But what are the implementation challenges as insurers transition to business as usual (BAU)? Insufficient attention can create risks that may result in significant associated costs, be they hard dollars, time delays, difficulties caused by insufficient testing or potential reputational risk if things do go wrong.
IFRS 17 has been in the works for over 20 years. After a number of iterations, and wide discussions with various stakeholders, the final standard was published in the summer of 2020, effective for IFRS reporters for annual reporting periods beginning on or after January 1, 2023. Insurers reporting IFRS with a December 31 year-end will likely be publishing accounts on an IFRS 17 basis for the first time for interim and full year 2023 — and possibly quarter-end as well. At least one year of comparatives are required, and some insurers may choose two years and/or publish early a restatement to IFRS 17.
As a principles-based standard, IFRS 17 is not designed to offer guidance on specific items. Each company has to set its own route and lay its own tracks to achieve the standard. The standard requires a significant amount of judgement and interpretation. And to complicate matters, the sheer lack of consistency in the interpretation of items, or occasionally industry disagreement about the interpretation of certain items, doesn’t always make the end destination clear.
While there are many dimensions of risk, we focus on the following three key aspects:
Are there sufficient and appropriate resources to manage and run your IFRS 17 implementation project? The technical complexities associated with the standard mean there is a tendency for companies to overly focus on systems and software to get to the finish line. Important as these are, what about the people who are going to operate the controls?
While some companies have the luxury to afford to assemble teams that are dedicated to the task, many have suggested they will need to beg and borrow resources as they move down the implementation track. Their people are often already doubling up on their day job and IFRS 17 project work.
Moreover, the people who have most to contribute and who need to dedicate more time to this project are also the people who have the most experience and the most historical knowledge. Pulling these people off their day jobs to spend more time on IFRS 17 implementation will naturally require backfilling their day jobs with less experienced people or with people from different roles. So, a balance needs to be found between having the right people working on IFRS 17 and maintaining sufficient oversight of existing reporting.
While some companies have the luxury to afford to assemble teams that are dedicated to the task, many have suggested they will need to beg and borrow resources as they move down the implementation track.”
At some point the systems and processes will be transferred to the end users or the BAU team. By involving them early on in the IFRS 17 projects, they can work on acceptance testing and become familiar with the processes, becoming active users rather than passive bystanders. This should also create opportunities for them to provide useful and relevant feedback before systems go live as well as buy into and accept the project.
This creates its own set of issues, namely, how will the current BAU processes be impacted. Other statutory and internal management information reporting still needs to be done. We’ve seen varied approaches: Companies pull the IFRS 17 resources back into the BAU processes, backfill the critical BAU processes with external and temporary resources, or use external resources on the IFRS 17 implementation. Each has its own challenges, but it can’t be emphasized enough how important your go-forward BAU people are to the implementation process.
Managing data includes all the necessary inputs to determine best estimate cash flows, manage locked-in discount rates for the contractual service margin (CSM) if the general measurement approach (GMA) is used, grouping of contracts, and ensure appropriate loss recognition components and movements for reinsurance-held contracts where some of the underlying contracts are onerous (or even more complex, if they move to become onerous in the future). To manage these complexities, significant transformation effort will be required to make the data and data flow more robust, or to fill in data that is missing. In the past, actuaries would estimate liabilities where data are incorrect or missing, and that was generally sufficient. Under IFRS 17, such an approach needs to be reconsidered, since the actuarial systems now determine not only the liabilities but also the revenue.
Under IFRS 17, actuaries and actuarial models will determine the vast majority of the insurance revenue (defined as “expected claims”, change in risk adjustment and CSM). This is a significant departure from how income statements were historically developed, moving from “actual” results to “modeled” results. This requires identification and modeling of all of the business — not just most of the business — through valuation systems rather than relying solely on feeds from accounting or administration systems.
