The IFRS17 compliance train is leaving the station and is moving quickly. Its departure heralds a move that will carry the global insurance industry into a new era, one typified by the use of data to enable integrated, rapid and accurate reporting that supports the longer-term viability and profitability of the business.
But are insurers asleep at the wheel? If concrete action is not taken soon, IFRS17 could run them over and force a last-gasp attempt at compliance. This puts them at risk of raising the ire of investors, regulators and shareholders. More importantly, they’d miss an opportunity to radically rethink and reimagine some of the processes in how the business manages and reports on risk.
The what and why of IFRS17
IFRS17 is a new set of regulations for insurance contracts and was issued in May 2017. It will be effective in the 120 countries where IFRS has been adopted from January 1st, 2021. IFRS17 forces a complete business process reengineering effort, as it requires insurers to calculate the value of the liabilities in their insurance contracts based on the present value of future cash flows with account risk and the time value of money factored in.
A new income statement will have to be produced and will feature new definitions for revenue and other disclosures, which will also result in an impact on the balance sheet.
Why the change? Insurance companies have been under immense pressure over the past ten years as fragmented business units, a lack of automation and outdated reporting models frustrate insurers’ ability to make accurate, data-driven decisions in real time, and importantly limits the ability on investors to ascertain the true value of cash flows and risks being incurred by the insurer.
What makes it challenging is that IFRS17 will require entirely new actuarial models and powerful new IT infrastructure to support compliance. Every South African insurance company will need to remeasure their estimates for every reporting period using current assumptions. The introduction of new data requirements at the inception and fulfilment of an insurance contract will also have a major impact on insurers and their ability to process and analyse the data quickly and accurately.
The train is moving along apace
For many insurers, this is a daunting prospect, especially for those that haven’t gotten a head start on compliance. Many insurance companies may not have invested in finance technology for years, even decades, and their systems are often stitched together based on what was needed at various times.
Dealing effectively and accurately with claims and underwriting profits requires a certain agility, especially as insurers’ volume of data increases. Having a clearer picture of pricing models and how those models impact margins and long-term profitability will be crucial to the success of each insurer. But in many cases, the legacy technology infrastructure and business processes that would support this level of granularity simply don’t exist.
And that’s where the real opportunity lies. Insurers that utilise the process of compliance to also reshape and reimagine how they process and store data could unlock huge benefits in terms of more accurate forecasting and greater granularity over individual customers and policies.
Deploying the correct IT solution to support IFRS17 compliance also increases the insurer’s operational visibility, agility and speed by getting a clearer picture of the costs that are incurred in the company’s core business operations. From there, insurers can start extracting insights around optimal cost allocation to align with cash flows and achieve the desired contract valuations
Turning insight to action; action to achievement
With this level of insight, insurers can identify the best underwriting pricing and customer acquisition decisions. By automating end-to-end processes, insurers can fix what is traditionally a fragmented cost-allocation process, reduce manual processes, reduce processing time from days to mere hours, and integrate actuarial and finance outcomes (the models vs the GL).
Finance and operations teams have more time for business planning, and can make better decisions and predictions over the performance and profitability of the business – the holy grail of the insurance industry.
Knowing that these benefits are already available from SAP creates a clear-cut value proposition. It’s the last call to get on the IFRS17 train and use the process of compliance as a catalyst for business transformation. Or you can dither and be left stranded at Nowhere Station.
To start a discussion over how you can turn your IFRS17 compliance process into a competitive advantage, get in touch with me at Darrel.Orsmond@sap.com.