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Finance and process transformation: how to find the silver lining in IFRS 17

By Bernhard Gose | February 4, 2019

Rather than simply begrudging further regulatory change as another time-consuming, complex and expensive burden, far-sighted organisations are using the introduction of IFRS 17 as a catalyst for more fundamental system and process changes that ultimately deliver significant business advantages, as well as making IFRS 17 implementation easier, quicker and cheaper.
Insurance Consulting and Technology

Historically, system and process evolution in insurance has addressed a small number of needs at a time – often in isolation from other business considerations.

Even before the full actuarial and financial reporting implications of the IFRS 17 accounting standard became clear, some insurers had started to take a more expansive view of system and process design. Now, with preparations (hopefully) in full flow, more organisations are recognising that effective finance and process transformation deserves some updated thinking: considering more far-reaching change and adopting new methods to not only address reporting IFRS 17 but to actually manage IFRS 17 and to support the wider needs and operation of the business.

So what are these organisations hoping to achieve and what are the options for reaching their goals? Let’s consider the potential benefits first.

pie chart showing the benefits of finance and process transformation

Chasing the benefits

Savings in run cost

Reducing model run cost in a clever, effective and sustainable way is high on many insurers’ priority lists these days. For reporting frameworks, achieving this goal will often mainly involve freeing up those in-house staff and resources that are dedicated to reporting to perform more value-creating tasks. Typically, this is likely to require:

  • Fully automated production processes. To provide results earlier, usually more reliably and, if well designed, at lower cost.
  • Elimination or reduction of ad-hoc analyses. All analyses that have been required at least twice would ideally form part of the standard output of the fully automated production process.
  • Minimal and easy maintenance. Changing requirements cannot be avoided but are often the major longer-term cost driver in overall reporting. Minimal and easy maintenance requires thoughtful design because, after the build phase, future maintenance costs are locked into a large extent.
  • Efficiency in using technology. The main driver of cost isn’t the technology that companies use, but rather how they use it. For example, the cost efficiency of using the cloud can easily vary by a factor of 10 depending on the reporting framework design – especially the model structure design.
Faster and more reliable reporting

Insurers’ reporting frameworks are often the home of cumbersome tools that are hard to manipulate and that a very few people in the company know how to operate. Besides unacceptable key person risk, the result is reporting that can only be completed by the submission deadline with great difficulty, and without sufficient time for adequate review and analysis of results.

Addressing last minute delivery and the need for excessive manual work with faster and more reliable reporting is conducive to a more professional and productive work environment. For example, producing a detailed value-adding Contract Service Margin (CSM) roll-forward in such an environment is performed by machines overnight. Understanding the outcome is the human part of the work.

Improved in-force management

Improving in-force management, including cross-, re- and up-selling, requires progress in either underlying data, analyses performed with that data, or in the actions taken based on the insights obtained.

Actuaries have data and tools to perform helpful analyses, but not necessarily the time to think about the right questions. Conversely, in-force and relationship managers often lack data or insight into product mechanics and legislation to find the right answers. More effective in-force and sales management aims to break down these siloes to find the right questions and answers.

Technology and systems approaches

Moving on to the information technology infrastructure that will enable these benefits, there are basically three options:

Keep and adapt existing framework

One obvious way to approach finance and process transformation is to rely on and leverage past developments in the existing framework. But, unless that framework can fulfil certain criteria (see below), our experience is that in the longer term, full replacement is likely to be the cheaper, quicker and easier way to achieve and future-proof some or all of the goals already mentioned.

  • Dark processing”: The framework is already end-to-end automated, or most components and processes have deliberately been designed for automation. Moving reporting frameworks that have been designed to be run manually, with a knowledgeable person monitoring the process, into a world of dark processing is typically less efficient and less effective than complete re-design.
  • Error handling: In many reporting frameworks, error handling is limited to top-down reasonability checks on the end results, often accompanied by an analysis of the various changes – again usually limited to a handful of steps. This way, usually only very serious material errors are recognised. In any professional automated process landscape, the error handling is performed step-wise and bottom-up, so that each step of the entire process contains criteria for failure or success that determines progression. In case of failure, the process returns an error statement and a request for correction.
  • Flexible, modular design: Many frameworks have evolved over time by adding multiple modules in a relatively arbitrary manner. A future-proof framework will have been designed, instead of having evolved, and its flexibility will allow users to introduce any future changes in requirements by applying “powerful” changes – meaning something requiring little implementation effort but significant results. The framework should also preserve full flexibility for further powerful changes.
  • One-directional process landscape: Good reporting frameworks have a clear one-directional process flow. There are no counter-intuitive loops or backward flows that have evolved over time because one module has been built on top of another older module.
  • Governance: The framework has in-built governance, including an IT security model; rules for roles, responsibilities and access rights; and data handling, storage, and archiving. It should also offer accessibility of all data and tools; traceability of results back to their origins; repeatability of results production; robustness of tools and processes; and the relevant audit reports.
Re-design the framework

If your reporting framework does not meet the ‘Keep and adapt existing framework’ criteria, one possible way to solve the issue is to completely or partially re-design the framework. Either way, an effective re-design will require the following steps (in the stated order!).

