IFRS 17: Beyond minimum compliance

This article is co-authored by Anton Kobelev, Executive Director, Actuarial, Financial Risk Management, KPMG in Canada and Alana Hudson, Senior Manager, Accounting Advisory Services, KPMG in Canada.

For insurance organizations in Canada and most places around the world, January 1, 2023, was a momentous day. It marked the end of years of work preparing for the implementation of International Financial Reporting Standard (IFRS) 17, mandatory for all Canadian insurers. This new standard replaces IFRS 4 and introduces standard accounting treatments for insurance contracts in different jurisdictions, allowing for more comparability across insurers.

Now that insurers have reached the finish line and are entering the post-implementation phase, what’s next?

The fact is, for most Canadian insurers, especially smaller, private insurers, crossing the IFRS 17 finish line did not bring the project to an immediate close. Many will still be in project mode through 2023 and are just starting to have conversations about shifting to business-as-usual (BAU).

The post-implementation phase is all about shifting the mindset, initiating those critical conversations, and taking time to make changes. Company executives might still be operating with an IFRS 4 mindset, however, it’s important for them to shift their thinking to help usher them into the new era of IFRS 17.

Insurance companies must set themselves up for success in moving to BAU. Although this process will vary by company, now is the time for insurers to ask themselves the following critical questions:

• How can we retain and leverage institutional knowledge gained in the project phase?
• How can we ensure stakeholders are comfortable and competent with IFRS 17?
• Did the IFRS 17 project suggest any improvements to processes and controls?
• Are there manual processes we can automate?
• What opportunities can we capitalize on beyond minimal compliance?

For many insurers, IFRS 17 provided a valuable opportunity for their information technology (IT) professionals, actuaries, and accountants to break out of their silos and work closely together. Bringing together a hands-on project team that was able to collaborate and exchange knowledge was critical to the success of many IFRS 17 projects.

During the post-implementation phase of big projects, it is natural for companies to prematurely return project team members to their previous roles. However, this process needs to be carefully designed as resources may return to the status quo that was prevalent under IFRS 4. Business-as-usual must move towards a new future, not back to the way it was in the past.

This process is frequently overlooked, as teams are eager to return to predictable reporting schedules without the looming large deadline of the effective date of IFRS 17. Some clients are proactively redesigning their target operating models, conducting workday scheduling exercises, and putting together heatmaps of process efficiencies. These processes are still considered as “Day 2” items, almost an afterthought to address when teams are in-between reporting deadlines during the post go-live quarters. The reality is that the project teams need to focus on addressing these issues now, before the muscle memory of the implementation project is gone.

For a successful transition to BAU, training in IFRS 17 is essential, and continuity is important. Project teams must ensure that appropriate resources are in place to educate the workforce in the new standard. This education should not be limited to employees. Executives, boards, and investors also need to consider how BAU has shifted with the launch of IFRS 17.

There are important differences between IFRS 4 and IFRS 17. Stakeholders are accustomed to pre-IFRS 17 interpretations and understandings of contract information and financial statements. The post-implementation process must train stakeholders in IFRS 17-consistent interpretations. Insurers need to guide their boards and their investors through the process, particularly changes in key performance indicators, capital implications, and changes in financial statement captions such as net income and insurance contract liabilities.

Insurers were pressed for time in the rush to get across the regulatory finish line, and in some cases manual processes were introduced in order to meet it. This, coupled with legacy processes that may not have been streamlined, creates operational risks that are at best are inefficient at worst can result in errors and require rework.

Copious amounts of new data and increased runtime help make the case for automation under IFRS 17. The following tangible benefits can be attained by automating the IFRS 17 process:

• Reduced human error and operational risk
• Reduced time-to-close the books and reduced costs associated with running the process and debugging errors
• Reduced complexity and improved auditability
• Compliance with regulation – Guideline E-23 on Model Risk Management of the Office of the Superintendent of Financial Institutions (OSFI) is slated to include insurance companies in 2023 or 2024.
  

Now is the time for insurers to think beyond minimum compliance and towards sustainable implementation going forward. Automation, while perceived as an unnecessary luxury for some smaller companies, is the solution to bridge implementation to go-live reporting.

Now that the clock has struck twelve on IFRS 17, insurance companies should aim for a smooth transition that capitalizes on some of the aforementioned process changes. They should also focus on creating a solid governance framework around IFRS 17.

The break between implementation projects is often short. The IFRS 17 project may be winding down, but new projects are coming down the pipeline in Environmental, Social, and Governance (ESG) and other areas. Insurers need to think about whether they are properly benched for that. As usual, there are major advantages to addressing process efficiencies as soon as possible.

Now that IFRS 17 systems are live and real-time reporting has begun, situations will inevitably pop up that have not been tried and tested. Staying agile will help insurers deal with new challenges as they appear.

KPMG’s advisory, audit and tax professionals can help insurance organizations advance their post-implementation processes and see them through a successful transition to BAU. We do so by analyzing end-to-end processes within organizations to streamline automation to introduce efficiencies. Our regulatory specialists have the knowledge, skills and experience to help communicate business changes associated with IFRS 17 to key stakeholders and employees.

Contact us to start the conversation.