IFRS 17 is less about reaching its destination – the calculation of closing balances – than the journey it takes to get there. Critical as they are, the standard's calculations are just part of a much bigger picture, covering not only data, systems and processes but also how these elements are controlled.
Understanding the key new challenges that insurers must navigate, the team behind FIS' Prophet risk management solution maps out a route to compliance
Challenge #1 – improve data management
Fundamentally, IFRS 17 demands unprecedented levels of connectivity and collaboration between insurers' actuarial and finance departments, especially in the way they manage their data. This means actuaries will now need to apply finance's rigorous standards of control to actuarial modelling.
Accountants' financial controls have long been under regulatory scrutiny, leading to legislation such as Sarbanes-Oxley that insists on efficient, documented controls. Under IFRS 17, actuaries too will need to demonstrate robust controls, audit trails and systems – and less reliance on unmanaged spreadsheets and processes. More specifically, they must:
- Provide for common assumptions information – "one version of the truth" with a clear link between the input assumptions and the calculations that use them.
- Ensure reproducible and traceable results, with locked-down data that demonstrates links between inputs and outputs.
- Add governance data to reporting data, so that reports can show not just results, but the steps and approvals that led to those.
- "Translate" the large, distributed data sets produced by actuaries into the specific values needed by the finance team, through controlled mapping mechanisms.
- Implement robust reconciliation processes to check the completeness and accuracy of any data transfers between systems.
- Allow for both volume and granularity in data retention and storage policies. Each new regulation requires new metrics to be calculated, increasing the amount of data that needs to be stored, and IFRS 17 is no exception.
- Put in place a controlled, documented process for any mechanisms used to make actuarial adjustments to data before it is published.
IFRS 17 also requires a different approach to auditing the reported values, as reported revenue and expenses will now consist largely of actuarially calculated values, spread across multiple lines of profit and loss. Reported closing balances will potentially need to be brought forward and to incorporate period and closing data.
Currently, provisions are typically calculated outside the accountancy system and passed to accountants as effectively black box output. IFRS 17 mandates not only certain calculations – such as time value of money – but also that these "intermediate" results are controlled to accountants' satisfaction. In other words, accountants need the lid of that black box to be opened, and its parts to be clearly labelled.
Actuarial review processes, meanwhile, have tended to focus on method – allowing actuaries to use their discretion as long as they can justify any differences in results. Accounting review, by contrast, is usually based more on transactions and often looks to a set of calculated variants to show the path from the previous value to the current value. Under IFRS 17, the standards applied by both sets of reviewers are likely to be tighter.
Overall, insurers will have to apply the same rigorous standards of audit and control as the finance department to actuarial modelling. And that means reducing their reliance on manual processes. At the same time governance policies will need to extend to the full cycle of calculations.
Today, it may be sufficient to take an actuarially calculated value and then place it under accountancy controls. IFRS 17 effectively places the whole calculation under the same controls, as the standard dictates the method. Any direct dependency on accounting values, such as experience adjustments on the contractual service margin, will encourage this approach even more.
IFRS 17 will also stipulate visible controls around the assumptions that are often not demonstrated, or required, even under Solvency II. What is more, since the standard's calculations involve using values from previous valuations, there will be a greater need to ensure the accuracy and robustness of any storage and retrieval of granular results.
By following these recommendations for data management, insurers will be in a far stronger position to achieve compliance with IFRS 17. But there is a greater opportunity here, namely, for actuaries to enhance and improve their data systems and processes of governance and control. This will, in turn, help increase efficiency, ensure accuracy, support collaboration and, above all, create a more robust and meaningful framework for risk management and ultimate business value.
Challenge #2 – modernise actuarial and finance systems
For many insurers, actuarial systems could be much the same today as they were not only five, but also 20 years before. Historically the focus has been purely on computational complexity, driven by cumulative regulatory changes. Equally, accountancy systems have taken an "arms' length" view of insurance contracts, based on separate aggregate results.
Now, with so much at stake, it's high time to bring aging systems up to date.
Today, actuarial systems are critical to businesses and should be used to underpin strategic decision-making, not simply as a risk reporting system for regulators. To get the most value out of these risk management tools, insurers need to make sure they are embedded across their organisation and controlled centrally by qualified teams.
In many regions, however – and particularly those yet to experience Solvency II or equivalent levels of risk-focused regulation – this requires a complete change of mindset and transformation of systems.
For these hitherto less regulated territories, IFRS 17 will come as something of a shock to the (risk) system. A jumble of antiquated solutions held together by "band aids" and in-house "glue" will lack the control and cohesion that IFRS 17 compliance is going to demand. Instead, you'll need an environment with the following attributes.
- Connectivity – The production of IFRS 17 numbers will rely on actuarial systems to perform the calculations coupled with data from the accountancy systems, and accountancy systems to report the resulting data from the actuarial systems. This requires the two systems to be carefully integrated and orchestrated together, supporting close collaboration between actuaries and accountants.
- Governance – Everyone working with data produced by the actuarial system needs full confidence in the provenance of its calculations through a chain of systems that is not only well controlled but also has strong auditability built in.
- Mission-criticality – IFRS 17 puts actuarial calculations and results front and centre of its reporting requirements; desktop systems and end-user computing will struggle to support this.
- Automation – For Solvency II and the like, many insurers have already implemented a "fast close" process, compressing the time needed to complete a period-end run. By documenting all the processes involved in producing and approving actuarial reports, you can then streamline and automate them through APIs that expose key attributes and enable workflow software.
- Reputation – IFRS 17 will not be the last accounting change, and the business demands on risk management will not stand still either. So, you need to be sure of your vendor's credentials and investment provide you with the ability to accelerate improvement, reduce operational risk and lower the cost of IFRS 17.
