The statutory requirements of IFRS 17 are forcing a massive disruption and ultimately a transformation within the insurance industry. No IFRS compliant insurer will be able to escape the profound changes in their operating model, accounting policies, and subsequent accounting system outputs and flows. This extends to connectivity and alignment with and actuarial systems and outputs-all underpinned by IT systems construct data and reporting requirements.
While the timing of the implementation of the standard has been well known, time is now of the essence. By on or after Jan. 1, 2022, insurers will have to have planned, executed and tested their ability to comply and begin reporting in parallel to the new standard. This is no quick exercise. Without careful consideration, planning and focused execution, insurers will quickly find themselves in non-compliance.
This disruption will transform the insurance industry regardless of the type of insurance underwritten. Here’s how:
- Accounting – Accounting for IFRS 17 is not as simple as the debits and credits accounting for IFRS 4. It’s not sufficient to simply change where you record premium income and Expenses, but rather transformed in the way you do so. Developing detailed new accounting policies and a wholesale change in the chart of accounts is required, as well as calculations required to appropriately report within your new income statement going forward. Mapping those to the data requirements for the new standard is the baseline minimum change.
- Data – Data is at the heart of IFRS17. Ensuring comprehensive data quality, data controls, and data governance are all at the heart of a functioning IFRS17 compliance program. Data drives the IFRS 17 accounting engine, whether you’re required to calculate contractual service margin under the general measurement model (GMM) or the variable fee approach (VFA) or calculate the more simplified premium allocation approach (PAA). Either way, changes are needed in how you treat the data to calculate the required outputs.
- Reporting – Minimum compliance reporting requirements under IFRS 17 are well beyond what is required under IFRS 4. Generated data from your IFRS 17 accounting engine will feed the minimum reporting requirements. Limiting investment to the minimum viable product may be suitable in the short term, but capitalizing on the rich data sets from IFRS 17 can transform an insurer’s business by providing deep customer and business insights to drive market penetration, retention, and profitability.
- IT Systems – Compliance cannot be achieved without substantial alignment of supporting IT systems to match new accounting policies, data accessibility, and data analytics/reporting requirements. For many insurers, this is the time to question the investment in upgrading legacy point-to-point systems using IFRS 17 as the mandate to upgrade to a data hub that captures all components of the requirement-allowing for alignment of the data flows for the end-to-end process.
- Actuarial – In many cases, actuarial models will need to be upgraded to be IFRS 17 compliant, adding new components and inputs, as well as providing updated outputs of your best-estimated cash flows, containing new components such as risk adjustment. Alignment between actuals and expected at a granular level is something that IFRS 17 will rely on in order for your IFRS 17 accounting engine to work properly.
With the runway to compliance shortening, insurers need to be rapidly examining and acting on their compliance plans. The only question left for most insurers is whether they use the opportunity of IFRS 17 compliance to simply create a minimum viable product or to truly transform their business into the 21st century and take a market leadership position.
IFRS 17 is complicated and one of the largest accounting changes in years. We, along with our partners, can provide the solutions you need to meet the required IFRS 17 deadlines. Contact us to learn how we can help. (This is the first in a series of seven articles. Upcoming articles will do a deep dive on each of the five key action areas.)