By Shannon Harris, Senior Research Executive, CeFPro
By Shannon Harris, Senior Research Executive, CeFPro
IFRS 17 continues to produce several challenges as firms gear up for parallel runs and final implementation. As yet, the timelines surrounding the reporting standard have been uncertain and recently the industry was granted a one year extension. This deferral has allowed firms to gain extra time to further enhance their programs and plan for transition. However, several unanswered questions remain, and industry professionals require further clarification in order to successfully finalise their planning – some of the largest challenges relate to transition and implementation. Due to the nature of IFRS 17 a vast amount of systems, departments and documentation will require alteration. In addition, questions around the technicalities of the standard are causing concern, items such as re-insurance and the contractual service margin are yet to be finalised. The coming 6-12 months are set to be a crucial time within the industry as many firms place greater emphasis on moving forward and meeting the deadline.
To explore these themes further The Center for Financial Professionals conducted an extensive research study into the top opportunities and challenges surrounding IFRS 17. Surveying multiple insurance firms, banks, regulatory bodies, consultants, advisors and more allowed a bigger picture as to the key challenges across the industry. The study produced several interesting trends and contributed to the agenda of our upcoming 4thEdition IFRS 17 Forum taking place 24September in London. During the study, we asked participants for their opinion on the top 3 challenges over the coming 12 months, below are the three highest ranking answers;
Undoubtedly the main concern surrounding IFRS 17 was implementation and how firms can successfully transition from IFRS 4 over to the new standard. So far, the project has required a vast amount of resources and we are not yet at the finish line. Several survey participants mentioned how they are having difficulty justifying resources, one reason may be due to the fact many people still do not fully understand IFRS 17. Or another explanation is that some firms are waiting for a trigger point to begin implementation, therefore resources may be withheld until this happens. There was also concern around the flexibility of implementation, as the final rule has not yet been released firms must ensure they can incorporate any changes into their planning. Below are just some of the key comments produced from the survey;
“Our main concern is the implementation cost and then explaining to people how it works, I still don’t think a lot of people don’t understand it. We are allocating a lot of time, resources and money on this, but how do you justify that expense when people don’t understand”
“The smaller companies have seen what it’s about and have an understanding but are waiting for the trigger point to start re-allocating resources. There is lots of noise of it being more resource intensive than Solvency II and that needs to be thought about seriously. But until anyone makes a noise and begins implementation it’s difficult to know what will happen”
“I think the main challenges is to keep up with all of the changes, what changes you will embrace and what changes you want apply. Having an adaptable implementation plan may be key to make sure you can take on all of the required changes”
“You really have to think carefully about implementation, you could go full steam ahead and start the process. But then later down the line find out the regulators want something else included, you then have to re-trace your steps and fix the problem. So do you start now and amend later down the line or do you wait and run the risk of being behind the curve?”
Data & systems
Another major concern highlighted by survey participants was the data and IT requirements needed for IFRS 17. Since the announcement of the transition it has been widely acknowledged that a large amount of legacy systems, infrastructure and data would need to be updated/amended to make this project a success. But achieving this goal is no easy task and financial institutions have experienced several obstacles when trying to amend their internal operations. One of the leading challenges mentioned throughout the survey was the need to connect actuarial departments and IT departments. These two areas of the business are largely disconnected but must work together to ensure the successful implementation of IFRS 17. On top of this dilemma firms will also have to re-organise their data and systems, it has been mentioned that IFRS 17 will require increased granularity and enhanced controls. Our research study produced several remarks on the IFRS 17 system and data requirements, below are just some of the leading concerns;
“The difficulty comes from an IT office perspective where people are working on this and developing IT programmes but they don’t really understand how IFRS 17 works”
“If you have a warehouse fit for purpose it should have the granular stuff, but how do you incorporate the actuarial pieces into the systems? The biggest problem is joining the actuarial world and systems together”
“Well I think the IT systems is a significant area in IFRS 17, if you have the best IT solution IFRS 17 shouldn’t be challenging. If you don’t have the IT you can’t put it into the various risk groups”
“Everything will have to be very granular to do the contract boundaries and what not. So its preparing warehouses for the interrogation and scrutiny that’s required, and being able to report and having sufficient control and analysis around it”
Impact on investors
The final area which was regularly mentioned as a post-implementation challenge was the potential impact on investors, shareholders and rating agencies. Currently there is uncertainty on how the switch to IFRS 17 will impact wider markets and individual institutions, there is a potential risk that some firms could appear unprofitable or undesirable after implementation. Although this concern seems like a challenge of tomorrow it can actually be tackled today and is something many industry professionals have already begun to target. By effectively communicating the expected changes and explaining how IFRS 17 could impact the industry may help in limiting the negative impacts. If investors, shareholders and rating agencies fully understand the changes to profits they may be less likely to retract their support when the numbers change after implementation. It appears that the impact to investors is an ongoing debate and just some of the comments we received are noted below;
“You will see the large insurance companies actively working on their investor relations now. They are keen on the changes, they want to see how it will impact future profit”
“There are still a lot of questions, like how IFRS 17 would actually effected the company in terms of outside share prices. We have already thought of that but additional insight would be interesting to see how other firms are tackling this issue”
“IFRS 17 impacts share price and reporting, there could be an imbalance in reporting and that could impact a firms profits. But if the bottom line changes it doesn’t necessarily mean there was a change, even if you leave things as they are the reporting changes could alter the profits”
“Everything comes down to the communication and the effectiveness of that communication. If you can get it right now and communicate the anticipated changes to investors then you might limit the impacts in the long run”
The results of our study provided an exclusive insight into the top challenges faced by those leading the IFRS 17 transition. Speaking with actuaries, accountants, reporting officials, regulators and consultants highlighted a mix of key topics and trends from within the industry. A surprising outcome of the investigation were the top three areas of concern, these included implementation, data & systems and the impact on investors. With so many unanswered questions around the transition including the implications for clients and the wider business many firms are understandably concerned about the task ahead. The next 12 months are set the be especially important in the progression of IFRS 17 as we await the final rule and gear up for the first rounds of parallel runs.
In light of this The Center for Financial Professionals will be hosting the 4thEdition IFRS 17 Forum taking place on the 24th of September in London. The compact and concise one day forum aims to cover the latest trends surrounding the standard. Throughout the gathering attendees will be encouraged to explore the latest developments within planning, timelines and implementation.
Multiple interactive sessions including presentations and panel discussions will prompt thought-sharing and collaboration. Over 10 handpicked industry professionals from across the UK and Europe will deliver their insight on the top opportunities and challenges surrounding IFRS 17. Just some of our presenting institutions include;
Allianz | Zurich | Aviva | Deutsche Bank | AIG | Legal & General | Lloyds Banking Group | Just Group plc | Skandia Group | Hiscox | SCOR Global life
To find out more about the upcoming IFRS 17 Forum please visit our website at www.cefpro.com/ifrs17 or email me at firstname.lastname@example.org
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