Insurance ERM | December 16, 2016
Martin Sarjeant explains how the new insurance contract accounting standard (IFRS 17) will involve changes to production of actuarial and financial information on a scale comparable with Solvency II
Why is IFRS 17 such an issue?
IFRS 17 is a new accounting standard for insurance contracts. It’s due to be implemented on 1 January 2021 and will impact insurers in well over 100 countries. It represents a fundamental change to the accounting regime for insurers, notably in how profit emerges from contracts, and will involve new kinds of actuarial and financial calculations.
Actuarial systems will be critical. The actuarial function will have to feed data to the finance function, requiring a much higher degree of collaboration between the two groups, and the data will have to be delivered much faster than currently.
Although it may seem insurers have a long time to comply, it will be a complex project, especially for life insurers. Many insurers are worried about the short timeline and many countries were looking for the IASB to delay implementation to 2023.
One major concern for actuaries should be that it is a finance-led regulation and will be generally managed by the finance function, with actuaries at risk of being left out of the discussions. Finance teams and actuaries will need to collaborate in ways they haven’t done in the past and breaking down some of those silos could also be a big challenge in some regions.
Will the work done to prepare for Solvency II be of any help?
Implementing IFRS 17 will be hardest for insurers that have not gone through a solvency modernisation programme like Solvency II. Firms that are still using old versions of actuarial software from the early 2000s will struggle compared with those that invested in updated actuarial systems and governance solutions as part of Solvency II.
Insurers are looking to reuse elements of Solvency II calculations for IFRS 17 – for example, insurers are looking to reuse the Risk Margin under Solvency II as an equivalent to the IFRS Risk Adjustment – but IFRS can generally be thought of as adding an extra layer of calculations on top of your existing models.
Solvency II also forced insurers to improve their end-to-end governance, and those enhancements will be completely reusable under IFRS 17.
Finally, there is a hard lesson in project management that comes from Solvency II. Many firms will be familiar with the ballooning budgets and crowds of people that arrived to help prepare for the legislation. Boards will be keeping a closer eye this time around, to ensure money is spent in the right areas and “gold-plating” is avoided.
How is FIS helping insurers prepare?
There are three main challenges with IFRS 17: the calculations; governance; and connecting to upstream finance systems.
Our solution has all the main calculations needed for IFRS 17 and we are monitoring the progress in the run up to the finalisation of the regulation.
In terms of technology, we made many advances in automation, governance and connectivity as part of our Solvency II enhancements, so we are in a good place to tackle the IFRS 17 governance needs.
For example, the new standard puts a lot of emphasis on analysis of change. We developed our solution, Assumptions Manager, to help insurers manage multiple reporting bases and analyse the impact of changes in assumptions from prior periods.
Our Insurance Data Repository provides a controlled and managed environment for results data and makes it accessible to senior executives, while the Prophet Control Centre aids automation and streamlining of end-to-end processes to meet the tight IFRS reporting timelines.
Will it encourage insurers to move to the cloud?
Cloud computing offers some unambiguous advantages for actuarial software. First in terms of costs – we have insurers reporting 30-40% cost savings by not using in-house computing. Second, in terms of performance, as IFRS 17 will require additional calculations, so being able to access additional compute resources will be helpful in terms of reducing processing times.
The cloud also changes the way that people use actuarial systems. With the cloud, each model run is costed, so it makes people think harder about the inputs to the system and where they have come from. That helps breed good governance and clearer thinking.
Do you have any new releases or updates planned?
We added the initial IFRS 17 calculations into Prophet in December 2015, so we are well prepared. Obviously we are updating those as the regulation evolves, and we are working with consultancies and clients to support insurers to be ready ahead of 2021. We will also be making targeted improvements across our product suite to further support IFRS 17.
Martin Sarjeant
Global Risk Solutions Leader, FIS’ Insurance business
martin.sarjeant@fisglobal.com