Why should you use a Target Operating Model for Insurance IFRS?
Achieving maximum business benefits from an Insurance IFRS implementation
1. Reporting to the Market
The extensive changes that will be imposed by the new IFRS Insurance demand that the whole organisation is capable of operating using the new profit drivers well ahead of the first release of the IFRS earnings under the new basis.
The consistency across the market (and often within an insurance multinational group) and the increased transparency that the new IFRS will produce for the first time for several insurance markets is likely to generate a demand that the communication of performance is strongly aligned with an operating model that uses it to manage performance and allocate resources.
The combined arrival of IFRS Insurance and Solvency II in the short space of a few years from now adds pressure to evolve any Target Operating Model developed to guide the Solvency II implementation and to ensure that both profit and capital dimensions are aligned within the insurer’s operations feeding seamlessly to the market reports and the all-important return on capital that could benefit from an unprecedented level of consistency across Europe.
2. Strategy and Governance
It is unlikely that the arrival of IFRS Insurance will have an immediate impact on insurers’ strategies. However those strategies and the forward looking statements that link them to the Reporting to the Market dimension would be affected because of the new financial reporting language brought in by IFRS Insurance.
A TOM-based approach to IFRS Insurance adoption would naturally consider the process leading to the formulation of strategy and focus at an early stage on the impact IFRS Insurance would have on the planning and forecasting processes of the operating model. These elements of the model are the key tools for all levels of management in governing how an insurer achieves its own strategy.
Assessing the impact that IFRS Insurance requirements have on existing governance processes is facilitated by a TOM-based approach. This is because the new data sources can be analyzed at an earlier stage to ensure that those in charge of governance are promptly equipped and trained to discharge their duties within the new financial reporting framework set by the new IFRS Insurance rules.
3. Organization, People and Culture
The change in the measurement of insurers’ reported profit will materially affect the performance measures on which reward and long-term incentives are based. In all cases the setting of performance targets is completed at a planning/forecasting stage in the financial reporting cycle. This impact links this dimension of the operating model with the strategy and governance dimension.
Using a TOM-based approach to manage the implementation of a change program with material impact on internally and externally reported profits will help insurers to manage changes in all the people dimensions of their operating model. Particularly the adaptation of the existing incentive principles and the alignment of externally reported indicators with those used to manage the insurer’s business internally.
The volume of data necessary to satisfy internal management objectives is a multiple of the externally reported information. A TOM-based approach to the IFRS Implementation would bring out the scale of the change on management information at the outset of the implementation timeline allowing the design of an approach to implementation that builds on areas where finance and the wider business functions interact more regularly. This would offer a stronger internal consensus around the implementation efforts contributing to a more natural incorporation of the new IFRS Insurance language in the insurance corporate culture.
When analyzed against a technology-heavy change program such as that arising from the new IFRS Insurance rules, the infrastructure dimension is the most tangible and readily understood element of the operating model where a TOM-based approach can deliver significant benefits.
The delicate status in which many insurers found themselves today as a result of the expensive efforts to build their Solvency II infrastructure heightens the disruptive risk from another change overlaid without any consideration as to how the operating model can be optimised to avoid rework and duplications.
The involvement of multidisciplinary teams involving key stakeholders in finance, risk and actuarial to work with IT architecture experts could deliver superior levels of outcomes if conducted within a TOM-based approach to the IFRS Implementation.
The design of the evolutionary pattern that the Solvency II infrastructure must follow to be safeguarded and to be leveraged for IFRS Insurance purposes is of critical importance for the majority of European insurers. The use of a TOM to guide this exercise would usually de-risk it and allows the insurer to increase the likely seizure of those Strategic Synergy Benefits that Deloitte expects to be particularly material in this dimension.