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IFRS 17 – a question of timing

Insurance Consulting and Technology|Risk & Analytics
IFRS 17 Solutions|Insurer Solutions

May 20, 2019

As the International Accounting Standards Board (IASB) irons out a number of kinks in IFRS 17, one thing that won’t be affected is the need for actuarial and finance teams to work seamlessly to hit reporting deadlines once it’s implemented.

A matter of time

It’s been a long road already, but it appears a launch date may be in sight for IFRS 17, the new, almost global, insurance accounting standard. While there is still some uncertainty over its final form, the IASB is expected to release its amended Exposure Draft in June 2019. This will address a whole range of issues raised by the industry in response to the previous draft (see feature box) and will also set a new expected implementation date of 1 January 2022.

This leaves insurers with a lot to do in just over two years, even allowing for the fact that, by our reckoning, approximately 70% of affected organisations have moved beyond gap analysis and are in an implementation phase. The need for sustained action, however, is reflected in the companies we’ve observed choosing to use the extra year of preparation to refine their approach, rather than put on hold what they’d started. In some regions, notably Asia and increasingly the Middle East, regulators are also applying their own pressure for companies to maintain an active and comprehensive IFRS 17 programme.

But the ultimate test of any preparations will be insurers’ ability to produce IFRS 17 numbers in what, effectively, will amount to five working days of a quarterly reporting timetable. And because of the nature of the standard, actuarial and finance teams and systems will have to interact closely, firstly to achieve that but, just as importantly, to create adequate time for review. Planning decisions made now will almost definitely help or hinder those objectives.

IFRS 17 latest developments
Figure 1. IFRS 17 – background to the June 2019 Exposure Draft

The insurance industry raised multiple challenges to the previous IFRS 17 Exposure Draft, released by the IASB in May 2017. These included concerns about acquisition costs so that insurers can recognise them over the lifetime of a contract; the ways in which companies account for reinsurance contracts; and the need for recognition of investment gains in the contract service margin.

It’s all about investors

That’s because, in trying to introduce a standard that means insurers will report results more like other industries, particularly those involving contracts, the IASB has created a different beast for insurers to tame. It considerably blurs the lines between accountants’ and actuaries’ responsibilities. Hence there is a need for careful planning and consideration of the way insurers go about it and, in the longer term, how they embed the number production in to business as usual (BAU).

And to complicate matters for insurers that are just getting used to Solvency II, IFRS 17 is nothing to do with regulators; it’s all about investors.

While it will be chief financial officers (CFOs) who will have to own the IFRS 17 results message, they will be heavily reliant on actuaries for the substance, including components such as assumption setting, property and casualty (P&C) reserve adequacy, and expense allocation over the lifetime of insurance contracts. The bottom line is that processes put in place will not only have to support very tight timelines, but also give the CFO the opportunity to present a coherent, sensible results story in front of the investor community.

Probable pinch points

So where are the pinch points likely to be in this new world of actuarial and accounting overlap?

  1. Timeframes – IFRS 17 numbers will have to be produced to a similar timetable as GAAP. It’s like doing the Solvency II quarterly reporting templates in three days.
  2. Data capture – IFRS 17 requires more varied and more granular data, particularly relating to ongoing liabilities so that there is a consistent and detailed allocation of expenses over contract periods.
  3. Investor communications – the point here is that we all remember how hard it was to train the board to explain Solvency II numbers to regulators. IFRS 17 will be just as, if not more, challenging.
  4. Planning/business key performance indicators – some will be similar to existing accounting regimes, but others, such as the probability of an insurer’s future reserves being adequate, will not. Many will require detailed actuarial input.
  5. Managing assumptions – the emphasis will be on ensuring that assumptions are consistent and make use of more granular data. Any changes in consistency of assumptions, or approximations that result in volatility from one reporting period to the next, will show up in reconciliations and financial statements – and will therefore need revisiting or explaining.
  6. Interpretation and explanation of results – analysis of results will need to fit within the reporting timetable. Things like the effect of variations in yield curves (of which there at least three to be considered for each underwriting year) will need to be addressed. Commentary on financial statements will require sifting of vast amounts of detail to address issues that could potentially be red flags to investors, such as unexpected patterns of earnings or unexpected losses being incurred.

Where insurers spend their time will have a significant effect on meeting deadlines, but also on their ability to provide credible and detailed commentary for investors. Ideally, insurers will be in a situation where they are able to think about the numbers, rather than struggling with production by, for example, having to copy and paste between spreadsheets. Those that can spend time on whether things look right, and why certain things are happening in the results, should be in a far stronger position to deal with what IFRS 17, and an investor community getting to grips with it, will th at them.

Automation – a better way forward

For insurers to do that, and to be able to drill in to the data, models and assumptions that will crucially underpin IFRS 17 numbers, they may need to rely on increased levels of automation to drive process efficiency and avoid duplication of effort.

With this in mind, Willis Towers Watson has developed an IFRS 17 process architecture (Figure 2), based around a number of our proprietary software products and managed in our Unify workflow environment. This aims to make number production as slick as possible and leave as much time to interpret and think about the results as possible.

IFRS 17 architectural model
Figure 2. Willis Towers Watson IFRS 17 model production architecture

For each quarter end, the key aspects of this architecture are that data preparation, validation and population are automatic, as is production of assumptions based on the core reserving process that takes place in ResQ. Factors such as choice of reserving methods and selection of ultimates are pre-programmed. Once figures are generated, these are automatically fed in to the IFRS 17 calculations, from which management information and drillable results can be generated. The whole process allows quick review and playback, with the potential to adjust assumptions, prior to feeding in to the general ledger and financial reporting systems.

Two worlds collide…or should at least

It’s hard not to conclude that IFRS 17, even while its exact requirements remain unclear, will be a whole lot harder for insurers whose actuaries aren’t working hand-in-glove with the CFO and finance team, and whose systems don’t actively support cross-working and process efficiency.

Currently, it appears that in many companies, actuaries are in the second tier of IFRS 17 preparations behind finance teams, even though they will be responsible for a lot of the work involved. It’s time for that to change and for it to become a truly collaborative effort – meeting the BAU timelines of IFRS17 with time in hand to think critically about the information requirements of investors may depend upon it.

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