IFRS 17: Successful Strategies
IFRS 17: Successful Strategies
Ever since IFRS 17 was notified in May 2017, it has been a dominant topic in the insurance industry worldwide. The standard has already been implemented in many countries with full-year results being declared for the first time.
Many countries are currently implementing it and will be going live in FY2025. IFRS 17, or the equivalent Indian Accounting Standard Ind AS 117, is still in its draft stage. A few insurance companies in India have implemented the standard for consolidation purposes for their parent organisations.
But, a lack of clarity as to the effective date has resulted in slower implementation. Considering the complexity of the standard and the anticipated costs of implementation, there was also some hesitancy as any changes to the standard in India or the effective date being pushed forward may further increase the costs.
However, this has changed now, as the Indian regulator Insurance Regulatory and Development Authority (IRDAI) is keen on kick-starting the implementation to avoid a strain on resources with all companies rushing towards meeting the deadline in one go. They have provided a roadmap and have guided that companies that meet certain criteria can commence implementation.
The challenges of implementation are alleviated to some extent as the experience of implementation in the rest of the world offers a learning experience and should help to reduce the time of implementation.
The best approach to tackle this task involves careful planning and execution, acknowledging the complexity of IFRS 17. Even with the experience of implementation in other jurisdictions, there would be a lot of uncertainties, and these must be considered during the planning phase. It is important to note that IFRS 17 or Ind AS 117 do not alter the fundamentals of business.
Good underwriting, expense efficiencies, good risk management and customer satisfaction will remain the core of business. The expected aim of the standard is to bring in more transparency and comparability.
During implementation, companies need to leverage this opportunity to enhance their understanding of business and bring in operational efficiencies. The broad steps for implementation could be:
People: IFRS 17 introduces complex actuarial and accounting concepts, and companies need to ensure that their teams possess the necessary expertise or seek external assistance to effectively apply the concepts.
Policy choices: The first stage would be to understand the impact of IFRS 17 on the financial statements. As IFRS 17 is a principle-based standard, the choices should be exercised in a way that they reflect the economic reality of the business being written. Quite a few insurance companies have already done this or are in the process of doing this.
Data and systems: One of the significant challenges in implementing the standard is ensuring that data systems can handle the new requirements. Identification of the right technological solution is the most significant decision in the entire journey. The choice will also depend on whether companies are viewing the implementation as a compliance exercise or as an opportunity to transform their financial systems to provide stakeholders and decision-makers with meaningful insights.
Processes: It would be an understatement to say that there will be a significant change to the way the financial information is prepared. Companies must update their documentation to reflect the policy choices and process notes and ensure that internal controls are in place to support accurate and reliable financial reporting.
Communication: Communication of results is the next important aspect that companies need to focus on. The actuarial and accounting teams need to put in efforts to understand the results themselves, as well as communicate these with the wider stakeholders; this needs to be budgeted in the implementation plan. Interaction with auditors at an appropriate stage is required to be sure that the companies meet the technical requirements of the standard while managing the operational and financial implications of the transition.
Companies need to reconcile results from the current GAAP and Embedded Value for life insurance companies to the IFRS 17 results. This will help in understanding the results that can be expected if the current strategy is to be followed.
Parallel runs: Before the first reporting under IFRS 17, it would be important to conduct parallel runs to test the new accounting policies and systems. This helps identify potential issues and ensures a smooth transition to the new reporting standards.
Additionally, insurance companies need to address the below:
Business planning and performance metrics: An important decision that companies need to make pertains to business planning and the key metrics for performance management. Will IFRS 17 results replace the current GAAP? Will the value of new business and Embedded Value be replaced? Will risk management focus on the IFRS 17 balance sheet or the solvency balance sheet if that is different? How do companies make sure that the business benefits from the better insights that are now available? The company should also be able to map data, say, from customer complaint systems to cohorts of policies, which would throw up any issues there may be with certain products or distribution channels.
Continuous monitoring: After initial implementation, insurance companies need to continuously monitor the effectiveness of their IFRS 17 processes. As the industry evolves, adjustments may be necessary to ensure ongoing compliance.
Support from the regulator: A mammoth activity like this, spanning an entire industry, needs support from the regulator. To ensure that companies get the benefits of implementing the standard, investors should be satisfied when implementation is done with adequate thought and checks. All companies should be able to adhere to the deadlines and demonstrate not just compliance but also an understanding of the numbers and the factors that affect the results.
As a first step, a clear effective date is required so that resources can be dedicated to work on the implementation. Another area where the industry can benefit from during the implementation is guidance for products or issues peculiar to the Indian insurance industry. However, this will be a discovery process as many of these issues would be uncovered when insurers spend time implementing them.
A recurring question is whether the regulator should mandate the choices so that there will be more uniformity in the results, which is one of the stated intentions of the standard. However, this is a premature decision, since it is only when many companies go ahead with their implementation that many of these issues would come to light. The regulator must invest time during the implementation of the standard.
However, while this may not be particular to Ind AS 117, one of the issues that the regulator needs to think about is the multiplicity of accounting and financial performance frameworks that insurance companies would have to deal with.
Currently, the accounting and the solvency frameworks are the same. Life insurance companies calculate Embedded Value to reflect their economic worth. The regulator has identified the requirement to move towards a risk-based solvency regime which is still in a preliminary stage. Until the framework is finalised and monitoring completely moves to the new regime, it is quite likely that the regulator may require solvency capital to be assessed in the current framework and the new risk-based one.
Secondly, especially for life insurers, Embedded Value reporting serves as a measure of the performance of the company. Reporting of Embedded Value may continue as a parallel activity until such time as Ind AS 117 is implemented and becomes business as usual. It is quite possible that the taxation, especially for life insurance companies, may continue with the current calculation as there are too many issues to be sorted out before moving it to Ind AS 117.
Therefore, it is quite likely that insurance companies will be producing results in three or four frameworks. The regulator could possibly leverage any of these frameworks to meet one or more requirements. E.g. The IFRS 17 balance sheet could be the starting point for a risk-based solvency balance sheet.
Another area where the regulator may be required to invest time is providing guidelines on how insurance company financials should be audited. Currently, there is only one line in the Financials, i.e., the Actuarial liability which is provided by the actuary. Going forward, almost the entire financials will be generated with actuarial inputs. Auditing firms have to ensure that they have actuarial resources to sign off on various aspects of financials.
The IRDAI also has an agenda for the development of the sector. Implementation of Ind AS 117 should aid the development of the sector as there would be more investors who would be willing to invest in the sector as they will now have quality information which should give them confidence in the industry.
Source:- Asia Insurance Post