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Internal Audit functions in the UK are at different stages with regard to IFRS 17 assurance planning, and are currently reassessing and adjusting their holistic assurance timelines. IFRS 17 has a number of areas of complexity and challenge and prioritising these can be difficult. This blog post discusses some of the key methodology decisions, highlighting common high risk areas and audit’s approach for providing assurance that informs governance around methodology.
A critical stage in the IFRS 17 implementation process
Internal Audit functions are reconsidering their assurance timelines for two reasons – Covid-19 has changed Internal Audit’s and organisation’s wider plans for 2020, and, during March, it was announced that the effective date of IFRS 17 will be deferred to 1 January 2023, prompting project teams to consider refreshing their own timelines. With many programmes on the cusp of transition from design stage into execution, assurance over the IFRS 17 applicability assessment performed across the product portfolio is an important early milestone in ensuring the implementation programme covers all insurance contracts as defined within the standard.
A typical high level IFRS 17 programme is set out below – this may be further broken down based on workstream, geographical location or other characteristics.
Certain key decisions, the working assumptions, are made early and drive downstream effects of the implementation programme. For example, adopting the General Measurement Model (“GM”) will require many organisations to modify existing systems and databases to capture additional contract or portfolio level data; whereas the Premium Allocation Approach (“PAA”) may not require such a significant change to the organisation’s existing infrastructure (but may introduce different risks). The cost associated with identifying and correcting inappropriate accounting policy or methodology choices during the implementation programme can be substantial and may put key deadlines at risk.
What are some of the key methodology choices for internal audit to consider?
While IFRS 17 introduces numerous accounting policy choices, the following methodology decisions are some of the most pivotal in driving implementation. These should be the focus for independent assurance and challenge, ensuring appropriate controls and governance around the approach, data, judgements and assumptions behind each. These areas typically form some of the initial working assumptions agreed by project teams but are equally important further into implementation.
A view on the approval process
As well as the technical risks noted above, the process for review and approval of working assumptions and other methodology choices is important to get right. As noted in our previous post on assurance timelines, IFRS 17 reaches all parts of a business, so approving bodies or individuals must be careful to bring in the requisite IFRS 17 and actuarial technical skills and local entity knowledge to do this effectively.
One of the key risks related to governance of working assumptions is the broad impact of the standard across the business and the possibility that a critical point of view might be missed when agreeing them. The composition of bodies approving working assumptions – and the process for doing so – is fundamental to the programme being set up correctly, yet because it comes at the end of the Initiation phase of the programme it may be rushed in order to meet an internal deadline. Audit should be aware of internal programme milestones which may indicate increased risk at certain stages of the implementation.
Many internal auditors have accounting experience. However, given the new concepts brought in by IFRS 17 and the need to fully understand technical matters in order to challenge the effectiveness of controls and governance around them, it will likely be necessary to supplement this existing accounting experience with additional IFRS 17 specific expertise in accounting, actuarial or technology. In order to provide impactful and influential assurance over the process for making IFRS 17 methodology decisions, Internal Audit will need to bring together a range of skills in the same way expected of the business.
Please refer here for other resources related to COVID-19 for Financial Services.
Charlie has been a Senior Manager within Deloitte’s Insurance Audit group for the last 3 years. He is a qualified accountant with 9 years of experience providing audit and assurance services to general and life insurance clients. He focuses on the provision of internal audit and controls advisory services and manages a portfolio of internal audit engagements. Charlie began his career with Deloitte with a focus on SOX controls and spent two years seconded to Deloitte Canada leading the audit of a leading US listed life insurer. Since returning to the UK in 2017, Charlie has continued to manage the delivery of a portfolio of client internal audits as a key member of Deloitte’s Insurance Internal Audit team, working in the main with large global insurers. Charlie is the Insurance Audit group’s lead on IFRS 17 for Internal Audit, delivering training, advice and support to assurance teams on the subject. He specialises in audits in the areas of Finance and financial control. As well as delivering and managing internal audit programmes, he has also worked on IFRS 17 deliverables for London Market clients.