Insight from Legerity.
This is an ambitious topic to be addressing in one paper, there are so many perspectives. Some of you will be well on the way to understanding your solution and requirements, while others will have only just started. A survey from our last webinar suggested 60% were in the early stages of mobilisation, 30% had yet to get started, with only 2% having started implementation. There are also many stakeholders from IT, actuarial and of course finance. In this paper I want to keep it high level and show a broad perspective but aim to give you something to think about. I am an accountant with many years of experience in managing finance change, currently working as Global IFRS Lead at Legerity – the industry innovators in Accounting Rules platforms, so I will be biased a bit towards finance, but hopefully I can bring an insightful view and would love to discuss any details further with you directly.
This is a change programme that will have far-reaching impacts across the organisation, with significant potential for challenge and disruption. It is a new accounting standard, so in that sense it is a finance change program, but the impacts will be felt in the data and source systems, actuarial models as well as reporting and disclosure. We are often asked if this is an actuarial or finance challenge, and we see answers on both sides, but really the big challenge of IFRS 17 is that it demands integration across the functions. This requires a new, closer collaboration in systems, data, process and controls like never before.
IFRS 17 is a principle-based accounting standard, it does not come with a manual for how to implement. It will be up to individual organisations to interpret the standard and set their requirements, including maybe goals extending beyond pure compliance. It is not going to be a case of simply selecting an application and installing it, you need to understand what you need now and into the future. Of course, with the hangover of Solvency II investments still present within the Insurance industry, how much to invest will also be a key consideration.
Data is going to drive your IFRS 17 solution. That sounds obvious, but it remains very important – and needs to be recognised early. Without proper consideration of the data implications of your solution, you will be heading for trouble. Clearly, having the data is a start and an area where many may struggle, but it is more than that – because the data needs to be granular, available in a timely manner and, importantly, of robust quality. IFRS 17 data will be subject to accounting controls, and so not only does it need to be accessible, but processes will need to be put in place around the data to ensure validation and audit. This means data needs to be transparent and shareable.
It is not just about the underlying source data – that data will be transformed and manipulated along the way. All these steps need to be validated and assured. There are many assumptions in IFRS 17 that need to be kept and controlled. A data lineage will need to be established from reported results to underlying transactions and assumptions.
When thinking about data requirements, you need to think about building an automated stable process for the future, but also you will need access to historic data, sometimes going back considerable periods into the past. The past and the future may require different considerations in the solution. The standard offers some options for the transition and that will need to be reflected.
Data requirements need to be defined as soon as possible, not least because you should really be ensuring you are capturing all relevant data now. It is a chance to drive consistency and standardisation across the organisation, particularly for businesses with multiple geographic footprints and / or historic acquisitions. But equally this can cause issues with differing levels of data maturity across businesses. In this respect, it is important that the implementation approach has the flexibility to manage data issues. The design should reflect standardisation, but there should be a modular approach so that timelines to fix certain data issues do not derail the overall project.
As I mentioned at the start there are many options to consider. This is a finance change built on actuarial input, so both parties need to be heavily involved. Not only are finance objectives important but also, looking to the longer term, the business objectives are very relevant. The impact of how the business will be run post–implementation must be considered. If you have not started yet, then you need to be doing impact assessments to understand what accounting choices to make. The standard offers quite a few, but equally you need to validate that you can pass the eligibility criteria and justify your choices, which is not always so easy. Beyond the choices to achieve compliance, there is the question of how far beyond compliance will your organisation aim for? A static, compliant solution might get you over the line, but how will you manage your analysis and performance management processes going forward? Regardless of what you choose, your IFRS 17 investment is going to be significant. This will be a lot more palatable for the Board if you can aim for some business benefits. You need to get started on this as soon as possible. Impact assessments followed by a proof of concept is the ideal method to help crystallise your options.
If you think about a traditional retail business, they have a relatively easy time in finance. A sale is a single transaction and can be posted directly to the P&L. In some sense in IFRS 4 the industry took a similar simple approach and booked premiums directly to the P&L. In IFRS 17, the journey from source data to reporting is a much longer journey. One of the most significant challenges is the number of steps in the process, the number of transformations and the potential handover between systems. When considering what has to happen from writing a policy to reporting revenue, then that workflow would look very similar to the graphic below.
