7 minute read 15 Jan 2020
Workers walking through data center

Accounting change: the path to modernized finance technology

Authors

Evan Bogardus

Ernst & Young LLP US Accounting Change Leader, Insurance FAAS Partner

Experienced Partner. Works with insurance companies of all natures and scales. Skilled in financial accounting and reporting. Expert in FP&A and metrics production and analysis.

Chad Runchey

EY Americas Insurance Financial Performance & Risk Leader

Career EY’er. Educated in Madison, interned in Hartford, started in Chicago, now working in New York. Leveraging an actuarial background to help clients solve their challenges.

7 minute read 15 Jan 2020

The response to IFRS 17 and LDTI for insurers calls for investments into agile and modernized finance technology that drive better business performance.

While possible to view accounting change as a compliance exercise, nearly all insurance companies are viewing these changes as the trigger for long-overdue deferred investments ranging from targeted data, system or process upgrades to full-scale modernization. Accounting change is also an opportunity for management teams to identify opportunities to transform their operating models, along with the role of finance, risk and actuarial in their businesses.

As for the timeline for making these investments, although the prescribed effective dates have been deferred and many local adoption approaches are still uncertain, there’s no room for delay in working through the significant effort required.

Participation across business units and organizational functions will be essential for adapting to accounting change. Instead of an unstructured approach led either by actuaries, accountants or IT specialists, what’s required is a cross-functional approach based on a business case to modernize operations with flexibly architected insurance solutions that integrate finance, risk and actuarial functions throughout the business.

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Chapter 1

Implications of accounting change

The accounting of insurance contracts under IFRS and US GAAP will result in increased volatility in financial results and shareholder equity.

This will result in heightened scrutiny by internal and external stakeholders over the judgments, data, systems and processes used to measure insurance assets and liabilities. 

In response, management may need to reconsider pricing, business mix, sales channels and other characteristics of the business. Only time will tell which responses will be most appropriate, but it is certain that senior leadership will need timely and insightful data to inform its decisions.

Insurers that are better able to articulate their investor story, accurately steer consensus expectations and proactively address implications of the new accounting and reporting regime will undoubtedly have a competitive advantage against peers.

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Chapter 2

Customized technology solutions

Accounting change represents a fundamental transformation not just in financial statements, but in how insurance companies operate.

The core challenge is that older accounting systems were built to aggregate actuarial and risk data for external financial reporting without the capacity for more granular estimation of the underlying cash flows. Meanwhile, older front-end business systems built to collect transactional information typically lack the precision or efficiency needed for integration with accounting systems. These legacy platforms, either on the accounting side or the business side, will be hard pressed to handle increased transparency and requirements for more precise data while still meeting quarterly and annual reporting deadlines.

Standing up a rules engine between legacy front-end and accounting systems is a significant endeavor, and one that few firms with legacy systems would be able to complete to meet the upcoming IFRS 17 and LDTI deadlines. Unless an insurer has completed an end-to-end transformation within the last five to seven years, accounting change requires modernization, not modification. By far, the fastest and least expensive path to modernization will be to utilize flexibly architected, cloud-based actuarial and accounting solutions.

Modernized insurance solutions:
  • Run in the cloud, substantially reducing the cost and time of delivery while generating tangible expense reductions
  • Allow convergence between finance, risk and actuarial functions through cloud-based APIs and other approaches to connectivity
  • Support “straight through” automated financial reporting to meet the requirements of accounting change

Deployment of a modernized solution is by no means a straightforward proposition, as the software requirements will be dependent upon the specific characteristics of each underlying line of business. Accordingly, there’s no single off-the-shelf rules engine currently supporting the entire range of business requirements for accounting and reporting on insurance and reinsurance assets and liabilities.

The technology needs to be carefully tailored to the insurance products, which require a hands-on approach to deployment that involves stakeholders throughout the enterprise. Moreover, it’s not just a matter of capturing incremental data elements, but also ensuring that business practices are capable of evolving to improve underlying business results in an environment of increased scrutiny. This calls for a platform that supports ongoing transformation in line with evolving business needs.

EY and SAP bring to market a capability to help insurers transform financial reporting and implement accounting policy changes

Read more

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Chapter 3

Integrated, cross-functional approach

Modernization for accounting change requires an integrated approach from multiple functional and business areas within the organization.

