Accounting Standards » IFRS 17: Forcing the pace to adapt and lead in the digital age

The phrase ‘faster, better, cheaper’ has progressively come to define an almost inescapable goal for insurers’ systems and processes. Under pressure to measure, model and report on more than ever before, companies have been increasingly turning to automation and process industrialisation to achieve this goal.

And despite the proposed one-year delay by the IASB to IFRS 17 implementation, now expected in January 2022, insurers should be prepared for their finance and actuarial systems to be tested to their limits. Quantitative work carried out by Willis Towers Watson on the data of international insurers has shown that whilst the calculations are not inherently more difficult than what insurers already do, the complexity of the processing and data management required by IFRS17 means the operation can quickly get out of hand without strong governance and controls.

Insurance company finance directors have seen their own departmental costs mounting at a time when they are pressing the rest of their businesses to tighten their belts; particularly as system and process evolution has historically often taken place in a piecemeal fashion. Most companies have simply added to existing practices, processes and systems with new islands of functionality. These islands create separate streams of data which need reconciling. As these multiply, the burden on the reserving and closing process becomes unmanageable, leading to significant operational risk.

The narrow focus of most developments has been compounded by the fact that most insurers have tackled technical issues in similar ways for many years. However, it is now possible to create the modern finance function that all of us dream of and there are several examples of major firms that have transformed their reporting environment to move ahead of the pack.

The ability of those teams to provide quick, value-added analysis to support the wider business is far superior to those teams still hampered by inefficient or fragmented processes requiring significant manual intervention. For the companies in this second class, the need to complete more tasks in a shorter time frame and at lower cost often leaves little time to carry out the more in-depth analysis of key business lines that may be critical to the organisation’s success.

Adjust for wider business needs

Insurers increasingly recognise that the demands on teams are better met by re-organising functions by process (e.g. reporting and planning) rather than by skill set, leading them to adopt a more holistic view that brings together the finance, actuarial and IT teams. This not only allows processes to be reviewed, re-designed, integrated and automated, but new technology solutions that meet the wider business needs to be identified and implemented.

This unshackles actuaries from the mundane, saving time and money, as well as freeing them to provide quick, value-added analysis and to collaborate with other teams including underwriting, pricing, reinsurance and capital modelling. Prioritising process improvement also allows insurers to harness a wider spectrum of data far more effectively from source through calculation systems to audited results.

While processing speeds and governance capabilities are clearly universally valuable traits in themselves in the current environment, IFRS 17 also brings other factors into play that, when considered from a process, expertise, organisational and value perspective, may demand some specific refinements.

For example, Solvency II very much reinforced the separation of finance, risk and actuarial teams. With IFRS 17, these teams have to work together towards a shared goal – meeting the standard and reporting the numbers. Organisational design and working methods, including where automation and expert analysis are deployed, will therefore benefit from being rethought with that in mind. Practices that lead to actuaries working in their silos and using distributed databases to provide information to the finance team are likely to be highly inefficient from a time, risk and cost perspective.

Equally, IFRS 17 will also demand smoother pathways for the finance function to feed in to actuaries’ work. That is why in a model IFRS 17 systems architecture based on Unify, Willis Towers Watson’s transformational solution, we stress three key pillars – integration (of all systems used within the process); automation (of repetitive tasks); and governance.

Many international insurers have especially struggled with inefficient finance processes due to decentralised operations that have resulted in multiple accounting processes, systems, and tools. The result, perhaps inevitably, has been significant manual and exception-based processing; disparate, uncoordinated initiatives to address operating inefficiencies; and the lack of an overall roadmap for financial processes and related financial technology.

These companies face sizable obstacles to transformation, including embedded fragmentation, legal requirements, cultural resistance to change, and the need for significant investment. How finance directors approach these challenges while attempting to expand their operations will be crucial to the overall success of the entire enterprise.

With IFRS 17 introducing major changes to the language of insurance accounting, companies will also need to invest sufficient time opening up the complexity of their actuarial models to ensure the information is accessible to investors and other stakeholders.

Conclusion

In the current dynamic environment, the drive to achieve high-level organisational objectives of profitable and sustainable business has translated into financial, risk and actuarial goals that have increased the emphasis on speed, efficiency and cost. While the balance between the three depends on individual company circumstances, the basic ingredients for effecting change remain the same.

That is the case whether it is responding to market pressures to produce higher quality management information more quickly and delivering more for the business with less, or keeping pace with the regulatory agenda to manage converging time lines, produce more granular analysis and reports, and keep multiple external bodies happy.

While these pressures had been growing organically for some time, Solvency II drove companies to the edge and created the first big push to streamline the ways that financial and management information were produced. IFRS 17 promises to have a similar, perhaps even more profound effect.