This needs to happen at a granular level with all the controls and audit checks in place that a finance process requires. To facilitate validation and reconciliation, lineage must be established from end reporting to source data.
To facilitate an efficient implementation and to keep control of the process, it is useful to think about business events driving accounting journals This approach enables you to set defined data requirements for each type of event, and design the calculations and journals to deliver the required accounting. This gives you a framework to define your requirements in a very modular way, and allows you scope to look at the process and impact on system data and accounting at different levels of granularity.
At Legerity, we see that businesses are thinking of taking differing approaches in terms of where to perform the various calculations and processes. Some processes have clear homes – modelling and risk sits with actuaries, control and disclosure with finance – but in the middle are a number of IFRS 17 processes that sit in a grey area, particularly around calculation of the CSM and movements, producing journals and matching detailed underlying transactions. There is no ‘one-size-fits-all’ approach, and different organisations will design their process with a different allocation of responsibility.
There are many variations and they can be made to work to deliver compliance. However, when thinking about the transformational benefits, it should be a goal to process and store more of the details in the finance area, enabling a rich, quality-assured, and shared finance data store to enable analysis, reconciliation and reporting. This inevitably means opening up the historic black boxes of underwriting and actuarial but is a natural consequence of IFRS 17. This transparency of activities can be the key platform to deliver ongoing business benefits and efficiencies.
No one insurer is the same and no one solution will fit all. As already discussed IFRS 17 is about integrating underlying source systems, actuarial modelling with finance disciplines of control, audit and reconciliation. Some organisations will be at a stage in their technology cycle where a full transformation is appropriate, but for most that will be too costly and time consuming. Certainly those going for a full transformation should be well underway by now.
Understanding detailed requirements at an early stage is a challenge, but one area where it is important to achieve clarity as soon as possible, is the extent to which you want to enable business benefits and not go for a pure compliance solution. Experience tells us that taking a short-term view, and aiming for compliance only, is more costly in the long run – something a lot of insurers have already experienced with Solvency II.
The situation is further complicated because the vendor landscape is also fragmented. Vendors offering IFRS 17 solutions are coming at the problem from different angles, but all targeting – in their own way – the middle integration space. Actuarial vendors and ERP vendors are trying to extend their products, EPM vendors are using data transformation and reporting tools to bridge the gap, and specialist accounting calculation and rules platforms are focussed on enabling automated, more detailed finance processes. The decision on what makes sense will be driven by the extent to which your organisation is looking for business benefit compared against achieving the least level of disruption.
Some key areas to think about in your decision will be process automation, out-of-the-box financial control, processing power for high volume complex calculations, low cost storage options to handle high data volumes, future-proofed technology and non-disruptive implementation.
The key is to firstly make sure that the solution can handle the complexity and data volumes to deliver compliant IFRS 17 numbers on time. More than that, you need to be thinking about enabling the necessary walks, reconciliation and disclosures to be produced within the month-end close window. It will be so important to move away from silo-based data extraction and report processes, so that results can be produced and validated quickly, allowing finance to focus on analysis and adding value to the business.
IFRS 17 for many will be an unwelcome challenge coming off the back of Solvency II investments, BREXIT and unrelenting competitive pressure. However, the answer to the challenge is to take a pragmatic approach and use the opportunity to leverage your investment to deliver real business benefits. At Legerity we understand that one of the first challenges is just knowing what to do. To help with that we offer a comprehensive Proof of Concept which enables you to better understand how IFRS 17 will impact your data and systems. Please contact us and to discuss how we can help you get started on your journey to getting the most out of IFRS 17.
Legerity helps clients deliver complex accounting change. Legerity’s FastPost Accounting Rules platform provides a 3rdgeneration solution that meets new IFRS 9, 15, 16 and 17 accounting standards in a fast and non-disruptive manner.
Based on cutting edge application and data design, FastPost provides best in class accounting rules functionality for the most complex of contracts, products, tariffs and leases. Available as a cloud software as a service (SaaS), FastPost provides highly scalable and on demand performance, giving firms’ confidence that new IFRS accounting data is available when required.