  • It’s not merely a finance and accounting project. Even if the results are targeted for financial reporting, the scope of change goes way beyond what the CFO’s office can undertake on its own.
  • It’s not merely an actuarial project. Even though actuaries are intimately involved in the valuation of insurance contracts, this calls for an industrialized process implemented within the business.
  • It’s not merely a line-of-business project. The frontline sales and support teams will need to react to knowledge about how products are evaluated and reported in financial results, which requires information provided from elsewhere in the organization.
Making waves over the airwaves

Long-duration targeted improvements to US GAAP webcast series

The insurance industry faces new challenges from new GAAP accounting rule ASU 2018-12 for long-duration contracts.

The result will be a converged operating model that brings together finance, risk and actuarial within a modernized IT architecture that delivers timely information to management and lines of business throughout the organization.

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Chapter 4

Building the business case for modernization

By operating in a converged operating model underpinned by technology, companies may achieve a variety of benefits.

Although modernization will necessarily involve a partnership with the chief information officer and participation of several other organizational stakeholders, actuaries and accountants have been first to understand the magnitude and implications of accounting change. Accordingly, it will be incumbent upon finance and actuarial teams to create a business case that achieves a shared benefit by working together with executive leadership throughout the organization.

  • By having finance, risk and actuarial functions operating together in a converged operating model underpinned by modern technology, companies may achieve benefits in:

    • Lower operating costs. Deployment of a cloud-based solution will lead to direct reductions in capital expenditure with potential for operational expenditure reductions as well.
    • Relevant financials. The ability to provide complete, relevant, insightful and timely information about the measurement and movements in insurance and reinsurance assets and liabilities to both internal and external stakeholders will be a competitive advantage for insurers that get it right.
    • Better decision-making. Better understanding of the financial results will lead to better decision-making. Management will be more prepared to take timely action on unprofitable or uncompetitive products.
    • Future-proofing for industry changes. In the years following accounting change, there will be inevitable changes in industry structure. Even if it’s too soon to predict exactly how the marketplace dynamics will play out, investing now in a converged operating model supported by a well-architected technology platform will preserve agility and flexibility for the future.
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Chapter 5

Critical success factors

When developing business cases and strategies, there are six critical success factors for modernizing in response to accounting change.

  1. Implementation will require an “agile” approach. If design decisions made early in the process are too rigid, there’s a greater chance that major midcourse corrections will be required once you fully grasp the extent of the business requirements.
  2. Involve everyone early on. Actuaries may consider one set of solutions, while accountants may consider another. This involves not only actuarial and accounting, but also operations and frontline staff — so include everyone throughout the process, with the expectation that you’ll learn as you go.
  3. Assess your current competencies. Some companies are excellent at liability valuation, while others excel at financial planning and forecasting. Knowing your company’s strengths and areas for improvement will affect your choice of solutions.
  4. Make decisions after you understand the implications. Understand the impact on operations and financial reporting and the cultural ramifications, and then compromise on the best approach.
  5. Build upon a solid technology infrastructure. Look for a cloud-based platform with API-based connectivity, business rules that can be embedded directly into frontline operations and a user-friendly interface that allows business users to customize rules to their evolving needs without needing to bring in programmers. These capabilities have been proven to be essential for a modernized technology infrastructure.
  6. Don’t delay. Given the industry-changing implications of accounting change, firms need to act now to transform investor perceptions, realign executive incentives and redefine how they operate.

Summary

By providing more extensive detail of financial results, IFRS 17 and long-duration targeted improvement (LDTI) or accounting change — will transform the financial statements of life and health insurers, certain property and casualty insurers and reinsurers, with significant implications for investor perceptions and executive priorities throughout the insurance industry.

We explore the urgency for modernization so insurers can thrive with an operating model that delivers flexibility to respond to changing stakeholder perceptions brought on by accounting change.

About this article

Authors

Evan Bogardus

Ernst & Young LLP US Accounting Change Leader, Insurance FAAS Partner

Experienced Partner. Works with insurance companies of all natures and scales. Skilled in financial accounting and reporting. Expert in FP&A and metrics production and analysis.

Chad Runchey

EY Americas Insurance Financial Performance & Risk Leader

Career EY’er. Educated in Madison, interned in Hartford, started in Chicago, now working in New York. Leveraging an actuarial background to help clients solve their challenges.