With the publication of IFRS 17 “Insurance contracts” and IFRS 9 “Financial Instruments” the financial reporting of insurance companies faces fundamental challenges.
Why are we talking about two standards at the same time?
While IFRS 17 makes significant changes to the valuation of liabilities, IFRS 9 mainly impacts the valuation of assets. IFRS 9 will affect measurement, impairment and hedge accounting of financial instruments. IFRS 17 (principle based) revaluates all relevant insurance contracts and introduces a contractual service margin as a new KPI.
Furthermore, several accounting mismatches arising from IFRS 9 valuated instruments on the asset side are to be expected, since insurance contracts can include financial instruments which are linked to corresponding investments (especially life insurance contracts).
Therefore, insurers can postpone the original IFRS 9 implementation date (01.01.2018) to the IFRS 17 effective date to avoid these massive mismatches (deferral approach) upfront.
This simultaneous implementation comes with a plethora of challenges regarding operational processes, systems, reporting, KPIs and ultimately revenue and earnings patterns. Main IFRS 17 challenges like siloed IT infrastructures, responsibility barriers between actuaries and accountants are combined with IFRS 9 challenges regarding valuation, categorization and organizational issues between risk and accounting.
Therefore, it is crucial to combine the IFRS 9 and 17 implementations to tackle these challenges.
The three keys to a successful IFRS 9 and IFRS 17 implementation
1) Close alignment of all project streams
Opportunities for alignment between both implementations should be identified in the early project phases:
- Analyze and classify contracts affected by both standards
- Address organizational responsibilities aligning actuaries, risk and accounting
- Identify shared risk and actuarial data
- Conduct parallel testing and pilot phases for increased efficiency
2) Harmonized data collection
Designing a harmonized data management strategy will lead to an efficient and reliable outputs, which can be achieved by:
- Harmonization of IFRS 9 and IFRS 17 requirements
- IT architecture and infrastructure harmonization for valuations and CSM calculations
- Joint source for market and valuation data, such as interest rates and risk assessments
3) A profitable ALM strategy
Both sides of the balance sheet will be affected due to the financial asset accounting under IFRS 9 and the revaluation of insurance liabilities under IFRS 17.
- Evaluate your current ALM strategy and identify deviations between your current model(s) and the new standards for an impact analysis
- Act to enable a smooth transition on the effective date and to reduce the binary impact on your OCI
How our agile integrated transformation approach helps
Our integrated transformation approach for IFRS 17 and IFRS 9 provides multiple benefits and allows to raise synergies (excerpt):
- Early identification and mitigation of dependency risks
- Quick responsibility clarification (actuarial, risk, accounting department)
- Consistent accounting principle interpretations
- Avoidance of Accounting mismatches
- Easier Golden Source identification and data harmonization
- Consistent auditor approvals
Illustration of an IFRS 9 and IFRS 17 implementation project approach
- Profit from our lessons learned through our extensive IFRS 9 implementation knowledge in the financial industry
- Utilize our quick scan to identify dependencies and high-level impacts
- Create value with our flexible agile framework ensuring the efficient usage of lessons learned, alignment of departments and an iterative end2end implementation
Insurance companies are facing a plethora of challenges regarding the IFRS 9 and IFRS 17 implementation since their balance sheet is affected within countless positions and valuations. The tough timeline (01.01.2021) can be achieved by our IFRS 9 and 17 integrated transformation approach while leveraging our extensive cross industry IFRS 9 project experiences.