Have you started your IFRS 17 journey? If not, it’s time to begin!
Over four years ago, the International Accounting Standards Board (IASB) introduced the new insurance accounting standard, IFRS 17. In only two years’ time, insurers with a December balance date will be completing their June 2023 accounts under the new standard, including June 2022 comparatives. Now is the moment to act - failure to respond could quickly lead to a loss of license.
Not implementing IFRS 17 on time leads to not being able to prepare your financial statements. Not completing your financial statements on time leads to fines under the Insurance Prudential Supervision Act (IPSA) and Companies Act. It also might lead to grounds for removal from the companies register. Removal from the companies register may lead to the Reserve Bank of New Zealand cancelling your insurance license.
Our experience of success factors
To meet the requirements of IFRS 17 is a significant project impacting the entire business across various teams and should not be taken lightly. IFRS 17 looks similar to New Zealand’s current IFRS 4 accounting standard, so it is easy to underestimate the differences and the complexity that the new standard brings to the end to end reporting process. There are numerous areas of judgement required that could have material unexpected flow-on implications on the reported numbers if not carefully considered.
The introduction of IFRS 17 will be a driving force in changing the operating model for insurance. In the implementation projects already underway, we have seen increased collaboration between the actuaries, accountants and IT/data teams, and we expect this to continue upon transitioning to IFRS 17 reporting.
This increased collaboration has been due to the nature of the new standard, where a much higher level of granularity requires re-assessing data availability and problem solving through collaborative teams to remap to the new requirements. For example, unpaid premiums which have previously been a high-level accounting adjustment will now need to be reflected within the liabilities, which are typically in the actuarial realm.
With the greater alignment between the teams, there is an opportunity to re-think and revolutionise the reporting process and the future operating model. However, all of this takes time.
As we all know, the devil is in the details and IFRS 17 is a prime example of this. The standard is principles-based rather than prescriptive, along with some options based on accounting policy choices, so detailed analysis is required to fully understand the impact of any interpretation and choices made.
Data and operating models
For example, the Premium Allocation Approach (PAA) measurement model appears to be the simpler model to implement. However, from a practical perspective, we have seen life insurers opt for a General Measurement Model (GMM) approach to their Yearly Renewable Term (YRT) business, even if it’s been assessed as automatically qualifying for the PAA approach. This conclusion is usually a result of not only considering technical interpretation, but also operational impacts and the effort required to build processes for multiple models. That is, a more holistic view of the overall operating model has driven such change.
End to end data flow picture
This need for a holistic approach to the end to end reporting process requires greater collaboration not only between the actuaries and accountants, but also the system architects and data specialists. The success of IFRS17 projects and the value added (beyond compliance and keeping your insurance license!) largely hinges on data transformation which provides an opportunity for better reporting to inform the business. However, this is only if sufficient time is available to design a solution to meet the strategic needs of the business, rather than just being a compliance activity.
While there have been amendments to IFRS 17, including delays to the implementation date, now that the European Financial Reporting Advisory Group (EFRAG) has endorsed the standard, we do not expect further material changes before the implementation date of 1 January 2023.
It is imperative that insurers start their projects as early as possible to allow enough time to not only understand the implications of the transition to IFRS 17 on their business, but also to focus on building an innovative and streamlined solution to meet their IFRS 17 needs. Many insurers, including some in New Zealand, have made significant progress in their journeys. Industry interpretation is starting to align, software solutions are available, and there is no advantage in waiting for further industry progress as any IFRS 17 solution will need to be customised to your business.
Constant iteration and agility
We have seen first-hand that upon building an IFRS 17 solution, unexpected results are unearthed, driving some re-design of the initial plan. These moments can either be rushed with temporary fixes or solved with time and proper planning, implementing a best practice long-term solution.
Connect with our cross-functional team to hear how we can help you to meet the requirements of IFRS 17 with practical, holistic solutions for your business.