IFRS 17 brings finance and risk closer together

IFRS 17 brings finance and risk closer together

The insurance sector is preparing for the implementation of IFRS 17. A great deal of attention is paid to modeling and the consequences for (finance and risk) policy. In addition to complying with the regulations, the implementation of IFRS 17 also offers an opportunity to bring the worlds of finance and risk closer together. Experiences from other areas of the financial sector could then prove useful. Yvonne Sijm, director at Zanders, explains.

What opportunities does IFRS 17 offer?

“The required changes due to IFRS 17 create opportunities to realize efficiency benefits and further consistency at the same time. But the implementation of IFRS 17, with associated costs, is a major challenge for all insurers involved. In addition, IFRS 17 means a significant change in the financial measures used by both internal and – above all – external stakeholders. While implementing, it is therefore necessary to decide how this new information should be incorporated into the strategy and risk policy. The different perspectives from supervisors, accounting and the economic reality never connect to each other for the full 100 per cent. Insurers with clear, integrated strategies and processes have an advantage over competitors who see IFRS 17 solely as a mandatory exercise.”

What does this mean for the role of risk and finance?

“In the financial sector there is a clear trend in which the integration between finance and risk increases, as a result of the legislation and regulations. For example, the prudential guidelines of Basel and Solvency II require an increasing degree of reconciliation with the financial reporting. In addition, IFRS 17 and IFRS 9 offer the risk perspective a clear spot in accounting. But although finance and risk are integrating further, their worlds are originally separate, with their own data, processes and systems. This leads to internal discussions about outcomes and to an expensive, inconsistent architecture of databases, models and tooling. As long as there is no clear need to implement changes, this situation remains intact.

In the meantime, many experiences and models of Solvency II form the basis for IFRS 17. But there are inevitable differences too – because of the specific requirements and because of the choices insurers make themselves. Although these differences are logical and justified, there will be a need, both internally and externally, to align the results. A reconciliation like that is often difficult to make afterwards, because it has not been taken into account in the design stage of the data streams and models. However, when reconciliation is taken into account in advance as a starting point, there are possibilities for connecting the Solvency and IFRS figures.”

IFRS 17 is specific to insurance contracts. To what extent can insurers draw lessons from other experiences?

“The overlap between Solvency II and IFRS 17 shows many parallels with Basel versus IFRS 9 in the banking sector. Especially because there is a lot of overlap between accounting and prudential regulation in both cases. However, everyone involved approaches the issue from within their own field of expertise, which makes it difficult in practice to bridge the differences between the two perspectives.

In addition, economic reality often offers a different perspective too. Experiences from similar projects show that, with the right project teams, more synergy is achieved. Both in the design phase and with the implementation, capable people are needed, with knowledge of the various domains and preferably also hands-on experience with modeling and system implementations. Then the practical consequences of choices will be clear as early as possible. That’s a role that suits Zanders perfectly and our clients see in practice that we add value as an independent party.”