IFRS 17 “Insurance Contracts” has been saved
Perspectives
IFRS 17 “Insurance Contracts”
Harnessing compliance risks to drive strategic opportunities
With only three years to go until adoption of International Financial Reporting Standards (IFRS) 17, what actions should insurers take now to navigate compliance obligations and prevent roadblocks to sustained business success?
July 30, 2018
A blog post by Wallace Nuttycombe, principal, Deloitte & Touche LLP; Azer Hann, partner, Deloitte Canada; Bryan Benjamin, senior manager, Deloitte & Touche LLP; Marianne Davitjan, senior manager, Deloitte Canada; and Saad Malik, manager, Deloitte Canada.
The scale of IFRS 17 changes will require a multi-year effort by insurers to meet compliance timelines. Insurers should act now to carefully understand the impacts, assess strategic options, and make well-informed decisions to determine appropriate controls and next steps on the path forward. The required changes will disrupt traditional operating models, involve functional and business areas enterprise-wide, and require significant effort and associated cost. Leading insurers are seeking synergetic, opportunistic, and strategic benefits to drive value from the anticipated costs of compliance in order to enhance the target operating model. By understanding and anticipating disruptive forces driven by IFRS 17, leading insurers can take proactive steps to innovate their strategies, embrace complexity, and accelerate performance.
Analyzing the impacts and requirements of changes driven by IFRS 17
IFRS 17 requirements will require vast changes to the way that insurance contracts are accounted for, recognized into income, and presented in financial statements. Traditional financial metrics calculations will also need to be redefined to reflect the new financial statement presentation and accounting model, impacting performance measurement and changing overall risk profiles. The extent of changes required across operating models, processes, and technology will drive a variety of resource, skill, and organizational changes. The dependencies involved in designing and implementing these changes will likely require a multi-year effort. Evidencing proper implementation will require effective controls across the journey from the current state to the end state. Existing controls will need to be evaluated and new controls put in place to address specific risks and meet compliance objectives, as well as audit documentation standards.
An illustrative overview of end-to-end impacts from our experience working with clients on IFRS 17 and other major initiatives is presented below to highlight the extent of cross-functional change required.
Re-assessing strategic options, considering broader stakeholder impact
To effectively manage the cross-functional changes required as a result of implementing IFRS 17, insurers should consider how the changes may impact performance and stakeholders, possibly necessitating a shift in strategy and objectives. For example, for certain types of contracts, it may make sense to defensively pull back and redeploy capital or invest in a new business instead of continuing along the current path.
In assessing their strategic options, it is also important for insurers to consider risks associated with, and emanating from, their chosen strategy. For example, under the target operating model and planned business, how will the new income statement appear and what key performance indicators will be of interest to investors and other stakeholders? How can this be compared to others and what data, reporting, and process/application changes are needed to sustain demonstrable business performance?
Some areas for strategic consideration include:
- Reassessment of profitability, capital required, and capital levers
- Product and pricing strategy, including diversification/portfolio restructuring
- Risk transfer considerations, including transfers to capital market or re-insurers
- Asset portfolio restructuring, such as considering income statement mismatch
What should risk and compliance functions consider doing now?
Our experience indicates that many insurers may be challenged to align existing risk management operating models with the new target operating model. We’ve seen that greater congruence between an organization's approach to risk and its overall approach to business can translate into better risk management operations—in other words, when risk management aligns with the business model, it is often easier for employees to learn and execute risk management processes. As insurers prepare to implement these changes, risk functions can consider the following four initial priorities:
- Target state financial reporting—Assess the target state impact on financial reporting to identify process and applications changes and lay the groundwork for capturing required data. Define a systematic approach to manage the complexity of process and applications changes across functional and business areas.
- Compliance readiness—Develop an enterprise-wide baseline for IFRS 17 requirements and define a critical path toward achieving key objectives.
- Team capabilities—Consider the proper mix of in-house resources and external capabilities to address planning and implementation skillsets across finance, actuarial, risk, and technology teams, as well as respective business areas. Identify committed resources and engage them early in the implementation process to avoid potential bottlenecks.
- Governance and controls—Establish an effective governance and controls program to address the cross-functional nature of the teams, skills sets, and experience involved in planning and implementing IFRS 17.
Deloitte has developed a framework and tailored tools to help facilitate rapid assessment of controls to effectively shape and execute IFRS 17 implementation plans. Our framework is designed to accelerate efforts saving time and costs by mapping impacts, helping to prioritize areas of risk, and helping you proactively addressing potential roadblocks.
To learn more about the impact of IFRS 17 and how to plan for the new change, take a look at our previous articles that explore drivers of change in data functions and offers tips to better prepare for and implement the new standard.
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