IFRS 17 delays: make best use of the extra year (or two)

The IFRS 17 accounting standard for insurers has been more than 20 years in the making, but ongoing implementation delays mean firms now have even longer to prepare for the deadline.

 

IFRS 17 was first added to the International Accounting Standards Board (IASB) agenda in 2001, the same year in which the organisation was formed. After 16 years of development, the IASB finally published the new standard in May 2017, with an original implementation date of January 1st, 2021. We wrote about how the changes could impact insurers at the time. But since then, the IASB has released an Exposure Draft (ED) that outlines key amendments to IFRS 17. The effective deadline has also been pushed back by one year.

So, what are the changes? And how will they affect preparations?

IFRS 17 amendments at a glance

KPMG has provided a useful summary and explanation of the proposed amendments. However, here are the seven broad areas where changes will occur:

1. Accounting rules for certain types of credit cards and loans;
2. Accounting rules for investment services in insurance contracts;
3. The reinsurance of ‘onerous’ contracts;
4. The allocation of insurance acquisition cash flows;
5. Insurance contract assets and liabilities presentations;
6. Accounting for acquired claims liabilities upon transition; and
7. Financial risk mitigation of direct participating contracts.

Mary Trussell, KPMG’s Global Lead for Insurance Accounting Change, said the amendments are “helpful” but added that IFRS 17 is already a complex undertaking, which will require new systems, processes and controls.

 

“It’s vital that insurers make good use of the extra year,” she explained. “Many insurers will need to step up the pace of their implementation efforts to reach the finish line, with systems and processes tested and results understood by management and investors.”

 

The good news for insurers is that many were already confident of meeting the original deadline of 2021. Deloitte figures from early 2018 showed 90% believed they would be compliant by the implementation date, with 45% ‘strongly’ optimistic. The bad news is that confidence varies between sectors (60% of health insurers were confident, compared with just 37% of life insurers, for example). Also, businesses may be overestimating their readiness, particularly if they feel three years is ample time to make the necessary changes.

 

This disparity between expectations and reality is perhaps best shown in budgeting predictions. In 2013, just 7% of insurers thought they would need to spend more than €50 million to comply with IFRS 17. By last year, this figure had ballooned to over one-third (35%). In fact, Insurance Europe is already arguing for another one-year delay to the implementation date, which would push back the deadline until January 1st, 2023. The institution, along with seven other international insurance associations, said the move would enable organisations to “manage implementation challenges” and allow for more IASB changes to the standard.

How should insurers use the extra time?

Whether or not the IFRS 17 deadline is further delayed, organisations will want to ensure they put the extra time they have now to best use. According to KPMG, well-prepared insurers should consider:

• The specific impact of the proposed IFRS 17 changes on their plans;
• What new data will need to be collected;
• How processes and systems designs must be adapted;
• The updates required for testing and implementation plans;
• How best to communicate changes to those leading governance; and
• Speeding up the pace of implementation.

But what specific challenges are associated with IFRS 17? At a recent Q&A, reported by Risk.net, a panel of industry experts discussed some of the preparation strategies that insurers have embarked upon.

 

Sufyan Khan, Head of Analytics Solution Consulting for EMEA at Oracle, highlighted five key areas of concern:

1. Data: IFRS 17 requires massive amounts of data from various functions, covering both historic and current information, ranging from policy and premiums figures to reference and investment data. Mr Khan suggested having a comprehensive, holistic approach to data management.
2. Measurement: Organisations must put in place various metrics to measure large amounts of data and results in order to accurately compute contractual service margins (CSM) for IFRS 17.
3. Reporting: Day-one reporting for measurement standards will be a significant undertaking for businesses, particularly for insurers with fragmented data and low automation levels.
4. Postings: CSM results under various measurement approaches must be translated into general ledger postings, which need to be then seamlessly fed into financial statements.
5. Process automation: As mentioned, insurers that currently have limited automation will face the biggest challenges. The end-to-end workflow, from data capture all the way through to report generation, should be automated as much as possible.

Many of the above issues will require substantial investment in new technologies, a fact that is not lost on insurers. The Deloitte study revealed 87% of organisations believe they will need to upgrade their systems technology to improve data capture and perform the necessary calculations to comply with IFRS 17.

Finding the right talent

Stefan De Lombaert, Global IFRS 17 Lead for analytics firm SAS, said insurers face another significant hurdle in their implementation projects for the new standard: staffing.

 

“Implementation teams require the full-time attention of a multidisciplinary internal team, assistance of external subject matter experts and personnel from its technology provider,” he explained. “Companies moving faster will have access to better resources, while slow deciders will face difficulties in ensuring the necessary resources.”

 

Put simply, successful implementation plans require a sophisticated mix of skills, and businesses that start recruiting early are more likely to secure the talent they need. Cross-collaboration between departments is key, as IFRS 17 requires input from finance, actuarial, IT, compliance and regulatory teams. Large insurers operating globally will also need to coordinate their process and systems changes across different cultures, languages and time zones. Professionals with excellent communication skills and experience of liaising between multiple departments are therefore in high demand.

 

However, IFRS 17 is also highly technical and most businesses must perform broad reviews of their IT operations and infrastructure. Data professionals are already in short supply, so finding the right candidates in this field could be especially tough for insurers.

 

That said, finding the right talent is always a challenge, which is why it can help to work with a specialist recruitment agency that can support your hiring needs. If you would like to discuss your staffing requirements for IFRS 17 or other regulatory changes, please contact me on 020 7936 2601 or via email at rb@barclaysimpson.com.

Our Market Reports combine our review of the prevailing conditions in the corporate governance recruitment market with the results of our latest employer and candidate surveys.

Image credit: Steve Buissinne via Pixabay