  • Analyse requirements: Assess and take account of factors such as: Group structure and views (legal and managerial consolidation); reporting requirements; roles and responsibilities; data model philosophy (eg where database, where blob storage ); end-to-end process speed requirements; and requirements for accuracy and ease of analysis.
  • Design the process end to end:
    • Be radical in the design phase! Start with a green field site and let it be driven by the aspired outcome, never by which tools are already being used. Only once you have a clear view on the end state vision should you assess which existing pieces may be re-used. The task of designing the end-to-end process needs to be completed BEFORE the implementation starts.
    • The design needs to include the choice of roles and their responsibilities; process steps and their order; high-level definition of data flows to ensure the overall process remains one-directional; high-level choice of calculation methodologies and how methodology breaks are avoided; choice of data handling, data storage and data archiving methods; and the choice of software packages for the various needs.
    • Another core aspect in the design phase is shaping the modules. Interfaces work best when they are lean and straightforward, driven by natural data structures and generic in their layout. In IT projects, often around 80% of the effort and cost is spent on implementing the interfaces between modules – a primary source of inefficiency.
    • The initial design and implementation of the framework in itself is a key driver of lifetime cost because of the implications for on-going maintenance. If such shortcomings in the initial design become apparent, re-starting from scratch is often the best option for keeping run costs low.
  • Implement: Our experience has led us to few general recommendations which may partly seem counter-intuitive on first sight. Keep the team small and select excellent people only. Break the work into large blocks and assign each to a single team member. Keep responsibilities and interfaces clear and simple; however, each team member has to understand the end-to-end big picture and how his or her respective own task interacts with all other tasks. Give all team members responsibility and freedom; make them “burn” for the vision. Create a healthy relationship between time spent on actual work and on project management (i.e., no more than 20:1).
Rent a ready-to-use, tested plug-and-play framework tailored to your business

Even with a completely redesigned framework, you will still need to maintain and update it, adapting it to comply with new regulations and legislation, programming it to model new products, and so on. If you would like to obtain all the advantages of a fresh re-design, but avoid the potential risk and pain associated with designing, implementing and future-proofing a bespoke framework, an alternative is to rent a pre-built reporting framework, designed to ensure it remains future-proof in the long term. Among the business benefits that Willis Towers Watson’s rental reporting framework can offer are:

  • It reflects your product specifications as defined at inception;
  • Management rules and other specifics are reflected appropriately;
  • The approach to reflecting actual events in the reporting framework allows you to obtain relevant additional insights into specific behavioural differences between the various sub-portfolios; i.e. it supports in-force management as well as cross-, re- and up-selling;
  • You can introduce IFRS 17 in a comparably easy, quick and cheap way;
  • You can postpone many methodology decisions to a very late stage;
  • You move to one, single, consistent machine for applications such as IFRS 17, business planning, local statutory reserving, Solvency II, Swiss Solvency Test, your internal risk model, and asset and liability management;
  • You gain group wide consistency and comparability between entities down to a very granular level;
  • You can go live quickly and with very little effort;
  • On-going maintenance and releases ensure sustainability and consistency over time;
  • The solution is cloud-based and plug-and-play and therefore involves very limited effort for IT departments;

Willis Towers Watson’s rental reporting framework further offers considerable benefits regarding project investments and run cost:

  • The high degree of automation can usually free up in the order of 60-70% of the actuarial team’s time to perform other, value-adding tasks instead;
  • We pre-finance the implementation; a pre-defined annual rent covers the initial implementation, all changes directly induced by regulatory developments, and the software licence fees;
  • The framework helps reduce considerably overall project cost related to, for example, regulatory change in implementation efforts and far beyond;
  • Actual cloud usage cost is variable but, based on our experience, is usually low because of the very specific framework design.

IFRS 17 introduction – a clean start can be easy, quick and cheap

Finance and process transformation in insurance companies is not new, but the scale of the challenges involved in IFRS 17 provides a potential ‘eureka moment’.  Do insurers keep topping up and refreshing the bath water (their existing frameworks), or run a completely new bath?

At present, it’s surprising to us how many insurance companies are choosing the former, with the prospect of running big IT projects and spending large amounts of money in the course of introducing IFRS 17. Often, in our view, this stems from a belief that the existing framework ought to be good enough to cope with the new requirements and that their expert staff will make it work - somehow – or that such a scenario is unavoidable because of cost.

Yet simply focusing on ‘faster’, or ‘better’, or ‘cheaper’ adaptations of existing processes will only prolong the pain that many companies and their employees may be feeling as a result.

Changes that encompass all of ‘faster, better, cheaper’ for the process in question, as well as enable companies to make better use of information in the business more widely, can offer a way for companies to better keep their reporting heads above water in preparing for IFRS 17 and beyond.

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