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IFRS 17, mixed project teams and finance transformation are inextricable

Insurance Consulting and Technology
Insurer Solutions|IFRS 17 Solutions

By Andreas Schröder | April 27, 2021

For the vast majority of insurers, there’s plenty still left to do to be ready for IFRS 17.

Deriving wider business planning value from the time and monetary investment they make in meeting the standard is likely to require an implementation team drawn from across the business and genuine technology-enabled finance transformation.

As we have worked with insurers on their IFRS 17 preparations, ahead of the new accounting standard going live on 1 January 2023, it’s become apparent to us that most insurers are currently in the throes of what we describe as a ‘system implementation’ phase. As such, the biggest challenges that companies have said they face are data and IT requirements and concerns about the availability of qualified staff to do the remaining work needed1.

Coming soon on the agenda will be decisions around, and action on, things like the desired level of automation, audit trails, business planning and reporting and, further afield, disclosures and external reporting as they seek to resolve questions such as:

  • How do we deliver numbers in the required timeframe?
  • Will systems and the corresponding data models help explain numbers to management and shareholders, how they were arrived at, and what they mean?
  • How do we ensure the technology platform meets the need for transparency around analytics and sets us up well for future needs?
  • Will we be ready in time?

Different routes to similar goals

What companies may not yet appreciate is that the answer to these mixed questions will be highly dependent on technology choices they’ve largely already made about future operating models. No more so than the decision taken about the nature and location of the IFRS 17 calculation engine. This will dictate many future tasks and opportunities in an IFRS 17 implementation.

Essentially, this has boiled down to two options. One, typically favoured by chief financial officers (CFOs) with an actuarial background, where the IFRS 17 calculation engine is close to the actuarial cashflow production for business and analysis purposes. The other, typically chosen by CFOs with an accounting background, involving the creation of a classical sub-ledger variant close to the general ledger.

There are advantages and disadvantages to each and both then drive consequential additional needs. In the sub-ledger variant, insurers have either built their own sub-ledger, purchased an IFRS 17 sub-ledger from their general ledger provider or bought a third party sub-ledger for IFRS 17.

The advantage is they provide database formats supporting the analysis and the accounting events an accounting department wants to see and use further.

Disadvantages include potentially high implementation and maintenance costs and a lack of any meaningful business planning functionality. Also, these solutions typically have rigid or even closed database formats where the IFRS 17 calculation logic is in a black box, extinguishing the possibility of actuarial analysis on the cashflows in conjunction with the IFRS 17 calculations.

By contrast, the actuarial leaning engine is typically built on the actuarial cashflow projection systems.

The advantage here is that insurers can quickly assess the impact of methodology choices and implement, for example, the country-specific variable fee approach requirements for life insurance contracts. Further, a client specific reporting database stores results for management information and the mapping to the client specific general ledger. It also attaches the accounting framework requirements to the actuarial cashflow and IFRS 17 engine results production.

The disadvantage is that, whereas the functionality of this ‘actuarial’ IFRS 17 solution set-up basically replicates the classical sub-ledger, the look and feel of the system is different to what an accounting department might expect and like to have.

Finance transformation to the core

Whichever route taken though, the most advantageous way forward, in our view, is to treat IFRS 17 as a finance transformation project in its own right, recognising that technical understanding of complex issues needs to underpin the processes, tools and people change requirements.

That means putting representatives from multiple and diverse teams into the IFRS 17 implementation project. In our experience, excluding certain groups is an early warning signal of a potential problem with an IFRS 17 programme.


Technological transformation

The technology used to support IFRS 17 should ideally complement this inclusive and transformative approach. By way of illustration, Figure 1 shows the Willis Towers Watson technology components and framework that can support such an approach for a life insurer from the IFRS 17 implementation phase to business as usual.

By way of illustration, Figure 1 shows the Willis Towers Watson technology components and framework that can support such an approach for a life insurer from the IFRS 17 implementation phase to business as usual. In this Technology framework, Unify provides a workflow and integration centre with access for all teams that incorporates automation of routine, repetitive tasks together with an automatically produced audit trail and which can be dovetailed to work with Solvency II workflows. The set-up also enables true business plan projections by looping Unify over the cashflow production systems in connection with the “actuarial” IFRS 17 calculation engine. The Unify technology is also applied in the classical IFRS 17 subledger or the combined variant, as after each IFRS 17 calculation engine decision the automation and audit trail requirements need to be fulfilled, too.
Figure 1. Illustrative IFRS 17 life insurance financial transformation project with Willis Towers Watson technology components

 

In this Technology framework, Unify provides a workflow and integration centre with access for all teams that incorporates automation of routine, repetitive tasks together with an automatically produced audit trail and which can be dovetailed to work with Solvency II workflows. The set-up also enables true business plan projections by looping Unify over the cashflow production systems in connection with the “actuarial” IFRS 17 calculation engine. The Unify technology is also applied in the classical IFRS 17 subledger or the combined variant, as after each IFRS 17 calculation engine decision the automation and audit trail requirements need to be fulfilled, too.


Particularly alarming from our perspective are some voices from around the market that dispute the need for actuaries in IFRS 17 implementation and reporting teams.

We are not alone in this view. Notably, The Actuarial Association of Europe (AAE) has recently issued a discussion paper2 on the role of the actuary in IFRS 17 reporting, arguing the case that: “..actuaries can and should be required to take statutory roles relating to the preparation by insurance companies and groups of IFRS 17 accounts, and that the involvement of actuaries in this way would add professionalism and consistency to the valuation of insurance liabilities under IFRS 17. The AAE believes that such roles should be defined as part of the accounting regulatory framework for insurance companies and groups reporting under IFRS 17.” In smaller and mid size companies this actuarial reporting role might be taken up or just complemented by the actuarial function on the Solvency II side.

The AAE discussion paper went on to say: “In considering the audit of IFRS 17 accounts, the AAE recognises the auditors’ statutory roles and responsibilities in relation to preparing and auditing financial statements, and the AAE proposes to cooperate with the audit profession to define the best possible statutory framework for actuaries and auditors to cooperate. This should in our opinion involve a requirement for auditors to engage with actuarial experts in auditing IFRS 17 insurance liabilities.”

Lessons learned

So, as insurers move forward with their IFRS 17 preparations, companies will, we believe, need to bear in mind whether their current strategy and plans are developing in a way that is sufficiently flexible and transformative in nature to aid business as usual activity after 2023.

From our privileged position of working with many companies on the associated issues and challenges, we’d highlight three key points at this juncture.

  • One, costly and rigid sub-ledger systems are not ideal for every client and can be avoided.
  • Two, a sub-ledger for the accountants and actuarial engines for the actuarial analysis and business planning can coexist. We’ve seen this in a recent trend of sub-ledger focused organisations purchasing additional IFRS 17 engines for short-term what-if analysis in ongoing implementation projects and for future business planning and asset and liability management processes.
  • Three, exclude actuaries from IFRS 17 reporting teams at your peril. The crossover of the accounting and actuarial worlds in IFRS 17 reporting makes including a reporting actuary advisable, if not essential.

In a project of the scale of IFRS 17 these are, of course, far from the only factors to consider as insurers push towards implementation but, based on our experience, their importance for setting the right future course shouldn’t be bypassed.


Footnotes:

1. Willis Towers Watson 2020 Global IFRS 17 survey
2. ‘Roles of actuaries in relation to IFRS 17’, November 2020 – Actuarial Association of Europe

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