- Speed and scalability – IFRS 17 will create additional reporting requirements for insurers and may be computationally or data intensive compared to other regulatory reporting. Certainly, for all insurance companies, life and non-life, the level of detail that you need to report on will increase. Internal managers of all disciplines are also ever more reliant on the results produced by actuarial systems to deliver new insight, and to allow more granular scrutiny of the business. Can your system scale to meet these new demands on computing power and data? And will it provide the speed and throughput to meet the ever-decreasing deadlines?
Above all, start thinking about these requirements right now. Risk management systems cannot be installed overnight, needing planning and coordination across many departments and stakeholders. And adding expensive additional ledgers won't solve those weaknesses to sub-standard existing systems.
An enterprise actuarial solution will help deliver constant business value across the whole spectrum of actuarial and risk analysis – from product pricing, reserves and valuations, through asset-liability management and capital projections, to driving five-year business plans.
Challenge #3 – improve automation and workflow
Automation and workflow improvements have long been on actuaries' "to do" list, but are often left for a time when work eases off. Ironically, the very lack of workflow solutions can explain why this time never comes. Now, IFRS 17's emphasis on audit and control makes it more important than ever to reduce manual actuarial, finance and risk management processes.
There are two more reasons why insurers should increase automation. First, the senior managers of today's insurance companies are increasingly interested in the risk metrics of their business, which means more modelling runs, data analysis and pressure on actuarial processes. And second, insurance margins continue to tighten – so, rather than hire more actuaries to ease the pressure on processes, firms need to make existing teams more productive through automation.
There are also good reasons why – unlike their finance colleagues – actuaries have largely resisted adopting automated workflow solutions until now. In contrast with highly standardised financial close processes, period-end processes for actuaries vary widely from firm to firm. The models are different, and so are the data requirements, making solutions complex to implement.
Despite these variations, actuarial processes at period-end do follow a common sequence that lends itself well to automation and should be the focus of any workflow solution to IFRS 17:
- Data gathering and enrichment – collation of data from a range of input systems, both internal and external, and including policy and claim administration systems, finance systems and economic scenario generators.
- Assumptions setting – although sometimes part of the data- gathering process, assumptions often require formal approval before use and introduce extra stages in the business process.
- Model execution – running the model using the data and assumptions gathered (and optionally approved).
- Aggregation and contextualisation – summing up the results of the modelling process at the level expected by the business, frequently combining data from other sources to add context.
- Results analysis – checking the results against expect values or cross-checking one set of results against another, sometimes automated but often significantly manual.
- Dissemination – publishing the results to the business and regulators, usually via a third-party tool such as a business intelligence engine and integration with the general ledger.
The actual business process surrounding each stage can vary, with some firms requiring manual approval at certain points, or automated "sanity checks" to ensure that results are not wildly different from expectations.
It is also vital to remember that the sequence described above represents an ideal world where everything goes according to plan. Any workflow solution needs the ability to follow not only this path, but also all possible exceptions – when a stage is missing data, fails or is overdue. When setting up business process definitions, you should pay a lot of attention to managing both exceptions and escalation, to ensure you never miss a reporting deadline again.
Lastly, technology is not constant. The recent uptake of cloud has been incredibly fast – from flat refusal to whole-hearted acceptance in less than five years. Focusing entirely on building a process for IFRS 17 may lead firms to create a rigid workflow, with hard-coded stages that hamper the adoption of emerging working practices and technologies. So, while automation matters hugely under IFRS 17, a flexible framework for workflow can be just as important in the long run.
So, can you go the distance for IFRS 17?
Beyond its reporting and calculation requirements, IFRS 17 is likely to considerably transform the way that insurance companies operate. IFRS 17 reporting will now effectively drive a company's profits, tying the actuarial function much more closely to the whole financial reporting process. As a result, many insurers will need to fully review their whole infrastructure and find new ways to reduce reporting times and collaborate more effectively.
Actuarial processes at period end do follow a common sequence that lends itself well to automation and should be the focus of any workflow solution to IFRS 17." John Winter, director, Solutions Management
In particular, organisations will need to make unprecedented improvements to the governance of actuarial systems and the connectivity of those systems to the general ledger and finance department. Interaction between the traditionally siloed actuarial and finance functions will also need to increase to levels not needed before.
For some companies, particularly those not yet subject to Solvency II or its regional equivalents, there will need to be a complete step change to governance levels – a journey in its own right.
Now, as the compliance deadline of 2021 approaches, more firms are realising that a robust production environment, sound assumption management and an efficient, controlled and highly integrated process platform will be central to an effective IFRS 17 implementation. Arguably, the calculations are the simple part – the true challenge is managing and completing the overall process effectively.
The time is ripe for operational change. With a solid, seamlessly connected foundation of systems and processes, you'll be in a stronger position to not only ease the pressure of IFRS 17 but also reap long-term business benefits. Are you on track to rise to the challenge?
How FIS' Prophet can help
FIS is uniquely placed to help you through the transformative journey to compliance with IFRS 17, and make sure you get true business value out of the reporting standard. We have updated our Prophet suite of solutions to tackle all of the challenges that insurers will encounter along the way, across life, health and general insurance. As well as our core risk management system, we offer an end-to-end IFRS 17 solution with improved data management, processes and governance. FIS Prophet not only helps you meet day 1 compliance but also enables you to project and manage your business on a single platform.
In FIS and Prophet clients can count on a trusted partner with a long history of success and a well-earned reputation and we are already implementing IFRS 17 with several insurers. We also offer comprehensive services to assist with implementation. In the run-up to 2021, we are committed to helping insurers not only meet the requirements of IFRS 17 but enable them to derive true business value along the journey to better data, systems, process and control.