Insurers now have an extra year to implement IFRS17. Naturally they want to use the time wisely. But what exactly does that entail? And is the answer the same for all?
When the IASB tentatively agreed to a 1-year deferral of IFRS 17 implementation in November 2018, we saw as many insurers shedding tears of frustration as those that let out a sigh of relief.
Of course, an additional year is a bonus. But many insurers — both large and small — had been hoping for a longer extension. Some face the challenge of applying a complex standard to a myriad of different products. Many have found the new standard’s data requirements a tall order. Most recognize they need more time with their software vendors to test, validate and configure their solutions to fit their particular business needs. Taken together, almost all are finding the practical steps needed to implement the standard time-consuming and complex.
The 1-year deferral does more than simply push the reset button on the implementation countdown clock. The goalposts are also being realigned to reflect proposed amendments to the standard — albeit in ways that most insurers will welcome — and insurers will need to analyze and assess the changes, update their implementation plans and then execute on them. When the standard was initially issued, insurers had approximately 3.5 years before the effective date. With the 1-year deferral, the clock now shows less than 3 years to go. We all have to raise our game to hit the new target.
Time well spent by all
What can insurers do to ensure they are making the most of the time they have been given? In our discussions with insurers around the world, we often focus on five key areas.
- Strengthen your roadmap: If you have not already developed an implementation road map, do so immediately. If you already have an existing road map, now is the time to take a step back and ask whether it is practical and achievable given your resources, the additional year and proposed amendments. Cross-check progress against plans. Don’t forget to consider any areas that have been on hold in the hope of further amendments. Ensure you have the right tools and capabilities to achieve all objectives by 2022.
- Scenario plan: Identify uncertainties and then conduct robust scenario planning exercises and test your assumptions to ensure you are prepared for a variety of outcomes and situations. Focus on ‘no regrets’ activities that deliver immediate value while recognizing any potential uncertainties in the environment or in the standard (for example, until the proposed amendments are finalized).
- Practice, practice, practice: The additional time means more time for test runs and parallel runs. Recognize that delivering IFRS 17 results will require multiple iterations, challenge and oversight before sharing with the outside world. Particularly for the more advanced organizations, this additional year offers valuable time to ensure tools, processes and people are ready for implementation. Also, don’t forget to allow ample time to design, test, and implement new controls around the revised and new processes.
- Talk to stakeholders: Use the extra year to strengthen communication with the business, subsidiaries and stakeholders. It will be critical to build into your implementation program time to help stakeholders understand what your IFRS 17 financial results will look like and how to interpret those results. Review current performance metrics and identify the drivers of IFRS 17 results. Work with the business to consider what metrics can be continued, which need refreshing and what needs to be replaced. Consider briefing investors and analysts early and throughout your journey on the approach and progress.
- Look for opportunities: Don’t overlook the potential for related opportunities on the road to implementation. Consider using IFRS 17 as the catalyst to upgrade your finance and actuarial capabilities. Spending the time to understand your data architecture, i.e. the data flows and interfaces throughout your end-to-end processes, can help you understand what can be done to simplify, standardize and automate financial and actuarial processes. Find opportunities to streamline. And look for commercial opportunities to optimize reinsurance arrangements, product design and pricing and asset liability management. Consider strengthening the links between the two by enhancing planning and performance management.
New year, new challenges?
But the extra year also brings challenges. Besides the obvious concern about whether the IASB’s proposed changes will make the standard more meaningful and less complex to implement, many will likely face challenges ensuring that employees and top management continue to prioritize the project. For those that already started their IFRS 17 journey, what was already a long-haul just got longer — and typically more costly.
Keeping everyone motivated and aligned to overcome project fatigue (particularly given all of the other disruptions that may occur over the next 3 years) is priceless. We find that breaking the program down into more manageable sprints and rotating people onto and off the program throughout its life are techniques that can help the program stay on track. Staff rotations to the program help people to acquire new skills and experience to meet their personal goals, inject new life and energy into the team and spread knowledge as they graduate from the program into new roles.
But is the answer the same for all?
One size doesn’t fit all and entities need to find the right pace of change to fit their culture and ambition — after all, some entities are tackling this solely to achieve compliance for local reporting. For others, it represents a whole new language to explain their business.
So how might some of these different groups of entities react to the changes?
1. Welcome relief for 'front-runners'
For the fortunate few who started work ahead of the standard being issued, and have the discipline to regularly update their work plan to accommodate change, one option might be to press ahead, using the additional time for further dry runs and to learn to steer their business on the new basis. Others will use the time to upgrade their finance and actuarial capabilities, automating where possible and rethinking processes to improve agility.
2. A wake-up call for 'late adopters'
But what about any late adopters1? The problem facing the unprepared is not just one of increased risk of noncompliance. It’s also that they will likely face much higher operating costs in the future as they work to catch up with those that took the time to investigate the challenges thoroughly and invest in automation, and have put themselves at the back of the line to access a fastdraining talent pool. We urge these insurers not to hit the snooze button and to use the new timeline and proposed amendments as a wake-up call to get started.
3. A reality check for perfectionists
In an attempt to reach the perfect answer, some insurers find it difficult to land accounting and actuarial judgments or identify their target architecture and select a software solution provider. If that sounds like you, we would strongly recommend using the deferral as a shot in the arm to re-invigorate your program, with a focus on right to left thinking that compares where you need to get to with where you are now. Perhaps you’ve held off from a detailed evaluation of the impact of IFRS 17 on reinsurance ceded, in the hope that the standard would be updated. That hope has been addressed (at least in part) and so the time to start the analysis is now.
Making the most of the extra year
Ever since the new standard was announced, we’ve been advising IFRS filers to prepare for the single biggest evolution in insurance reporting — certainly bigger than the implementation of IFRS and even bigger than Solvency II. While the extra year will provide some welcome wiggle-room for many insurers, the reality is that it will take hard work and tight timelines to ensure you are fully prepared.
Insurers need to make the most of the extra year. With the proposed amendments, it’s a bigger window ofopportunity than many dared hope for.
1 At KPMG we regularly survey insurers on their readiness for IFRS 17 and IFRS 9 and our most recent temperature check tells us that fully forty eight per cent of smaller insurers have yet to meaningfully start on their implementation program. KPMG International, In It To Win It.