Beyond insurance accounting standards: A long-term vision

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In 2020, insurers had to surmount the trials of a pandemic while continuing to address regulatory compliance standards and shareholder requirements. This balancing act forced greater emphasis on business processes and operations – and the value of technologies supporting them. At the same time, new accounting standards like IFRS 17 challenged insurers to seek out cost-effective ways to meet these new requirements.

To meet reporting requirements, insurers invested significant budget, resources and time in new solutions. They also invested in IT and process transformation, data management, and system integration. Now, they’re looking for ways to extend the value of these investments beyond immediate goals so they can achieve a higher overall return for the business.

Technology questions

At a basic level, IFRS 17 requirements trigger questions around several technology areas. These include data management strategies – for data access and integration, data quality and data storage – as well as systems architecture design and the integration of actuarial and accounting processes to support future reporting. Many insurers are planning or have ongoing projects for:

  • Providing a data foundation to validate actuarial assumptions, perform predictive modeling for pricing, optimize their portfolios through advanced analytics, etc.
  • Designing a unified, secure and scalable platform for systems and process integration.
  • Transforming processes – automating and integrating various operational processes overlaid with a governance framework.

These types of projects bring multiple advantages to the business. They lead to less manual intervention, increased transparency, a more efficient operating model and better operational risk management. They also promote effective communication among stakeholders, such as actuaries, finance and IT.

IFRS 17 will determine the foundation of the insurer's future financial decision-making process. As such, an IFRS 17 implementation represents a long-term investment in a system that will be used for the next 10 to 15 years. Beyond that, IFRS 17 will pave the way for additional business areas that might require a new way of thinking or a different approach. For example, consider strategic business planning, integrated stress testing and asset liability management (ALM).

Look forward to better planning

A flexible IFRS 17 solution supports strategic business planning through forward-looking profit and loss (P&L) projection. It does so by rolling forward the closing positions of the last reporting period into the future, together with new business projections. This can help you understand how current IFRS results and forward-looking business plans would change under different sensitivities or adverse scenarios related to economic and insurance risks and methodology choices – such as the choice of profit-emerging patterns.

If you perform regular, ongoing sensitivity or stress testing – instead of using this as an annual exercise – you’ll get additional insights. Such an approach helps you anticipate key risk factors along with the magnitude of IFRS 17 impacts on your key portfolios under key adverse scenarios.

Taking a forward-looking, scalable approach makes it easier to introduce other initiatives, like actuarial ratemaking. And with mostly automated processes, it can be a breeze to perform sensitivity analysis and stress testing based on the cashflows generated during the IFRS 17 process.

It’s also possible to maintain subtle differences between IFRS 17 implementation across jurisdictions while applying consistency at a group level. Valuations of assets and liabilities under the new accounting standards will be on market-consistent value, rather than on historic or book value. This means balance sheets could fluctuate more due to ongoing changes in interest rates and market conditions.

Make asset liability management an integral part of the strategy

Under IFRS 17, coupled with IFRS 9, it’s important to understand insurers’ asset liability management strategies. Of course, your new accounting practices should reflect this strategy, integrating both the asset and the liabilities side.

Currently, ALM mainly focuses on market-consistent balance sheets and seeks to optimize ALM under risk-based solvency frameworks. Moving forward, market value-based accounting will make ALM more important to managing P&L and balance sheet volatility. Insurers will need to scale up their ALM capabilities to better manage ALM mismatches. Insurers should continuously assess their open positions to see if they are sustainable and then assess the P&L impact of de-risking these positions. Strategic asset allocation (SAA) will receive more attention in the future.

Support your strategic vision

Business results are best when insurers develop a comprehensive business strategy based on various approaches. Consider things such as setting new KPIs for profitability management, regular experience studies, business planning, sensitivity analysis, stress testing and ALM. It’s important to have a long-term vision when planning for and implementing IFRS 17. That includes not only a comprehensive plan but also a comprehensive, integrated system architecture.

SAS can guide insurers in deploying analytics for specific tasks and areas of the business. For example, SAS helps address regulatory compliance with IFRS 17, actuarial ratemaking (including optimized pricing and reserving), insurance claims fraud, anti-money laundering and more. In turn, insurers not only gain fast business insights; they save time by avoiding the need to adapt generic models to specific needs.

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About Author

Thorsten Hein

Principal Product Marketing Manager

Thorsten Hein is a Principal Product Marketing Manager in the Risk Research and Quantitative Solutions Division at SAS Institute. He specialises in global risk management operations insights in both banking and insurance, focusing on risk and finance integration, IFRS, Solvency regulations and regulatory reporting. He helps risk management stakeholders to go beyond pure regulatory compliance and drive value-based management to maximise business performance, using his wide experience to deliver both business relevance and technical coherence.

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