IFRS 17 solutions: build or buy?

Many insurers who have to implement IFRS, the new international accounting standard on Insurance Contracts, are well advanced in their preparations – having completed initial impact assessments and solution design with the focus now moving to implementation. High up on the ‘to-do list’ will be determining how best to design and implement a cost-effective, but robust, systems solution. 

One of the key design decisions facing concerns these insurers is whether to build an IFRS 17 solution internally or to appoint a vendor to deliver an off-the-shelf product. On the one hand, a self-build approach provides an opportunity to tailor the solution precisely to the insurer’s specific needs. On the other hand, an off-the-shelf solution brings a standardised end-to-end model that can then be tailored to the individual insurer. 

Each insurer must consider its own needs. However, there are several advantages to using a third-party vendor solution. 

Advantages of vendor solutions 

1.    Firstly, vendor solutions provide a well-controlled environment designed specifically for IFRS 17 data management. Given the complex requirements of IFRS 17, a well-controlled environment with a full reconciliation framework and an accounting engine capable of making the right journal entries is critical to an efficient financial reporting close process. Designing a robust and well-controlled process in-house from scratch presents a substantial challenge. It also comes with a delivery risk, given the short timeframe left to implement IFRS 17 before 2022.

2.    Secondly, by appointing a vendor, insurers gain access to system support, product upgrades and training for their staff. Many vendors also offer cloud-based hosting for their solutions. Self-building introduces some risk in that the insurer will not necessarily have the technical support for future maintenance and knowledge sharing.

3.    Finally, although there is a cost to appointing a third-party vendor, building a bespoke in-house solution can also be time consuming and expensive, drawing in resources from across the business. Over the long term, the cost of a self-build solution may exceed the cost of appointing a third-party vendor – and the project risk and delivery risk will also generally be higher. Many vendor solutions have been, or are currently being, implemented in a number of organizations globally and so are being tested and improved over time. In contrast, an in-house solution – given its unique status – will generally be untested.

 Actuarial or sub-ledger solution? 

If opting for an off-the-shelf solution, the next consideration is what type to choose. Available solutions broadly fall into two categories: actuarial-based and sub-ledger.  

The first of these options – actuarial-based solutions – reflect the fact that actuarial models will be needed to produce fulfilment cash flows and claims reserves. These can be extended to produce other IFRS 17 variables such as the contractual service margin (CSM) and risk adjustment for non-financial risk. By performing as much of the granular calculations and aggregation as possible in the actuarial system, insurers can minimise the amount of detail required in the general ledger itself. However, insurers may need to purchase some additional software to manage the data and assumptions outside of the actuarial models in a well-controlled environment. They are also likely to need to upgrade or replace the accounting posting engine, given that the chart of accounts in the general ledger will require a major overhaul for IFRS 17.  

Sub-ledger systems may be attractive because they can sit between the actuarial system and the general ledger. They can take cash flow information from the actuarial system and actual cash flows from other source systems (such as premium, claim or expense systems) and perform both the granular CSM calculations and the detailed accounting posting rules and aggregation, which can then be input into the general ledger.  

Sub-ledger systems may offer the best of both worlds by providing a robust control environment for both the CSM calculations and accounting. The sub-ledger can also store data at highly granular level, allowing insurers to drill into their profitability drivers. Most sub-ledger solutions offer a “Financial Cockpit”, enabling detailed business analysis and tailored management reporting.  

 Identifying the right solution 

Many solutions are available – all with different strengths and weaknesses. Choosing the right solution will depend on clarifying the insurer’s goals and the desired target state, as well as understanding the current capabilities of the end-to-end reporting process – factors to be considered in a future blog.  

For more on this topic listen to the latest episode of our IFRS 17 podcast series. In this episode Janine Donelly, a finance performance improvement partner, is joined by Martyn van Wensveen, EY’s Asia Pacific IFRS 17 leader based in Hong Kong to discuss IFRS 17 solution design and implementation. Click here to listen.