Will you be ready to celebrate IFRS 17 compliance on 1 January 2023?

Having just closed one year and opened another, I’d like to reflect on some of the great work our insurance clients and EY teams have been doing all around the world to prepare for IFRS 17 and IFRS 9 implementation. I’ll also share some thoughts on what’s ahead in 2022, particularly for small and mid-sized insurers.

2021 was an important year for firms that completed their first dry runs on the new standards. This step provided a strong basis to think strategically about managing and steering the business under #IFRS17 and #IFRS9. It also provides a solid foundation to drive broader transformation of finance, risk and actuarial data and processes. Before discussing 2022 priorities, I owe an enormous thank you to my clients and EY teams whom I’d personally like to celebrate. I am proud of the global community of almost 5000 professionals we have built at EY with skills spanning accounting, actuarial, data and technology to provide end-to-end support for IFRS 17 and insurance finance change. More than 70% of our IFRS 17 projects last year have included a component of finance data, system and process transformation, illustrating just how many of our clients are seizing the opportunity for strategic change.

So, what are the IFRS 17 priorities for 2022?

While much work has been done, the IFRS 17 implementation deadline is just a year away. That means finance and accounting leaders across the insurance industry are understandably focused on the final tactical steps necessary to achieve compliance. Many larger firms have this generally under control, so I expect attention to shift relatively quickly towards optimization of the processes and systems. The question of how to best explain performance under the new standard to investors and analysts also requires careful considerations by senior finance leaders at large carriers. My previous posts?in this series have touched on these areas. ???

?At small and mid-sized insurers, however, I expect the push towards compliance will dominate the agenda throughout 2022, as they typically have smaller finance teams and fewer resources to allocate to large-scale initiatives like IFRS 17. Some firms may have only started their compliance journeys very recently. Based on our experience, I think the following steps will help these firms make the best use of their remaining time and enable them to cross the finish line with confidence.

Finding the right IFRS 17 solution for small and mid-size insurers

The needs of smaller firms with respect to IFRS 17 are very different from large groups. I am thinking specifically about regional insurers in countries that have IFRS as a local standard, monoline listed P&C carriers and insurance subsidiaries of banking groups. For many of these firms, IFRS 17 reporting is something that just has to get done, and not something that offers much strategic upside.?

A tactical approach may well make complete sense for many of these insurers, as their market niches are well understood by investors, especially in contrast to the opaque financials of large life and composite insurers. The largest carriers must develop clear and comprehensive narratives to explain their performance under IFRS 17 to analysts. Smaller carriers often have an easier story to tell, because of their simpler performance measures (e.g. combined ratios and premiums). Because Solvency 2 and rating agency capital are typically more important for these insurers and because they have already invested in communications on these measures, IFRS 17 is more like a compliance exercise than a transformation opportunity.?

Still, there are a few challenges to be noted. For instance, even though the premium allocation approach for short-tail business under IFRS 17 can look relatively similar to current accounting, there are enough differences in the detail of the calculations and the basis of disclosure to trip up those unfamiliar with the standard. It’s also worth noting that longer-tail P&C business needs to be accounted for under the building block approach, which is based on discounted cashflows. Some smaller firms will lack the tools to make these cashflow calculations but understanding the details behind them is important to get them right. Relying on emerging industry standards can help manage the risk of getting it wrong.?

The right tech for the job

So, what is the best approach for smaller carriers to take on IFRS 17 implementation? Unsurprisingly, a strong tech solution holds the key. Ideally, a standardized, out-of-box solution will provide the core calculation, accounting subledger and reporting capabilities based on a robust set of accounting policies to deliver the information that regulators and investors are looking for. Compliance will take precedence over customization, as most firms will not need to tailor their IFRS 17 reporting tool to any significant degree.?

Transparency is another critical feature, as auditors will need visibility into how calculations are structured and executed. It’s worth providing a caveat regarding transparency: some IFRS 17 technologies on the market today function as black boxes, with limited visibility into the calculations.?

As with any other technology that supports finance, risk and actuarial, insurers will want to ensure their IFRS 17 solution is secure and has the necessary application programming interfaces (APIs) and microservices for easy integration with existing platforms and systems. Specifically, finance leaders should look for direct connections to transaction data sources, flows from specific contracts and the ability to access and post general ledger (GL) entries in automated fashion. These features will streamline calculation and reporting processes, eliminating the increased cost and higher risk of manual steps in IFRS 17 processes. Cloud-based solutions also provide an advantage by offering automatic updates to calculations and other functionality as the accounting standard evolves, as it inevitably will.?

EY’s experience-based answer

We have gained deep insight into the needs of smaller insurers because we’ve been working with some of them on IFRS 17 for several years. And that’s how we came to develop the EY Reporting and Calculation Platform (RCP). The first version of the platform was built in direct collaboration with five small and mid-sized insurers. Last year we doubled down on our investment in the platform and under the leadership of Yannick Cortese and Utku Meshur, took the tool to global leadership in its segment within eight months.?We have refined and enhanced the cloud-based tool repeatedly through these implementation and managed services engagements.

Today, more than 23 insurers worldwide are using RCP, in Hong Kong, the UK, Australia, Canada, the Middle East and other markets. So far, it’s proven effective in meeting insurers’ internal deadlines and – perhaps more importantly – staying within implementation budgets.?

At the heart of RCP are calculation methodologies designed to meet IFRS 17 requirements, with additional accounting capabilities to match local guidelines. RCP tools generate IFRS 17 postings and feed them directly into the GL. RCP and its individual calculating or reporting modules are available via private or public cloud, with on-premise or managed services arrangements. Because no coding is required to adjust modules in line with company accounting policies, RCP virtually eliminates the need for internal IT support. Further, management can focus its attention on managing the business, since leaders can have confidence that IFRS 17 requirements are being met.?RCP has thus become the solution offering the largest functional coverage and the most flexible deployment capabilities to match the unique requirements of individual insurers.

The bottom line: getting to IFRS 17 compliance quickly, efficiently and confidently

In working with all types and sizes of carriers to address the big challenge of IFRS 17 implementation, I’m proud of the way the EY Insurance team has collaborated to design holistic solutions to meet clients’ unique needs and offer tangible return on investment. RCP is one such solution, giving small insurers the specific capabilities they need to achieve compliance in a highly automated, repeatable and transparent fashion.

In this sense, what’s true for the largest insurers also applies to smaller firms: because IFRS must be done, it should be done as efficiently and effectively as possible. RCP definitely meets that criteria for small and mid-sized carriers.?I’m looking forward to working with many of these clients during 2022 to implement IFRS 17 with confidence!

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