CeFPro research – IFRS 17 best practice: Data, re-insurance efficiency and achieving positive financial implications

CeFPro research – IFRS 17 best practice: Data, re-insurance efficiency and achieving positive financial implications

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By Guglielmo Migliori, Senior Research Executive, CeFPro 

The insurance industry faces many regulatory and compliance challenges ahead of the  implementation of IFRS 17; institutions are increasing efforts to ensure compliance ahead of the 2021 deadline and juggling the many hurdles needed to comply with the full guidance.

With this in mind, The Center for Financial Professionals conducted extensive research with leading industry experts to identify the current challenges, opportunities and emerging trends ahead within IFRS 17. The results of this research will be discussed in depth at the upcoming 3rdedition of the IFRS 17 Forum (London, November 27).

Over the course of the research, one of the main topics highlighted by the experts was how different aspects of IFRS 17 could impact firms’ decision-making processes. Being one of the most important changes in the last few years in the insurance industry, interviewees stressed how IFRS 17 requirements are going to change financial disclosures and other operational aspects such as data granularity and warehousing. For this reason, insurers need to analyse thoroughly the different actuarial procedures for a new way of reporting, by understanding and utilising the new data and systems – Helping them to face an implementation process full of hurdles.

It’s becoming crucial for insurers to study how maximising the data aggregation of contracts in a portfolio and how to measure a performance. There must be a greater focus on these areas” (Senior official, EIOPA)

We need to understand what the current systems need to deliver for the standard requirements. It’s so important to assess the budget to be able to deliver the right implementation, as one of the main issues for IFRS 17 is to understand how to go back to the have the right data in place to be able to extract the right information”.  (Actuarial Office, insurer between £20 and £25 bl under management).

Being able to rapidly access the relevant data that is needed could mean terrific timing improvements in the implementation process – Which needs to be done by 2021, avoiding last minute procedures, potential budget misjudgements and ensuring new contracts reporting methods are ready.

Another of the key areas which our research underlined was implementation for management of re-insurance contracts, given that in our research the main concern regarded potential mismatches in new contracts. These mismatches could require important modifications of their features, something which could be achieved by comparing best practices for re-insurance profit reporting and identifying new risk trends. The industry may need a focused sharing of best practices to address the main differences about these contracts and their new particular issues, in order to be fully ready for the implementation process, especially with what it could mean for calculating liabilities.

When you create new re-insurances contracts, you have to consider future IFRS 17 policies, because we need to have a view on how to define a contract. It’s getting more complicated and it will become challenging to estimate liabilities out of this group of contracts” – Actuarial Officer, insurer between £15 and £10 bn under management.

IFRS 17 has a very specific approach to re-insurance, as these contracts may have to become completely separate. Potentially, the new standard could make them match some of the firm’s liabilities, but the whole industry could be having issues with the way it’s going to work: there could be accounting mismatches which are not expected. The issue is operational for different implementations” – Actuarial Office, insurer between £50 and £75 bl under management.

As a consequence, the reinsurance costs recognition process will change, as well as the systems currently utilised. In the future, once IFRS 17 is fully in place, terms and conditions of contracts will be undergoing a deep analysis, so that re-insurers could be able to stop covering underlying contracts in a more timely fashion.

Another of the prominent areas of concern across the insurance industry was the financial implications of IFRS 17 post-implementation, and its potential impact on the business. The focus on this was how institutions can best prepare for and manage volatility levels. A thorough analysis should be conducted ahead of 2021 to understand and limit volatility.  For this reason, it becomes vital to co-operate internally and externally in the early stages of the implementation process, to manage volatility and to limit some potential financial instabilities. By doing so, stakeholders and shareholders can be reassured about the firm’s steadiness. Working in a more cohesive way and involving different departments could be crucial to identify solutions in advance, so to avoid harmful situations which could dramatically increase volatility and market instability.

In the market perception, if there was an internal focus only for IFRS 17 and if the market hasn’t been pre-warned about new procedures, there could be some difficulties. It’s so important to educate the market before-hand about IFRS 17 before the actual implementation is complete. As many departments as possible should be involved in the firm, so that everyone can understand how decisions are taken and what they could mean for the financial world.” – Actuarial Office, insurer between £25 and £20 bl under management.

In conclusion, IFRS 17 is assuming a greater role in insurers’ minds, as 2021 is quickly approaching. The time for discussion couldn’t be better, as the TRG will have had their meeting only a few weeks before the Forum. As said, there is still some unclear points around this standard, such as new utilisation of data, re-insurance and overall financial implications, all areas of detailed discussion. For this reason, collaboration and sharing best practices within the industry is required to unveil the best solutions to these issues, see below our upcoming IFRS 17 Forum.

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