The unforeseen consequences of IFRS 17

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Lee Thorpe, Head of Risk Business Solutions at SAS UK & Ireland, explores the challenges that the new international financial reporting standard (IFRS) 17 will introduce.

A fundamental change is coming to insurance. The new accounting standard, IFRS 17, will be introduced by the International Accounting Standards Board (IASB) in just under four years and transform how balance sheets are built. In an effort to improve current reporting practices, IFRS 17 will mandate that insurance companies deliver more transparent, comparable information.

Insurance entities will need to report the effect of insurance contracts on financial performance and risk exposure in statutory accounts. Significantly, they will also need to prove how they calculated profit and loss figures. This will require simulations; tweaking parameters to understand what factors impact future results and how sensitive a forecast is to single or multiple changes. Without the flexibility or governance to build that understanding then it will be difficult for insurers to explain how they are meeting targets. It will also be difficult to see how susceptible the financial position is to external and internal events.

The changing nature of the balance sheet

Currently, there is a lot of diversity within the insurance industry. Insurance businesses have many different systems and processes. For example, at one end of the scale there is car insurance, a simple insurance product that will only last for a year. At the other end is life insurance which runs for decades. It has multiple factors that all dramatically impact how a contract’s value could change over time. In addition, insurance companies report in very different ways and there is little consistency across jurisdictions.

It’s no longer appropriate for insurance companies to have opaque models producing valuations that can’t be validated. In today’s world, regulators, auditors and investors all use balance sheets to allow third parties to understand financial information, metrics and performance to make informed decisions. This is increasing the appetite for transparency in reporting, which over time will help drive efficiency and establish best practice.

Under the IFRS 17 model, accounting policies will be increasingly standardised and insurers will need to ensure that compliance processes are auditable. While IFRS 17 is being introduced for the right reasons, it will cause a significant amount of change. Insurers have already invested a lot of money in IT because of the capital adequacy requirements stemming from Solvency II and are resistant to having to undertake huge change management programmes. There is a perception that insurers could reuse infrastructure but it could mean they sacrifice important capabilities and efficiencies. At the same time, going back to manual methods will leave insurers open to risks as errors can be made.

Forecasting for the future

Instead, there needs to be a separate process that glues different processes together and provides the additional capability that will be needed to fulfil auditors’ demands. IFRS 17 will demand greater visibility over contracts being underwritten and require even more data sources to be analysed. This will make businesses understand the impact of decisions over time. As a result, insurers need to be able to understand the impact strategic decisions have and use IFRS 17 to understand, model and forecast key metrics.

As a starting point, organisations need to complete an assessment with accounting advisors to understand what the governing body wants to see over time. Once there is a firm understanding of what auditors want to know, then insurance businesses need to focus on procuring systems that can demonstrate compliance. IFRS 17 has raised the benchmark for governance and the quality of documentation required to facilitate a smooth audit sign off. At the heart of fulfilling auditor’s demands is the introduction of systems and processes that ensure the data required to demonstrate compliance is available, fully transparent and auditable. Insurers also need the ability to run different scenarios and understand how any changes in pricing parameters would influence the financial condition of the company, now and in the future. Finally, if the regulation increases in complexity, insurers need to make sure there is a scalable and flexible approach that can be adapted as requirements evolve, in line with best practice being established.

While the deadline sounds a long way away, the change is likely to spark a period of consolidation within the insurance industry. It will then become clearer which players are stronger and which are weaker. To save time and keep costs down, insurance companies need to stay in control and plan ahead.

Find out more about SAS’ solution for IFRS17 on the webinar: IFRS17 Turning compliance into opportunity.

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About Author

Lee Thorpe

Head of Risk Business Solutions, SAS UK & Ireland

Lee currently leads the Risk function for UK and Ireland, specialising in retail banking and treasury. He also led the stress testing working group across EMEA and was the key thought leader for the IFRS9 proposition globally. Prior to SAS, he spent 13 years working in various risk management and front office functions within banks and building societies. He has direct experience of all major risk categories across most retail products and treasury instruments.

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