Streamlined and powerful, the long-awaited International Financial Reporting Standards (IFRS) 17 will have a major impact on insurers’ back-end processes and how they report to stakeholders. Hannah Duncan looks at how and why IFRS 17 came about, what it’s here to achieve and, most importantly, what it unlocks for insurtech.
International Financial Reporting Standards (IFRS) 17 isn’t any ordinary accounting benchmark, it’s a super standard – and it’s rescuing the industry. Creating a common global language for the reporting of all insurance contracts, the standard could strike down decades of confusing accounting misalignments and facilitate much greater transparency for investors and other stakeholders.
However, as the saying goes, you can’t make an omelette without breaking a few eggs, and things are likely to get a lot more stressful for insurers before they get any better. After a series of delays, IFRS 17 will now need to be implemented within the next two-and-a-half years. This gives opportunistic insurtech firms an extended window to get involved.
What is IFRS 17?
Remember Esperanto, the universal language idea? It may not have the same poetic name, but IFRS 17 does make it easier for insurance industry insiders and outsiders to see what a company’s financial position is. It’s a common standard for reporting insurance contracts in the countries that have signed up to the IFRS global standards framework. The aim of IFRS 17 is to bring the reporting of insurance contractsglobally into line, to improve transparency and comparability between insurers themselves and between insurance and other industries. This will be accomplished by firstly, introducing a single accounting model; secondly by making the new model highly transparent; and, thirdly, by aligning IFRS 17 with other accounting standards, such as Solvency II.
Insurers will need to show a number of things. These include financial statements with a new chart of accounts, the profit margin they make on services, the expected real-time value of cash flows and any risk adjustments, too. The new information rules will apply to any newly-issued insurance and re-insurance contracts, as well as any which are already held. Investment contracts with discretionary participation features will also need to comply.
The change to the way business performance is measured is likely to have a far-reaching impact on an insurance company’s operations, systems and people as it triggers completely new accounting approaches. One major insurer that’s already taken the opportunity for a major rethink is Swiss Re. It is working with SAP accounting software to come up with what it calls a ‘true multi-GAAP (general accepted accounting principles)’, which it has called the Baseline Delta Approach. It believes this will have a number of future financial benefits for the organisation, not least in guaranteeing a ‘single source of truth’ – one comprehensive, integrated database for risk and finance data with a processing system that can handle big volumes and a single platform for assets and liabilities, among other advantages.
Where did IFRS 17 come from?
IFRS 17 has been a long time in the making and, like all great movements, began with a vision. As far back as 1997, the International Accounting Standards Committee (IASC) set to work on creating some common processes. For some time, they’d recognised the need for better alignment within insurance reporting and contracts. This would improve transparency and help to make more accurate comparisons. In 2004, IFRS 4 hit insurance reporting systems as an interim solution Finally, after more than a decade of comments, drafts and feedback, IFRS 17 replaced IFRS 4 in 2017. It comes into effect in January 2023, giving firms additional time to implement the new standards into their processes and contracts. IFRS 17 has gathered worldwide support, but there are also some bumps in the road. It’s faced criticism for being too focussed on the vision, without considering the details. Some firms also feel that the amount of work required to make it happen will be overwhelming.
Uphauling insurance accounting systems will be a tremendous job. Insurance companies in the European Union already had to untangle and reorganise their reporting and transparency processes with Solvency II back in 2016. For many firms, this took a significant investment in people, data and systems. IFRS 17 adds fresh layers of complexity to the mix. According to Deloitte, regulatory requirements in the insurance industry are often met with tactical solutions or emergency workarounds, rather than long-term infrastructure. This might be part of the reason why processes are often complex, disjointed or inter-dependant. But IFRS demands an unprecedented level of joined-up thinking.
Another major challenge that IFRS 17 will throw at insurers will be the requirement for more data. They’ll now need to provide much more detail, and in greater volumes. And it’s not only for existing contracts or new contracts – the data requirements are historic, too. Insurers will need to dig up legacy contracts and fill in the data gaps retrospectively. This is a headache of a job, and one that could be too much for some of the systems currently in place, especially within the timeframe.
The last major stumbling block, which might make IFRS 17 tricky to implement, is the classic incumbent issue, a lack of digitisation. Manual processes that should have been automated away a decade ago are still going strong for many insurers. Although pressure on firms to transform has been building for some time now, the attempts so far are not really hitting the spot. Getting through the IFRS 17 implementation will require, for most firms, new modelling and computer capabilities.
This will apply across processes like cash flow, risk adjustments, discounting, CSM (contractual service margin) calculations and more. But, more importantly, it may require a new mindset, too. Across incumbent industries, there’s been a palpable fear that robots will take away livelihoods, rather than freeing employees to get on with value-adding work, and perhaps this view still lingers. Yet, with compliance departments bursting at the seams trying to meet all the new regulations and stamp everything with a human seal of approval, something has to give. The challenge of digitisation may be more mental than technical. The reins need to be handed over to agile tech developers who can create architecture away from all the in-house policies. For the middle management teams who worry about their jobs, relevance and deadlines, that is a tough call.
What opportunities lie ahead?
According to EY, the high data granularity as well as data modelling, administration and utilisation demanded by IFRS 17, will require ‘a special IT infrastructure and a realignment of business processes’. In short, insurers will need to capture more data and process it faster. Those that take a more visionary, rather than tick-box, view of implementing the new standards, will likely drive demand for automated gathering of business intelligence, via data visualisation and predictive modelling tools. And there will be a need to develop integrated systems based on greater collaboration, understanding and knowledge-sharing across an organisation, especially as actuarial and accounting silos dissolve to meet the standard’s objectives.
If all this disruption was required to meet one compliance goal, the costs might appear disproportionate. But, as one supplier has observed, ‘the granularity of data required for IFRS 17 may drive more targeted uses of the data and uncover insights previously unknown’. As insurers stand on the cusp of a truly transformational time in our financial history, that surely is the greater prize.
This article was published in The Insurtech Magazine: Issue #4, Page 28.