July 10, 2017
Like Solvency II before it, the new International Financial Reporting Standard for insurance contracts (IFRS 17) is set to increase pressure on insurers’ systems and processes. The question is, can existing operations cope?
After Solvency II came into force, a survey highlighted our clients’ concerns about their operational readiness for compliance. Half of senior risk professionals thought their risk modeling processes needed reengineering within the next three years, with more than a quarter saying the need was more urgent.
Survey respondents identified speed, operational control, regulatory reporting and data quality as their top challenges, superseded only by resources. And 80 percent said they lacked both the time and resources to carry out validation as effectively as they’d wish, with it often taking up more than one fifth of the average cycle – more than twice as long as gathering data.
Now that IFRS 17 is on its way, the same kinds of concerns and issues continue to crop up in conversations with our clients around the world, across all types of insurance. In other words, insurance operations are still feeling the pressure of compliance requirements – and, with IFRS 17, the situation is about to get even more serious.
First, contracts need to be grouped and the contractual service margin (CSM) will need to be stored and looked up each period at the required unit of account. Under IFRS 17, accounting entries must be expanded, too, with provision movement broken down into key elements, including original, historic and expected movements, and other variables.
Critically, the audit and review of the whole process will include not just the value calculated and methodologies, but the full calculation approach. Most of this will also apply to approximations of the premium allocation approach as well as the full building block approach calculation.
Given these challenges, IFRS 17 could finally be the catalyst that insurers need to improve and re-engineer their systems and processes. As the compliance deadline of 2021 approaches, more firms are realizing that a robust production environment, sound assumption management and an efficient, controlled process platform will be central to an effective IFRS 17 implementation. Arguably, the calculations are the simple part – the true challenge is managing and completing the overall process effectively.
There is also the realization that, when done properly, this long overdue revamp of systems and processes can achieve more than just compliance. With greater end-to-end control over processes, insurers have the opportunity to add value by improving efficiency, transparency and the strength and availability of management information. Ultimately, this will help support profitability, shareholder value and rating assessments.
The time is ripe for operational change. With a solid foundation of systems and processes, you’ll be in a stronger position to not only ease the pressure of IFRS 17 but also reap long-term business benefits.