Countdown to compliance – it’s time for Australian insurers to get ready for IFRS17

Countdown to compliance – it’s time for Australian insurers to get ready for IFRS17 | Insurance Business Australia

Countdown to compliance – it’s time for Australian insurers to get ready for IFRS17

The following is an opinion piece written by Henri Wasjsblat, Director, Head of Financial Services Solutions at Anaplan. The views expressed within the article are not necessarily reflective of those of Insurance Business.

It’s an esoteric rule change for organisations outside the insurance industry – and a fundamental shake-up of the way things are done for those on the inside.

Issued by the International Accounting Standards Board (IASB) in 2017 and effective from January 01, 2021, IFRS 17 will change the way insurers create financial statements to ensure reports are presented to a uniform standard around the world.

It’s a development which will affect every Australian insurance company. For the first time, regulators and investors will be able to compare their performance and outputs with those of their competitors and counterparts internationally.

This harmonised system of tomorrow needs to be preceded by a significant compliance initiative and, two years out, Australian insurers need to plan rigorously to ensure they hit the deadline.

Gauging the effects of a new regime

Twenty years in the making, the IASB released its new accounting standard IFRS17 Insurance Contracts in May 2017.

According to a 2018 Global IFRS Insurance survey Deloitte commissioned to the Economist Intelligence Unit, less than half of the 340 senior insurance executives interviewed are strongly confident to meet the implementation date and close to 90% of them believe their system technology will require an upgrade.

The new standard represents a systemic change in the way insurance contracts are valued. It will necessitate a significant overhaul of financial and actuarial systems, processes, accounting and disclosure policies.

While the deadline is still two years out, insurers face a long journey towards compliance and are wise to begin the process now. Finance and ICT teams will need to collaborate closely to assess architecture gaps within the ICT infrastructure and ensure systems capture the change in reporting regime.

Capturing quality data

Complying with the transparency and reporting requirements of IFRS17 will be no easy ask. Under the new regime, insurers will face a two-fold challenge: generating and processing much higher volumes of data; and improving the quality of the information that’s captured.

Legacy infrastructure and data analytics tools may not have the flexibility and capacity to fulfill this requirement.

The problem may be compounded by the fact that siloed architecture is a feature of many Australian insurance companies. Finance, actuarial and risk management divisions typically run incompatible standalone systems.

Patching these together or extracting the requisite data for calculations from each system manually may seem like an expedient fix at first blush but it is unlikely to be the answer in the long term.

Manually intensive calculations are more open to error and auditing them can be a complex affair, if data has been extracted from an array of systems and calculation models, using a variety of different tools.

IFRS17 will make demands on the future as well as the present and an overhaul of technology may be needed to ensure these can be met.

Cash flow modelling and forecasting will need to reflect the new reporting regime and simulating the impact of a new product or a change in pricing on future IFRS17 statements will be a key functionality requirement. Producing these calculations using outdated and siloed systems is likely to be an ambitious and laborious undertaking.

Towards compliance – the technology checklist

So, what’s on the high-tech checklist for insurers for 2019 and 2020? They’ll need to address their technology solution requirements for Contract Service Margin calculations, IFRS17 compliant accounting systems, IFRS17 cost allocations, adapted planning, forecasting and management information to the new IFRS17 KPIs, and IFRS17 reporting and disclosures.

The implementation of systems to deliver the required functionality will dictate the need for sensitivity analyses and simulations, scenario modelling and IFRS17 impact assessments of any material changes to business.

Dealing with data more effectively

The current reliance on manual processes and legacy systems within the insurance industry’s finance function will need to change, as the IFRS17 deadline draws nearer.

Insurers will need to look towards collaborative and open platform solutions that can mine and exploit data from across the business, support the implementation of core reporting requirements and be agile enough to respond to scenario modelling and the what-if analyses the transition period will call for.

Insurers will need to assemble a substantial pool of information, from a variety of sources, in the process. This ‘data bank’ has the potential to become a hugely valuable resource, for those which adopt a unified platform to manage it.

Tony Trewhella, a consulting partner at Deloitte, says that insurers should start as soon as possible to run their initial PAA/BBA assessments, and they should also be, as part of the assessment, looking at a unified data platform to support the large volume of data required to support the regulatory requirements.

“In the past the level of detail required for IFRS17 was locked up within sub-ledgers and contract systems, and nobody could really get to it for insight purposes,” he said. “Now that they’re forced to unify that information, they can put layers of analytics on top of it and can start to really be an insight driven organisation.”

In addition to enabling IFRS17 compliance, such a platform can give insurers a clearer view of their contracts’ performance. A connected planning approach will enable them to gather data from various functions and view it in a single platform for planning and forecasting purposes.

Eliminating information siloes across the enterprise will ease data reconciliations, enhance the comparability of financial reporting and help insurers benchmark themselves against the best in the world.

For many insurers, IFRS17 compliance promises to be a long and complex journey in a relatively short time but the benefits will be significant for those who view the process as an opportunity to transform their finance functions into data-driven business units.