A functional approach to weather future storms

How to build a strong foundation in the regulatory insurance landscape

A functional approach to weather future storms

The insurance industry agrees that data requirements are a key challenge in the implementation of IFRS 17. Although the main purpose of IFRS 17 is to harmonize the insurance industry by setting principle-based standards, the new accounting standards also enforce a new level of data management. At Zanders we believe that this is the right opportunity to build a strong data foundation. Not only for the implementation of IFRS 17, but to prepare for any future regulatory or market changes.

The IFRS 17 accounting standards give guidance on recognition, measurement, presentation and disclosure requirements. The envisaged outcome is desirable, but insurers might not welcome another regulatory storm so soon after the previous compliance efforts for Solvency II (SII). Nevertheless, at Zanders we believe that this is an opportunity to build a strong data foundation to prepare for any future regulatory or market changes.

The timing is never right for large data integration projects. However, we think that a turning point has been reached where benefits clearly outweigh the costs. The key to materializing these benefits is to build a resilient and robust foundation through functional data management (FDM).

In this paper, we outline the urgency and benefits of integrating finance, risk and actuarial (FRA) functions to tackle current and future regulatory requirements. In addition, we advocate investing in FDM, a key element that should be at the forefront of large integration projects.

The challenge of IFRS 17

The insurance sector agrees that data requirements for the recognition and valuation of insurance liabilities are one of the main challenges of IFRS 17. Furthermore, IFRS 17 highlights the intertwining of the FRA worlds. Both challenges indicate the need for functional knowledge in data management, a comprehension of the interactions between data, systems and functional domains.

The difficulties do not lie in the methodology for each of the building blocks or the contractual service margin (CSM). The complicated part is the measurement of all building blocks and CSM through time, in combination with the increased granularity of reporting requirements.

The CSM is calculated by applying the full retrospective application. Under this approach, the value of the insurance contract needs to be determined at the date of initial recognition and all subsequent changes need to be calculated for each measurement period until the effective date of IFRS 17 and beyond. This requires insurers to store all historical discount curves and dig deep into their legacy policy systems for reinstating all insurance contracts. Both are a huge operational burden on the organization.

In addition to the increased data requirements in time, the granularity of disclosure requirements has also increased. IFRS 17 requires measurement and reporting at the level of groups of policy contracts, based on the lifetime profitability of the contracts. If necessary, vintage years of the contracts can be subdivided into quarters or months to make distinctions between profitable and onerous contracts at inception. Drilling-down is no longer an option and reports must adhere to these new standards.


Two sides of the coin

Fortunately, the increased data requirements can also be turned around and taken advantage of.

The worlds of FRA are intertwined and integration of these worlds is the way to go. Due to IFRS 17, changes in discount curves or underlying assumptions have direct impact on the Profit and Loss (P&L) or Other Comprehensive Income (OCI) statement of the insurer.

Hence, next to harmonizing the insurance market and increasing transparency, reporting under IFRS 17 can be the driver for a full FRA integration which can give valuable insights for internal management. Benefits to management and business are:

  • better insights and optimized pricing strategy for business generation (value of new business or embedded value);
  • advanced analytical capabilities – e.g. automated movement analysis and impact analysis of changing underlying assumptions;
  • automated reporting according to different accounting standards or regulations (Multi-GAAP, IFRS standards and SII) and better audit trail;
  • balance sheet and P&L projections – what-if scenario analyses and stress test capabilities; and
  • lower total operating costs – fewer separate IT and data silos to maintain, fewer reconciliations, fewer controls and more leverage of risk models from different reporting streams.

As mentioned before, the key to execute integration projects is to build a resilient and robust foundation through FDM. FDM means, in essence, designing a resilient IT landscape – actuarial systems, ledgers, databases – with one Single Source of Truth (SSOT) at the base.

Specifically, for a resilient insurance IT landscape, it is crucial to have, on top of the SSOT:

  1. an accounting layer – for sub-ledger and general ledger accounting; and
  2. an aggregation/reporting layer – for advanced analytics and automated reporting.

The top reporting layer serves as a business information layer where automated reports are generated and advanced analyses are executed. This design results in a FRA reporting and analytics data chain that is scalable and flexible enough for future developments in regulations and changes in the firm’s business strategy.

A major success factor for this design is to have functional knowledge in the organization. Zanders has the knowledge and experience in overseeing the interactions between data, systems and functional domains and can take your data management to the next strategic level.

Is now the time to integrate finance, risk and actuarial?

We believe that IFRS 17 is not the end of the integration of the FRA worlds and more changes will follow. We believe that insurers can prepare themselves for the future by building a flexible IT landscape with strong functional data management embedded in the chain.

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Contact for more information:
Raymond Rosa or Lennard Beijering.
Phone: +31 35 692 89 89