Will IFRS 17 help you transform to thrive, or simply survive?

Authors

EY Global IFRS 17 Leader

Implementation and Accounting Change Leader for the Insurance industry. Member of the IASB Transition Resources Group on IFRS 17. Passionate about Diversity & Inclusiveness.

Phil Vermeulen

EY Global IFRS 17 Leader; Partner, Insurance, Ernst & Young AG

Transformation leader and client relationship partner. Passionate about helping insurance clients fulfill their potential. Average runner; better cook. Father to twin boys.

Thomas Kagermeier

EY Global Insurance Financial Accounting Advisory Services Leader

Excited about digital tools to improve processes and automatize working world.

Contributors

Martyn van Wensveen

6 minute read 29 Oct 2020

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Across the globe, EY teams are working closely with insurers on their IFRS 17 implementation programs. So what are we seeing in the market? Well, for most insurers, implementing IFRS 17 is proving to be quite a challenge. Not only is the standard complex and some elements not yet finalized, it also requires a significant investment both in cash and management time.

Many insurers originally took a “minimum compliance” approach to IFRS 17, but as their programs have progressed, some have realized that the scale of the change and investment required to reach this standard is much more significant than expected.

In response, organizations are now looking for opportunities to not only comply but also to use their investment as a way to improve and transform their finance functions, and deliver real and tangible business benefits.

Implementation programs and progress

With the final standard still to be released, insurers are still progressing their implementation projects based on an assumption of a 1 January 2022 effective date.

A small number of global firms lead the pack. These leaders have already implemented their solutions to a large extent and are typically in their second or third dry run cycle. These firms will be well placed to use the remaining time to optimize processes and start adapting their investor story and business steering metrics to IFRS 17. Leveraging the change to drive enhanced insight and business performance.

More generally across the sector, the majority of insurers are currently working through the financial impact assessment, detailed planning and design stage of their IFRS 17 program.

However, across a sample covering 70 insurers globally where we have data on IFRS 17 implementation progress at Q3 2019, we observe that more than half have not yet decided on their target IFRS 17 system landscape. IFRS 17 vendor solutions are available and are growing in maturity with each new release, however, very rarely do solutions cover all the IFRS 17 needs “out of the box”. Many firms that are already in the system implementation phase are finding that more work is needed than they originally expected, to prepare data at the right granularity, align data models and customize the tools and reports.

As a result of this, we foresee a challenging time ahead for many firms, and in some cases underestimation of the effort required.

It’s therefore, no surprise that for many insurers, spend on IFRS 17 is likely to be much higher than originally estimated, and that’s adding to the pressure - not only to get the program right but also to maximize the benefits from this investment..

Key drivers in the implementation challenge

Data and systems are at the forefront of insurers’ minds as they plot their IFRS 17 response. Perhaps surprisingly though, it is usually not the calculation tools that are the biggest issue. Most firms have some form of actuarial modeling capability which they can build on, and a number of vendor solutions exist for calculating CSM. The bigger technology challenge comes from correctly managing this highly complex and interconnected systems landscape and increasing volume of data. Key challenges that companies are facing are aligning data models, managing the flow of between all the different systems, implementing new accounting rules engines or subledgers and deriving the right external and internal reporting.

It’s already clear that not all insurers will have in place the systems and processes required by the deadline, and there are some good reasons for this. Deciding on the right IFRS 17 solution is certainly key, and it makes sense that insurers invest time to understand their specific needs in terms of CSM calculations and accounting rules engines in particular. They then need to decide whether to build this solution in-house, or whether they should appoint a vendor, and then start the process to implement and test.

This all takes time, is complex and as with any technical implementation program, there will be a shortage of available skilled resources. Therefore it is essential organizations plan appropriately either through upskilling their current workforce or looking to external suppliers. At EY, we leverage our knowledge from multiple implementation programs to help clients at the start of this journey to accelerate their thinking.

What is sometimes also underestimated is the talent challenge that companies will face when IFRS 17 becomes the business as usual standard. Actuaries and accountants will play different roles than they currently do in the closing process and the need for training and upskilling is acute.

How EY can help

IFRS 17 implementation

IFRS 17 is the biggest insurance accounting change in decades. Our skilled team understands both the business and technical issues around IFRS 17 and can work with you to achieve compliance that’s aligned with your finance transformation programs.

Lessons learnt from successful implementation programs

Given what we are seeing and based on feedback from across the insurance sector, we believe there are four key factors for a successful implementation:

1. Collaboration - Given the complexity of IFRS 17, a collaborative approach is vital. In successful programs, the teams supporting data, technology, vendors, the accountants, actuaries and leadership teams all work closely together and are structured to achieve this. Optimal implementation requires all participants to understand the context around how policy decisions flow through actuarial and accounting systems to final disclosures, including the data implications.

2. Agility - Insurers cannot wait for all the uncertainties and unknown components of IFRS 17 to settle, and an agile approach will provide the flexibility to respond to development and changes as they occur. Understanding potential risks and and likely responses is key.

3. Setting realistic expectations - Vendor solutions are never going to be fully tailored for each organization's specific circumstances. So it’s important to have realistic expectations of the vendor solutions and be prepared to work with them to develop and tailor the solution for the business. That’s not easy and needs careful validation.

4. Focus on the final outcomes - Are you looking to comply or use the investment to help transform your actuarial and finance function? Moving beyond a minimum compliance mindset towards transformation could maximize your investment both in management time and cash. It’s better to ask the question now while there's still time to capture those benefits.

Transformation opportunities from IFRS 17

We are working with a few firms who are really trying to drive transformative outcomes. Some of the things they are focusing on include:

Modernization of actuarial models and enabling technology. Some of these systems are decades old and the speed and flexibility of technology has moved on significantly in this space.
Optimization of the financial close and disclosure processes, in part reflecting market pressure for earlier reporting by listed entities.
Integration of finance and actuarial activities – including the integration of data underlying actuarial and finance processes.
Improving performance metrics and employing new data analytics and visualization techniques to understand the key drivers of IFRS 17 and gain additional insights into business performance.

Using IFRS 17 to simply survive, or transform to thrive

With many insurers progressing their implementation programs based on a 1 January 2022 effective date, implementation is still the priority.

Although it would be easy for insurers to become solely focused on operational complexities as they grapple with the challenge of implementing IFRS 17, it’s important to keep a clear eye on the bigger picture.

Summary

Fundamentally, IFRS 17 will affect how insurers manage their businesses, and if accounting and implementation choices appear not to deliver desirable outcomes, there is still time to change them. Want to hear more? Listen to our latest 12-minute podcast on how insurers can prepare for the transition to IFRS 17.

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