IFRS 17 Implementation: Paving the Way to an Intelligent Insurance Company

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IFRS 17 in a nutshell

The new financial reporting IFRS 17. The result of almost 20 years of deliberations by the International Accounting Standards Board (IASB), this is unquestionably the most significant change to insurance accounting requirements in over two decades.

Demanding a complete overhaul of insurer’s financial statements, IFRS 17’s new valuation and profit recognition method is expected to affect $13 trillion assets across 450 listed insurers using the IFRS standard.

The standard introduces insurance contract measurement principles requiring (a) the present value of future cash flows, (b) an adjustment for the timing and risk of those cash flows, and (c) the expected profit for providing future insurance coverage (i.e. unearned profit).

Based on a current measurement model, IFRS 17 is expected to deliver consistent accounting for all insurance contracts. In that way, it provides updated information about the obligations, risks and performance of insurance contracts – increasing transparency in financial information reported by insurance companies.

No time to lose

Leading insurers are already preparing to transition to the new accounting standard. But clearly, for such a colossal implementation, this is not without pain. Originally set to be mandatory effective January 1, 2021, IASB is currently reviewing a proposal to defer the mandatory effective date by a year to January 1, 2022.

Even with that possible extension, there is no time to lose.

Implementing IFRS 17 is a complex and significant undertaking with wide-ranging implications. It goes beyond the finance and actuarial functions of insurers – with a considerable impact expected across systems, data and processes as well as the employees involved. For an implementation of such a scale, extensive communication and education – of the business impact and what needs to be done – is also required across internal and external stakeholders.

The timeline will be a challenge for many because IFRS 17 will need to be applied retrospectively for all contracts in force at the transition date.

 

A piece of the jigsaw: Accounting advisories

Without sufficient internal expertise, it is natural for many insurers to want to turn to accounting advisories. This may be rational as they are a valuable piece of the entire jigsaw. Reputable accounting advisories are well-poised to help insurers determine the impact of IFRS 17 and the gap that needs to be closed to attain compliance.

Professional accountants and preparers help to make judgements when applying the standards. They can also share practical IFRS knowledge with internal staff who oversee the preparation, audit, and enforcement of IFRS financial statements.

This help can be valuable as detailed IFRS 17 requirements are distinctly different from existing models in a number of key areas. For example, it is expected to change profit emergence patterns, accelerate the recognition of losses on onerous contracts, and add complexity to valuation processes, data requirements, and assumption settings.

In addition, some accounting advisories provide educational offerings such as eLearning programs for insurers’ employees[1]. This can be useful for insurers starting from ground zero.

 

There’s more to it

What’s critical, however, is not to assume that accounting advisories are the end-all to the implementation of IFRS 17. This is a pitfall insurers may unwittingly fall into simply because there is so much to IFRS 17 rollout, and sometimes – we simply don’t know what we don’t know.

In this case, it is key to recognize that IFRS 17 implementation will have a profound impact on all the aspects of an insurance organization – from front- to back-office.

There will be significant operational impact on strategic management, business, IT systems, and required employee skillsets. For instance, it may entail changes in policies and control procedures, roles and responsibility, reporting levels (e.g. group or local entity level), internal controls and audit trails, risk management, and performance management. Along with it, the technological and workforce requirements will also change.

With a scale of change this extensive, the process may seem daunting. Fortunately, this is also an exceptional opportunity to turn your IFRS implementation into a competitive advantage – by embracing the technological innovations that will not only enable IFRS 17, but also turn your insurance company into an intelligent enterprise.

How so? With digitization.

 

Digitize to turn IFRS 17 into a competitive advantage

Presently, insurers face operational and reporting challenges, for example, when asked to develop a daily balance sheet. Lack of automation has also made analytics challenging. Projections and financial planning are more based on sketch than actual possible outcomes due to the lack of granularity or up-to-date data.

By adopting digital technologies and an innovative approach that enables rapid solution deployment, insurers can not only address IFRS 17 financial accounting requirements, but also overcome these difficulties to thrive in the digital world.

Some of the benefits to look forward to:

  • Fast continuous closing – simpler reporting with accounting automation.
  • More precise future projections – with greater granularity.
  • Improved executive decision-making – with predictive analytics running through multiple “what-if” scenarios to test your theories.
  • And accurate, up-to-date data for making vital, business-changing decisions each day.

 

The right partners

And that’s just the tip of the iceberg. What may start out as the simplification of the complexities of an IFRS 17 implementation is really the path to becoming an intelligent insurance company – primed for tomorrow.

The next step is identifying and working with the right partners. The right digital partner affords insurers access to a rich ecosystem of global and regional partners – the key to running a thriving insurance business, now and into the future. Opportunely, SAP’s open, growing ecosystem of partners includes reputable accounting advisories such as EY and Deloitte among others.

In the countdown to the mandatory IFRS 17 deadline, getting two critical partners (accounting advisory and digital innovation) experienced in optimizing each other’s capabilities in one go is yet another timesaver and a huge competitive advantage.

 

The future: IFRS 17 implementation paving the way to reimagined business models

It’s been said that insurers will succeed not through incremental change. Instead, what’s needed is fundamentally the reimagining of business models.

Indeed, with radical disruption coursing through today’s insurance industry, digitization is not merely important for IFRS 17 compliance. It is the foundation for insurers to reinvent business models and strategies – to stay relevant, define new opportunities, and increase market share.

How is your company tackling the IFRS 17 challenge? Are you forming the right partnerships?

[1] https://www.pwc.co.uk/services/audit-assurance/capital-markets-accounting-advisory-and-structuring/insights/ifrs-17-e-learning-.html

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