Upcoming challenges for insurers

Upcoming challenges for insurers

Due to upcoming regulatory changes, technology advancements and the potentially catastrophic rise of so-called InsurTech companies, life as an insurer gets busier and busier. They are currently facing an awe-inspiring amount of challenges, such as IFRS 17, the Solvency II review, Net Capital Generation, Artificial Intelligence, InsurTech and the reform of interbank offered rate (IBOR). So, how are insurers coping with all these challenges?

The main challenge is the upcoming change in accounting regime issued by the IASB. IFRS 17 represents the biggest accounting change for insurers in many years. The data granularity requirements for IFRS 17 entails an overhaul of the current accounting systems. Furthermore, a successful implementation requires close cooperation of departments such as finance, actuarial and IT.

IFRS 17 focuses on increasing comparability between companies, insurance contracts and industries. In addition, the information provided will give insurers better insights into the profitability of insurance contracts. Furthermore, the underlying market-based approach will have an impact on P&L volatility (specifically for long-term liabilities), thus affecting the hedging strategies of insurers.

Coping with the challenges

Surprisingly, countless seminars, surveys and conferences show that most insurers are currently in the early stages of mobilization. This mainly implies that impact analysis and assessments have been performed and completed. With the deadline of IFRS 17 set to the 1st of January 2021, the lack of urgency for insurers might be considered alarming. It appears they have forgotten the tumultuous implementation of the Solvency II regulation. But for this upcoming implementation, insurers are leveraging on their past Solvency II experience. As a result, most implementation programs will involve the following key activities:

  • Strategy & assessment: The start of the implementation program will entail a high-level strategy and scope definition. Based on that, a gap analysis and impact assessment can be performed to reveal the first idea of financial impact and the amount of work to be done.
  • Design: The design phase of the implementation consists of understanding and designing the functional and technical requirements. In addition, insurers need to identify the system capabilities they need to acquire. Furthermore, detailed project plans, resource and budgets need to be prepared.
  • Construct & implement: Within the construct and implementation phase, the new solution is integrated within the insurer’s IT infrastructure. Furthermore, parallel runs, simulations and testing will be mainly carried out during this phase.
  • Operate, review and deployment: At this stage, the transition to the new accounting regime will be completed. At go-live, the opening balance is adjusted, and the new processes are handed over to business as usual.

Given the implementation challenges ahead, a Transition Resource Group was set up by the IASB. The purpose of this group is to provide a public forum and to inform the IASB if any action will be needed to address questions. Recently, a meeting of the Transition Resource Group was held, to discuss issues such as the determination of discount rates using the top-down approach, premium experience adjustments and cash flows that are outside the contract boundary at initial recognition.

IFRS 17, a blessing?

Aside from all the hassle, IFRS 17 could be a blessing in disguise. The implementation of this new accounting regime provides insurers with the opportunity to further incorporate automation in their reporting process, thus reducing operational costs, manual interventions and reporting run time.

Furthermore, IFRS 17 requires granular historical policy data for liability valuation purposes. This increase in granular data enables insurer to apply advanced models in claims modeling. In such a competitive sector, this might be the competitive advantage insurers are longing for, as insurers are currently investigating the application of advanced modeling techniques in their pricing strategy. For reporting purposes, insurers will leverage on the modeling framework already set in place from the Solvency II implementation.

Of course, we can’t forget about the developments in artificial intelligence and market disrupters. Fortunately, the newcomers haven’t been able (yet) to scale their solution. Nonetheless, this is also something insurers need to consider. At present, applications of advanced modeling are showing large improvements in further automation, cost reduction, fraud detection and dynamic pricing.

Lastly, the possible discontinuation of interest-rate benchmarks, the IBOR reform, will also affect insurers. Insurers need to assess the impact on capital and accounting models, system implementations as well as pricing and hedging strategies. The timelines of the IBOR reform will largely overlap with the timelines of IFRS 17, as the FCA will cease oversight of the benchmark rate at the end of 2021.

Avoid surprises

Altogether, these challenges will make the life of an insurer busier in the coming years. However, it appears that insurers aren’t fazed by the vast amount of changes. The presumed lack of urgency as the IFRS 17 deadline approaches, shows that insurers are carefully considering the best course of action. Based on their lessons learned from Solvency II implementation, insurers aim to prevent unnecessary costs by designing solutions based on ‘moving targets’ as some IFRS 17 requirements aren’t ironed out yet. On the other hand, the slow adoption of technology suggests that insurers might be too focused on the upcoming accounting standard and are downplaying the other hot topics. Insurers need to be careful of narrowing their attention only to upcoming regulatory/accounting changes and avoid getting surprised by other developments.