Existing accounting practices in the insurance industry are inconsistent and unclear. This has led to the issuance of IFRS 17 Insurance Contracts – the first international Standard for insurance contracts. Because this Standard is based solely on principle and does not provide explicit guidance, insurers will need to identify their own best practices of IFRS 17 for their financial reporting. This blog post discusses some of the gaps insurers will face when implementing the new Standard.
The biggest hurdle in implementing IFRS 17 is understanding the Standard itself. Such a knowledge gap would affect project planning and execution, as IFRS 17 involves business decisions specific to the insurers’ products and reporting procedures. For example, is the insurer currently able to generate IFRS 17 future cash flows, or do they require an actuarial system to project them? Is the insurer’s general ledger (GL) system capable of processing new IFRS 17 accounting events, or do they need to expand on their existing system? Thus, insurers should be familiar with the Standard to recognize which tools work best for their business and choose a solution that fits their needs.
Because IFRS 17 stresses the transparency of cash flows, insurers need to ensure that they have all the data required to measure their insurance contract liabilities. For instance, IFRS 17 measurements involve historical, current, and future cash flows – but are all these cash flows readily available for calculations? In addition, insurers will need to separate their contracts into insurance and non-insurance components, such as embedded derivatives and distinct investment components, since they fall under the scope of another Standard (IFRS 9). It is crucial to determine how much data transformation will be necessary for the implementation of IFRS 17, and how to address information that is not yet accessible.
Once the data gaps are identified, insurers will need to recognize how these requirements will impact their current systems. For example, will new applications be necessary to support the implementation of the Standard? Will insurers be required to expand their source systems considering the level of granularity and volume of data needed for IFRS 17? What is the best way to introduce IFRS 17 GL accounts to the insurers’ existing accounting system? How should insurers validate their implementation results? These are some factors to consider when planning to meet the IFRS 17 requirements.
If new systems need to be established, then insurers will likely also need to re-configure their financial reporting process. Because IFRS 17 requires information from multiple business departments (e.g., actuarial, IT, and finance), insurers need to recognize the level of commitment required to implement the Standard from an organizational perspective. They must define the roles and responsibilities expected of each department to drive any process change. These departments must communicate with each other and collaborate appropriately to maintain an efficient workflow. One approach insurers can take is to develop and implement a standard operating procedure for the entire IFRS 17 reporting process, which would communicate details of the process in a central guiding document.
In conclusion, insurers need to examine their existing gaps in knowledge, data, systems, and processes to implement the IFRS 17 Standard. With plenty of components to review, insurers should begin gap assessments as early as possible and begin reaching out to industry experts to accelerate this process.
Carmen Loh is a Risk Consultant with FRG. She graduated with her Actuarial Science degree in 2016 from Heriot-Watt University before joining FRG in the following fall. She is currently the subject matter expert on an IFRS 17 implementation project for a general insurance company in the APAC region.