Four Steps to Bridging the Actuarial and Finance Divide under IFRS 17
October 08, 2018
In stark contrast to existing accounting methods for insurance contracts, the new international standard (IFRS 17) puts actuarial calculations at the core of reporting requirements. So, it makes sense to locate IFRS 17’s additional calculations within the actuarial space. But first, actuarial and finance teams must learn to work more closely and effectively together. The question is: how?
To close the gap between two historically disparate functions, actuaries need to:
- Take responsibility for the quality of financial reporting data.
The powerful calculation engines of actuarial systems are a perfect fit for not only IFRS 17 reporting but also more complex projections for forecasting, scenario testing and pricing. By performing all calculations within a single platform, actuaries can reduce data complexity and review and validate IFRS 17 results before passing them to finance, avoiding costly corrections.
- Understand finance’s own reporting needs.
With a thorough understanding of IFRS 17’s accounting requirements, actuaries will be better placed to provide information in a suitable format for finance. This means providing a breakdown of actuarial results to the level at which journal entries can be generated, reflecting the newly updated chart of accounts and providing enough granularity to populate the required disclosure tables.
- Calculate more efficiently.
IFRS 17’s multiple reporting dependencies create significant time pressures. For example, the risk adjustment calculation may depend on cash flow projection models while the contractual service margin, if necessary, relies on results from multiple sources. Meanwhile, the presentation of financial information may also depend on cash flow projections, such as when you disaggregate the financing effect into other comprehensive income. These interdependencies require actuaries to define robust processes with appropriate controls and a fully transparent view of approvals and status. For firms with multiple actuarial modelling systems, this will be an opportunity to consolidate and achieve greater efficiency – by establishing a single platform and core calculation engine for all business lines.
- Make results meaningful to finance.
As financial statements and disclosures will now be made up of actuarially calculated values, finance teams also need a greater understanding of actuarial models and processes. Actuarial results must therefore be both explainable and defensible, which in turn requires a thorough understanding of source data, the calculations involved – and what the results say about the performance of the business. In other words, actuarial systems need to pass data to finance in a meaningful way, presented in a business context and allowing reuse for internal reporting and management information.
In summary, a mutual understanding of the needs of the actuarial and finance teams is critical to not only the successful implementation of IFRS 17 but also the effective long-term management of the business. With the right systems and processes in place, actuaries and finance can optimize the efficiency of the financial reporting process – and provide maximum business value.