Process efficiency is critical due to the significant number of steps and the way they need to interconnect. There will be many more touch points, which will result in more places where things could go wrong, at least without some automation. Robust automation will move the required data from potentially many platforms in an efficient and controlled manner with minimal intervention, which reduces effort and allows more time for analysis of results. Additionally, it reduces the likelihood of errors from multiple manual touch points. Companies have only recently begun to pivot to invest significant time and resources in process design to ensure they can produce results in a controlled manner with sufficient time for analysis. Companies have developed homegrown systems, but commercial systems — such as the Willis Towers Watson Unify platform — that allow users to automate their processes and provide governance through appropriate audit trails are available. This controls architecture has already been tried and tested by us through Solvency II.
Repeating an earlier observation, IFRS 17 has many areas of judgment and a range of acceptable interpretations are possible. Those that are documented and consistent across business units and geographies will provide a stronger basis for decisions on compliance by those who sign off the balance sheet and income statement. It should also support testing of systems, especially situational testing and the need to understand the results that are emerging before companies go live with IFRS 17. As well, robust documentation is an opportunity to avoid key person risk once those people transition off the project and perhaps to other areas of the company. We have estimated that for those companies that implemented Solvency II, the effort to produce quality documentation for IFRS 17 will be even more significant.
...documentation represents the positions and justifications of the company that the likes of auditors, regulators and independent third parties will scrutinize in order to provide sign-off.”
An effective implementation plan does more than simply put the system through its paces across a normal cycle. In our work with clients, we design a large number of scenarios to test that the results are as expected based on our understanding of what the system is doing, and also to confirm that the system is delivering results consistent with the understanding and interpretation of the standard.
Beyond the testing phase, dry runs allow insurers to put the systems through an end-to-end process. Kicking the tires ensures the various components are acting and reacting appropriately so that the necessary outputs are being produced and confirms that the outputs provide information that is actually useful. It allows an early view to ensure the results are correct while also offering sufficient detail to explain the results to both internal users and any external constituents. In our experience, companies can learn many lessons from this step, if they allow suitable time in the project plan.
And not to be lost is the ability to analyze the results. Analysis of movements allow an understanding of the drivers of earnings in a reporting period, and we have developed our own templates that we roll out with clients to help get a much better understanding of the results.
Developing sensitivities allows a deeper understanding of the impact of unexpected movements, whether they be temporary or permanent. Sensitivities are also key in the business planning to improve understanding of the future behavior of the accounts.
Based on our discussions to date, most companies feel that more effort will be required to explain earnings under IFRS 17 reporting, including the need to develop additional disclosures. Senior executives will want to understand how the old-world key performance indicators (KPIs) map to this new world. Products with acceptable profitability in the past may underperform under IFRS 17. This will have implications both for running the business and for presenting the business and performance to shareholders and analysts.
Companies have developed an understanding of profitability and performance under their current accounting standards. With IFRS 17 turning the insurance accounting world on its head, companies are thinking of new KPIs in order to properly understand and manage the business, including supporting those hard decisions on what products to keep, what products to reprice and what products need to be ditched.
Senior executives will want to understand how the old-world key performance indicators map to this new world.”
And let’s not forget about IFRS 9. IFRS 9 is now the applicable accounting standard for assets. Insurers were permitted to defer IFRS 9 implementation to be coincident with the implementation of IFRS 17. IFRS 9 redefines how assets are classified, how investment income is reported, and even how investment results are understood. Significant thought must go into the classification of asset performance to determine whether fair value movements are recorded in the income statement and balance sheet as Fair Value through Profit or Loss (FVTPL) or alternatively as Fair Value through Other Comprehensive Income (FVOCI). Classifications of assets depend on the business model or alternatively how an entity manages assets in order to generate cash flows; this must be evidenced. Great care must be given to those classifications, as future reclassifications of assets is permitted only when the business model has changed. Even with that, reclassifications of assets in the future are not permitted for equities valued at FVOCI, nor for any situation where the fair value option was elected.
Whichever of these risks may resonate most within your own organization, insurers certainly shouldn’t underestimate the cost of having to revisit decisions that might result from lack of sufficient attention to the risks of “what could go wrong” with IFRS 17 implementation.
The positive news is that companies can mitigate these risks by effective project sponsorship / management / replanning and use of external experts.