Unlocking the transformative potential of IFRS 17

If you’ve been anywhere near financial reporting in insurance over the last few years, IFRS 17 has probably become your passion, your most common headache, or a strange mixture of both.

The implementation of IFRS 17 has not only created significant challenges for insurance companies and reporting teams, but also presents a unique opportunity for transformation. It has had a profound impact on data management, assumption calibration, model structures, results analysis, internal controls and reporting processes and timelines, waking many up to the pressing need for modernisation of their business through automation.

With IFRS 17 now in place, what does IFRS 17 day two entail? ?How can these new systems and processes for producing IFRS 17 results be optimised to create additional value?

In this blog, we explore the multifaceted world of IFRS 17, delving into the opportunities IFRS 17 day two presents for insurers to transform.

Data management: the crucial foundation

Data is the foundation of financial reporting in the insurance industry, and IFRS 17 places a premium on data quality and granularity. High quality and efficient data extraction, transformation, and loading (ETL) activities become make-or-break due to increased granularity of calculation under IFRS 17. In addition, there is a need to balance prospective calculations (like best estimate liability and risk adjustment), with retrospective balances (tracking the contractual service margin (CSM) and loss component (LC)) as well as merging actuarial and accounting data to allow for premium and other variances.

In our experience the primary weak point of a CSM calculation is not in the CSM calculation itself, but often in the data feeding into the CSM engine. It's essential to assess the actual days required to run and resolve issues in these data processes.

Going forward we see data convergence as a critical consideration for the future insurer. Insurers need to align data seamlessly across different reporting regimes, be it local GAAP, IFRS, or regional solvency standards, to ensure efficiency in reporting, and consistency and comparability across reporting frameworks.

The tools used for data management, extraction, transformation, and analysis should be re-evaluated. Management ought to ask themselves whether the toolbox and skillset of their teams is moving them forward or holding them back. A modern data architecture is required to store, manage, process, transform, analyse data and act as the single source of ‘data truth’. Open-source software, like Python or R, can provide cost-effective, flexible, and future proof alternatives for data transformation and analysis.

Assumptions: the actuarial building blocks

IFRS 17 actuarial assumptions are fundamental to estimating future cash flows accurately - the core of insurance contract measurement. The days required for calibrating, testing impacts, and documenting assumptions must be quantified – if you could eliminate most of the time spent defining assumptions at the current level, what would you do with the balance??

By leveraging a strong data foundation, insurers can transform these processes into real-time exercises with live dashboards that facilitate quicker, better informed decision-making. With the potential to eliminate most of the time spent defining and testing assumptions, insurers can redirect their focus towards other value-adding activities. Ultimately, resulting in a more agile and responsive actuarial function that provides better informed insights to the business.

Calculations: a complex web of financial projections

IFRS 17 introduces a higher degree of complexity in calculations, especially compared to previous standards.

Automation becomes crucial to accelerate the calculation process and reduce margin for error. A framework and culture that is built around automation can adapt to changing regulations and market conditions at a far greater pace than manual processes, ensuring compliance and competitiveness. Furthermore, building a robust automated control environment around the models is paramount.

Results analysis: unveiling financial performance

Transparency is a key objective of IFRS 17 but navigating results to understand what is really happening can be a challenge even to management internally. Data visualisation, real-time IFRS 17 performance benchmarking and scenario analysis tools facilitate comprehensible and information rich financial reporting.

Internal control framework: ensuring compliance

Enhancing the internal control framework is essential following the transition to IFRS 17. The scope of the internal overhaul necessitates a refresh of controls to ensure data accuracy, calculation integrity, and overall compliance. Automation within the internal control framework is vital to detect issues and maintain error free data and calculations.

Documentation of the end-to-end process: a crucial step

Comprehensive documentation is a critical step in a company’s IFRS 17 journey to ensure a smooth transition as BAU teams take over from project teams. It ensures transparency, auditability, and facilitates internal and external reviews. Well-documented processes and decisions provide a clear trail of how data was prepared, assumptions were set, calculations were performed, and results were analysed – also setting up the business to better spot process inefficiencies and get ready for upgrades.

Team composition and training: the human element

The composition of the team is a vital consideration. Actuaries and accountants play key roles in navigating IFRS 17 – but the future insurer ought to tap into larger skill pools.

Actuaries and accountants bring domain expertise, but data scientists, data engineers and software developers can support advanced data analytics, statistical modelling, and data visualisation requirements. Striking the right balance between these roles and reimagining reporting teams is essential to redefining the status quo.

As the regulatory and technology landscape continue to evolve, investing in ongoing training and upskilling have emerged as critical components for ensuring success. Investment in training and development not only supports compliance efforts but also unlocks the transformative potential of modernisation and innovation. By empowering team members with targeted upskilling and collaborative learning opportunities, insurers can ensure that they remain at the forefront of industry best practices and can leverage new technologies to improve efficiency.

Timeline to produce results: the transition challenge

Implementing IFRS 17 is a complex process, and it's crucial to account for the timeline required for each step of the process. Insurers should examine the total number of model runs and data transformation pipeline run times needed, as this can significantly impact the overall timeline and resource allocation.

Optimising and automating the new systems and processes for producing IFRS 17 results will mitigate risks, save time, reduce cost, and ultimately lead to a modern and future-proof actuarial function.

In conclusion

Navigating the IFRS 17 day two landscape is a complex journey that demands a transformative mindset that emphasises meticulous planning, efficient data management, and a forward-thinking team. The right tools, the right team, and the right approach will enable insurers to meet the ongoing IFRS 17 requirements and leverage it as an opportunity to enhance efficiency, transparency, and performance. While the journey may be challenging, it's a path to a brighter, more compliant future for insurers, with the expectation of greater insights and improved communication of performance.

We would love to hear your views on the perspectives we have shared. Please share your thoughts, insights, and experiences in the comments section.

?

The views reflected in this article are the views of the author and do not necessarily reflect the views of the global EY organisation or its member firms.

?