Upgrade and Digitalise the Financial Systems with IFRS 17

Diego Cervantes-Knox, Director, Finance & Operations, PwC

Diego Cervantes-Knox, Director, Finance & Operations, PwC

Key Challenges of IFRS 17 for the CIO Agenda

The New International Financial Reporting Standard released by the International Accounting Standards Board in May 2017, commonly known as IFRS 17, will replace IFRS 4 on accounting for insurance contracts and has an effective date of 1 January 2022.

This is the biggest change in finance in the last 20 years and the perfect opportunity for insurers to significantly upgrade, digitalise their financial systems and accelerate their Cloud Strategies.

"Given the types of solutions and challenges that IFRS 17 creates for an organisation’s financial architecture and infrastructure, cloud-based solutions present significant advantages"

The New Standard creates three key challenges for an organisation’s technology and infrastructure agenda:

Greater Granularity: One of the biggest challenges created by IFRS 17 relates to data. Vast volumes of information are required at the lowest level of accounting granularity to measure profitability for groups of contracts.

Higher Frequency: Information is required at least monthly, if not daily, placing greater emphasis on the principles that underpin the organisation’s data governance in ensuring better data quality, lineage, and significant automation. It is achieved through infrastructure.

Better Performance: Risk and accounting processes must be completed more quickly to ensure a more effective and efficient schedule for the financial working day timetable.

Insurance CIOs must start dealing with complex business and IT requirements that call for close cross-functional collaboration to:

• Deliver the changes that need to be made to current systems, applications and legacy systems to ensure the required IFRS 17 capability

• Strengthen their organisation’s data management strategy, including data quality, storage and archiving

• Capture, standardise and leverage data through greater automation

• Re-engineer and develop current and new accounting rules engines respectively to generate posting specifically for IFRS 17

• Build a stronger suite of consolidation, reporting, and disclosure management tools

Considering The Wider Picture

Once the new accounting policies and actuarial methodologies have been defined, and working assumptions have been agreed upon, organisations must quickly switch gears and focus on how technology can effectively provide a solution that delivers on IFRS 17 compliance while maintaining or enhancing operational efficiencies. Several broad themes are emerging that must be considered to plan for the successful implementation of the chosen solution:

• Leveraging existing or new cashflow engines

• Data storage capability, whether this is a relational data store, a data lake, or a hybrid solution that caters for multiple levels of data hierarchies and granularity to cover distinct operational processes

• Chart of accounts and accounting rules engine required for the new standard from your current solution

• General Ledger and sub-ledger strategy, often leveraging a multi-ledger strategy allowing for multi-GAAP regulatory requirements across the various geographies in which the organisation operates

• Consolidation and disclosure management tools and reporting suite to support the new disclosures

Given the complexity of IFRS 17 and an organisation’s existing infrastructure, we must understand what, when, and how a vendor capability in the form of an IFRS 17 calculation engine solution can be integrated, whether this is off-the-shelf or a bespoke built.

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Approaches to IFRS17 Solution Implementation

In the last six to nine months, global insurers and composites have moved into a detail design and implementation phase. In most cases, to ensure business efficiency and effectiveness, organisations have chosen none of the three approaches outlined below, taking into consideration:

• Close-period controls

• End-to-end governance and alignment to working day timetable

• Process hand-offs (inputs/outputs), as well as internal workflow configuration

• Exception management and adjustments processes

• Other issues regarding the configuration of interpretations and therefore any subsequent downstream changes to the out-of-the-box solution functionality

Accounting-Led Solution: This focuses on enhancing or re-defining sub-ledger accounting capability, strengthening adjustment, aggregation, and period close capability. The key considerations with this approach are, first, often, there are higher expectations for existing actuarial platforms to provide Allocations, Discounting & Risk Adjustment; second, complex data integration is required with multiple Data Integration, Staging, Data Lineage and Workflow capabilities to support the end-to-end process flow.

Actuarial-Led Solution: This approach, where appropriate, will leverage the investments already in place with MCEV, and Solvency II. Often the focus here will be to ensure that the solution is more than capable of generating the Cashflows and discounting, UOA Application, and CSM Calculations. The key consideration with this approach is that it may require complex systems integration with accounting rules engines (and/or sub-ledgers) with adjustments, aggregation, and period close functionality requiring greater process design.

Data-Led Solution: A hybrid approach that focuses on demonstrating strong Cashflow Discounting, UOA Application, CSM Calculations, Data Lineage and Workflow with strong data integration into accounting rules engines (and/or sub-ledgers). There is a greater reliance on an organisation’s existing cashflow engines to generate BEL cashflows that are compliant with IFRS17. This approach is designed to really drive automation straight through processing in Finance back-office or production capability.

Accelerating Your Cloud Strategy

Given the types of solutions and challenges that IFRS 17 creates for an organisation’s financial architecture and infrastructure, cloud-based solutions present significant advantages.

There are three obvious advantages:

Infrastructure Scalability And Lower Total Cost Of Ownership: Conventional fixed infrastructures required a thorough estimation of volumetrics, integrations, data loads, and data storage. This was due to the concentration of activities required for quarterly, half-year and year-end financial reporting and the associated tools, licensing, on-premises installations, and ongoing investment in development, maintenance and fixes/testing. A cloud solution can quickly and efficiently scale to meet changing volume-related demand, with little or no residual infrastructure costs after the reporting cycle is over, therefore reducing the total cost of ownership significantly. This presents tremendous advantages given the vast volume of data that will be flowing through the chosen solution architecture.

Agility And Productivity: Actuarial and Accounting processing times are greatly reduced in an efficient cloud-based solution compared to the costs associated with a fixed-size on-site solution.

Let Businesses Focus On Core Finance Priorities, Not IT: Enables business users to focus on business-critical activities rather than infrastructure and data management. Analysts’ time can be spent generating insights rather than loading data.

There are multiple ways of implementing an IFRS 17 solution and the wider solution architecture, and we expect most customers to adopt one of these two models.

• Software as a Service [SaaS], a vendor managed service, keeping the core application to standard functionality.

• Platform as a Service [PaaS], enables business users to retain control over customisation and the scope of applications.

In most cases, and until the standard goes live, we will probably see organisations choosing a hybrid between these two.

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