As the clock ticks down to IFRS 17 implementation on 1 January 2023, many insurers around the Middle East (and elsewhere) have little time to waste in reaching decisions about how they will deliver numbers on time. That is further brought home when you consider that the actual implementation date is somewhat misleading due to the need to be able to demonstrate an IFRS 17-ready starting balance sheet for 2022. But, as they make those decisions, they will need to find a balance between the expediency that ensures they meet the deadline and preparing in such a way that will make future year submissions more straightforward and efficient.
Eyes only for the clock could lead to issues down the track, for example, in being able to explain numbers and what they mean to management and shareholders, in exacerbating resourcing concerns and key person risk, or in the creation of technology ‘black boxes’ that limit transparency and the analytics that could serve future needs.
For companies that haven’t yet decided, or are unsure, about their systems requirements, bringing some insight to three important overarching questions could help them strike that balance.
Choosing the right system poses insurers the dilemma of whether to quickly select the system and fit data and disclosures to its specifications but run the risk of selecting a system which is not aligned to their requirements versus defining their own requirements fully and then deciding on the system with the risk of causing delay to the entire IFRS 17 project?
The answer, of course, is different for every company. Various accounting policies will shape the functional requirements, but there is a bigger picture to consider also.
“What companies should bear in mind is that common practices and accepted ways to interpret the standard will evolve over time.”
What companies should bear in mind is that common practices and accepted ways to interpret the standard will evolve over time – and indeed there are many aspects of the requirements that are still being debated. Setting up a system is not a one-off process. The decision taken, while naturally remaining conscious of the timetable, needs to be accompanied by a roadmap of how the company will address development of the overarching process and the supporting tools, particularly in the early years after IFRS 17 implementation. The reality is that either the insurer itself or the third-party system provider(s) will need to keep up with the emerging practices.
Ultimately, IFRS 17 involves finance transformation and, as in any large transformation process, having clear goals at each stage and planning the evolution of the system to meet each set of checkpoints is vital, along with strong leadership and accountability. In terms of functionality, some elements will be important to individual companies, whilst others might not currently be important. Companies should make a decision based on a good fit for their criteria, but ensure they understand how features may evolve over time and reconcile both of these with their needs. It will be important to assess the consequences of each decision and balance the pros and cons before making a clear decision. Contingency plans will also be essential.
In some cases we are seeing that initial decisions have led to a realization that a system, either created in house or bought, isn’t able to meet particular needs, forcing some insurers in the region to look hurriedly for alternatives. Nor is this confined to the Middle East. We have seen many companies globally, for example, that have two systems and CSM (contractual service margin) engines working side by side to hedge their bets, and also because they found out that what they were sold was not always living up to the needs of the company.
This highlights how contingency plans should identify which parts of a solution can be adapted if there is uncertainty around whether it has the appropriate functionality.
If we were to highlight the key things to consider as part of the high-level question, they would be:
Important starting points on this question are be wary of cheap and cheerful, but also be wary of the behemoth multi-million dollar systems offering add-ons. IFRS 17 is not just an accountancy or financial standard anymore; this is a joint actuarial and accountancy standard that requires teams and systems to work together with the support of IT and technology teams. Solutions need to reflect that.
In essence, the challenge is three pronged. Finding a system that caters as widely as possible for combined IT, finance and actuarial needs should both enhance the quality of outputs and reduce costs.
Our advice would be to prioritize five things:
Regarding potential pitfalls, buying an extension to an existing system just because it has the IFRS 17 label on it without checking it can do what is needed is dangerous. A system is made up of many different parts, and some are more important to individual companies than others. PAA is a good example as it’s not as easy as it might seem. The investment component is another grey area, as is outwards reinsurance. In some cases, these will be irrelevant, in others they will be critical.
Then, there is the issue of how practical a system will be during a business-as-usual quarter close: who will do what, how long will they have to do it, and will it be possible? Workarounds and waiting on information from unconnected systems will be a real drain on time. These are very real, practical issues that highlight the need to understand the full information flow involved in IFRS 17, from initial data extraction to publishing of accounts, with all the requisite notes and disclosures.
And a final and crucial thing to watch out for is whether what is intimated as being ready and available actually is! Many (if not all) vendors are still developing their solutions, particularly in relation to the requirements in the recent amendments to the standard.
Moving on to best practice, IFRS 17 requires harmonious integration of many departments, systems, data and controls. The eventual solution will need to be robust and yet clear in how it works in order to adhere to audit requirements. Materiality will be a valuable tool to help decide on which parts are critical to a company, and which are not going to change the result. A system will need to allow all of these things to happen, and so it is vital to understand how this combined system will work practically, making the most of where shortcuts can be applied appropriately.
“IFRS 17 requires harmonious integration of many departments, systems, data and controls. The eventual solution will need to be robust and yet clear in how it works in order to adhere to audit requirements.”
Proof of concept projects or other ways of using tools on a limited basis to determine what they can and can’t do, and whether they can or can’t fit into a wider system architecture, can be valuable to spot any potential obstacles.
The fundamental requirement for all tools is the data feed from core systems. So, companies need to make sure they have thought about what they need out of the system and hence the level of detail required for the calculations, which should then be considered when setting initial assumptions. It is very easy to ask for an immense amount of data, but this needs to be balanced against the cost of delivering it and the value that it provides.
And last but not least, when buying in a system the selection process shouldn’t be run by one department, e.g. accounting, as this will give too narrow a view. It needs multiple stakeholders from different areas (e.g. including actuarial, who will have to look after the assumptions, inputs and calculations side of things) to ensure that a balanced view is taken of the pros and cons of each solution.
The crux of the matter, as we see it, is to treat IFRS 17 as a finance transformation project in its own right, recognising that technical understanding of complex issues needs to underpin the processes, tools and resourcing requirements.
That said, there is no getting away from the mounting time constraints that mean that companies across the Middle East can’t afford to delay on putting systems solutions in place. The rider to that is that companies will, we believe, need to bear in mind whether their current strategy and plans are developing in a way that is sufficiently flexible and transformative in nature to aid business as usual activity after 2023. System dead ends are the last thing insurers will need either before or after IFRS 17 implementation.
Matt is the Insurance Consultancy and Technology Leader for the GCC. A Senior Director with over 20 years’ experience in the London Market & Lloyd’s and personal lines insurance, Matt also has more than 15 years’ experience of the insurance industry in the GCC, ranging from reserve reviews, capital model builds, and price optimisation through to strategic business planning for (re)insurers.
