as the accounting standard demands extra, more granular calculations – and puts pressure on firms to speed up their close process.
With the cloud, rapid disaster recovery comes as standard, while keeping your data systems in the cloud eliminates capital expenditure on infrastructure, so that you never pay for more than you use. Cloud vendors also provide highly secure IT environments, effectively outsourcing the functions usually performed by internal IT, making cloud-based applications easy to upgrade and scale up or down, again with no capex.
But the benefits of a cloud-based operating model go beyond offsetting the costs and time spent on compliance – especially when it comes to tackling the core challenges of IFRS 17.
These advantages include:
The focus of the cloud providers on robust physical and logical controls has helped overcome traditional concerns in the insurance industry about the security of data in the cloud. Testament to firms' change of heart has been their significant adoption of the public cloud. And their confidence has been well rewarded, as costs are continuing to drop. This is thanks to both increased usage and massive investment by not only cloud providers but also companies like FIS, who can provide a "one-stop shop" for managing the applications and infrastructure 24/7.
The regular filing of reports already puts enormous pressure on finance and actuarial teams. At peak times, such as quarter and year ends, their systems may need at least three times as much compute power as in quieter periods. Traditionally, this drove insurers to purchase the infrastructure required for peak use and then have it sit idle for the rest of the year.
As IFRS 17 in particular forces interactions between finance and actuarial systems, it necessitates the exchange of more data between the two domains, while placing additional time constraints on the actuarial risk process. And that's where a managed cloud environment for your applications really comes into its own. Free from the constraints of fixed data centers, the cloud's pay-as-you-go cost model allows you to scale hardware rapidly up and down to your changing requirements. At the same time, you can free up in-house IT resources to add value in other areas – transferring any related technology risks to your managed cloud service provider, with its combined knowledge of both the software application and the cloud.
As well as lending itself to the usage patterns of risk reporting, a managed cloud service can help address a fundamental issue for most IFRS 17 implementations – how to connect and synchronize the two worlds of actuarial and finance. Under the standard, it's vital to tightly integrate the actuarial platform and general ledger, and closely control the end-to-end IFRS 17 reporting process. Insurers need to ensure consistent, highly granular, mutually comprehensible data and align business processes between these historically disparate domains. As a result, there should be careful consideration of where these systems are located, and the volumes of data passing between the two.
Whether you are implementing a centralized or decentralized operating model for IFRS 17, today's top managed cloud services can help you deploy a cloud topology and risk management platform that's optimal for your choice of both calculation technique and general ledger. For high levels of governance and control, this approach aims to keep all of the data management, calculations and processes associated with IFRS 17 in the same secure, cost-effective public cloud – maintaining a clear audit trail and minimizing costly or time-consuming data transfer between systems.
So, while IFRS 17 is a standard that focuses mainly on calculations, it may also prove a catalyst for shifting your risk management reporting processes onto a managed cloud service.
Transforming your operations in this way can put your whole business in a much stronger position to manage any future challenges – and, once again, to build extra business value into risk management and compliance.
Top implementation tips
As more insurers around the world kickstart their preparations for IFRS 17, what lessons can they learn from the implementations now underway? With our own practical experience of many successful projects, follow FIS' six-step approach to implementing the new accounting standard.
1. Start now – but don't rush.
Despite the delayed deadline, if you're still in the gap analysis phase there's no time to lose. But remember to strike a balance between making rash decisions and over-planning. Luckily, coming to IFRS 17 later than others has some benefits. A lot has already been learned about how to tackle trickier parts of the standard, speed up implementation and minimize costs.
2. Pick the right platform.
A single, centralized platform for implementing IFRS 17 can simplify processes and meet all-important governance requirements. But for multinational firms in particular, your modeling solution must also give you the flexibility to perform different steps of the reporting process at a local level or set various levels of data granularity.
3. Stagger the journey.
Successful implementations typically follow a three-phase roadmap, focusing first on building models, then on working with data and finally on optimizing processes. Doing too much too soon can lead to suboptimal results and preparation pays off. But reaching the production phase as soon as is practical will realize strong and rapid return on investment.
4. Build on existing models.
For insurers with existing cash flow models, it may be possible to reuse the models for IFRS 17 – by simply layering on the additional reporting elements that the new calculations require. This will be especially easy to do when a firm has taken a best estimate cash flow approach to meeting previous regulatory reporting requirements, such as for Solvency II.
5. Pilot a prototype.
If your company is multinational, you may be planning to implement IFRS 17 bit by bit at enterprise level. But it can actually be quicker to pilot a complete implementation first in just a few countries. You can then roll out the same process to the rest of your regions, but with the added advantage of an experienced team that has already been through every stage.
6. Consider the cloud.
By moving your whole risk management platform to the cloud, you could enhance overall reporting capabilities while ensuring high levels of governance and control. Keeping all the processes associated with IFRS 17 in the same cost-effective, scalable cloud environment will help maintain a clear audit trail and minimize data transfer between systems.