IFRS 17 Conference Takeaways

insurance contracts

IFRS 17 Conference Takeaways

The introduction of IFRS 17 is one of the largest regulatory shocks to the insurance industry in the past decade. At heart, the accounting standard attempts to combine traditional reporting with forward-looking actuarial calculations.

Clearly, two different sets of people (accountants and actuaries) that rarely worked together before now need to communicate and align processes. In June, Zanders (bronze) sponsored Knect’s IFRS 17 conference. The following summarizes our impressions.

Creating a linkage between risk and finance

The main challenge of the implementation of the standard relates to the insurers’ legacy systems. The new standard requires, among other changes, the gathering of monthly transaction data (e.g. premium and claim payments) that previously was not vital. Creating a linkage between risk and finance on a knowledge and data level is the key element for a successful transition period. This implies that the former ‘silo’ thinking needs to be abolished and replaced by multidisciplinary enabled squads that focus on concrete tasks.

Although risk and finance need to be brought closer together, most of the speakers were only covering their respective fields. Given that the principle-based standard is not yet finalized and bears uncertainty, the individual knowledge level is high. This is to be expected. However, since the standard’s rollout requires a communal effort, it is surprising that the focus is not at the point where the different disciplines meet.

Impactful decisions

On a conceptual level, insurance companies need to make several impactful decisions. The determination of discount rates offers an example of this. Either illiquidity premiums are added to the risk-free rate (bottom-up approach) or irrelevant components are deducted from a reference portfolio (top-down approach). Preferences to one or the other will ultimately be expressed based on the overall impact, which only becomes visible once a trial run is available.

It also became evident that internal processes receive most of the attention. However, it is not too early to start thinking about the effect of the new reporting figures. Apparently, rating agencies themselves do not have a framework in place yet to significantly include IFRS 17 results in their assessments. Instead, they predominantly rely on Solvency II figures and their own internal models. Presumably, key performance indicators will be adjusted in the future and focus on the profit and loss (P&L) statements, as IFRS 17 will probably have the most impact on these.

Open questions

Insurance companies are currently busy with the set-up of processes and data structures. IFRS 17 still leaves open questions to internal and external stakeholders. Seeing that the recent Solvency II framework delivers the main input for performance evaluation, the added value of standard remains to be answered.