With less than two years left to make adjustments, many financial institutions are rigorously preparing their processes and systems to accommodate the changes required by the IFRS 17: Insurance Contracts standard. At the same time, the International Accounting Standards Board (IASB) is still in the process of finalizing the details of the standard, providing financial institutions—insurers, especially—with a moving target that will continue to change until January 1, 2023.
Between then and now, how can financial institutions prepare themselves for the changes and demands brought about by the implementation of the new accounting guideline? Which areas should a company pay more attention to so that they can ensure that they’re ready for IFRS 17?
What Does IFRS 17 Bring to the Table?
IFRS 17 is set to replace IFRS 4, and this new standard will significantly impact the accounting processes used by financial institutions that issue insurance contracts. The IFRS 17 standard is designed to make insurance contracts more transparent.
In particular, the accounting standard requires insurers to recognize profits as they deliver services as well as provide information about insurance contract profits that they expect to realize in the future. This means that at the end of each reporting period, the carrying amount of a group insurance contract is made up of the sum of the liability for both the incurred claims and the remaining coverage. The liability for remaining coverage is made up of fulfillment cash flows (FCF) related to future services and the contractual service margin (CSM) of the insured group to date. The liability for the incurred claims, on the other hand, pertains to the FCF related to the past services that the group has been allocated with at that date.
This added transparency comes at a cost, however. The new standard will affect the way that existing insurance contracts are reassessed and regrouped, and it will also require considerable changes in reporting and disclosures that depend heavily on data and modeling inputs. What’s more, the transition into IFRS 17 is sure to affect data management, as companies need to be able to accommodate, analyze, and aggregate a huge amount of data on the implementation date itself. The data management systems will require more storage space as well as finer controls and workflows to ensure the timely delivery of quality information. To carry out seamless compliance, a financial entity needs to foster an open line of communication and collaboration between different disciplines, such as actuary, finance, and risk.
How Can Insurers Prepare for the IFRS 17?
Some people see the rollout of a new accounting standard as an additional burden on financial institutions. There is a bit of truth to this, as preparing for the IFRS 17 rollout in advance will undoubtedly require a lot of additional resources from financial entities, but that’s not all there is to it.
At the heart of it, the implementation of the new accounting standard presents individual companies with the perfect opportunity to streamline and future-proof their processes, thereby reducing subsequent compliance costs. But before they can enjoy these benefits and more, insurers and financial institutions should make sure that their systems and processes are prepared to take on the challenge of implementing IFRS 17. Below are some of the areas that insurers should focus on so that the adoption of this new standard will positively impact their company:
Under IFRS 17, insurers are required to account for insurance contracts so that the current measurement of the future cash flows is combined with the recognition of the profit throughout the time that the services are provided. To successfully comply with this, insurance companies need to ensure that they have access to accurate and timely information.
Unfortunately for many companies, the information required to carry out these calculations is largely found in legacy siloes. This, in turn, can make it difficult to access relevant data on the date that it is needed. Also, many insurers are still using data management systems that are configured specifically for complying with IFRS 4. Putting together a report that adheres to IFRS 17 using a legacy data system that’s configured for an older accounting model will require a lot of manual work, and it will make it more difficult for the compliance team to find a single source of trustworthy information.
Adopting a modern and highly flexible data management system is a good step in making sure that your company is ready for this task. More than anything, a future-proof data system will help ensure that your company can easily adapt to more stringent reporting requirements. Choosing a new and unified data platform will allow the insurer to meet the prerequisites of the new standard, usher digital transformation within the company, and make it easier for the company to ascertain that its processes will stay relevant and useful for future needs.
Reliability of Measurement
Extreme granularity is a requirement for IFRS 17, especially if your company is aiming to minimize the cost of compliance. In addition to policy-level reporting, insurers are also required to group policies together and consider their entire lifecycles whenever carrying out calculations or reporting. It’s important, therefore, to pay attention to minute details and definitions while implementing the new accounting standard. IFRS 17, however, does not provide guidance on discount rate determination, risk margin, and calculating adjustments, among others.
To come up with a reliable measurement system, insurers need to set their sights on a single data model with the native ability to encompass both actuarial and finance processes. For companies that still use heterogeneous actuarial systems, implementing IFRS 17 is the perfect chance to adopt a more homogenous level of cash flows among various entities within a particular group. Pursuing finer granularity, in turn, will allow insurance providers to target policy-level fulfillment cash flows.
Operational efficiency is always a concern when adopting a new accounting standard. This is especially important for the implementation of IFRS 17, as complying with this standard will require the use of more granular and aggregated information and higher levels of data management. To hit the ground running on the implementation date, insurers should look into data management systems that are geared toward extensive automation, one that can accept inputs and offers room for the reconciliation of groupings as needed in other reports. Ideally, the system should provide the insurer with the option to automate data capturing, quality assessment, and report generation, among other processes.
Poised for Change and Improved Transparency
Companies have the option of implementing IFRS 17 earlier than proposed as long as they can also implement IFRS 9: Financial Instruments. If you’re not doing it yet, it’s best to look for solutions that will help your company ease into this new accounting standard before its official implementation date. The good news is that there are insurance products that combine both financial instruments and insurance contracts that you can use, and these allow their users to streamline their response to the highly complex needs of these new accounting standards. Looking into these solutions is a great option for early adopters that aim to leverage the rollout of IFRS 17 as an opportunity to drive the growth of their company.