For nearly four years, insurers have heard “the clock is ticking” on preparing for IFRS 17, the International Financial Reporting Standard for insurance contracts that will replace IFRS 4. So, it’s hardly surprising that not everyone has been able to maintain the highest sense of urgency.
But now, the countdown to IFRS 17 is truly on. Insurers have less than two years to get themselves ready, and the vast majority still have lots to do to reach the finish line by 1 January 2023.
Even insurers who have been very proactive, with comprehensive, multi-year IFRS 17 projects are scrambling to make up for time lost due to the COVID-19 pandemic. As business necessarily shifted attention and resources to remote working and related issues, the new accounting standard understandably became less of an immediate priority. The finance function has been pressed to manage business challenges, including cost-cutting and now this has to be done in parallel with stepping up IFRS 17 efforts.
Budget pressures have ramped up as well. At the beginning of the IFRS 17 journey there may have been a significant budget allocated for the necessary activities. But budgets have been stretched as the effective date has been postponed
The good news is that the requirements for IFRS 17 dovetail nicely with insurers’ initiatives to digitally transform their businesses, which have been initiated or accelerated as a result of the pandemic. For many, adapting to the new standard has created an opportunity to overhaul finance and actuarial systems, processes and controls. They are looking to build greater resilience into their finance operations to stay ahead in a fast-changing world of complex challenges.
A refreshed Target Operating Model can help
Defining and implementing a refreshed Target Operating Model (TOM), can be the most effective step an insurer can take, not only to assure successful implementation of IFRS 17 but to enhance long-term operational resilience of the finance function. Why is the TOM such a powerful enabler of IFRS 17? It addresses key elements for successful implementation:
- Service delivery model
- Functional processes
- Supporting technology
- Data and reporting
- Governance and controls
For IFRS 17all are important, but the data strategy is perhaps at the kernel of successful implementation. One of the reasons IFRS 17 is so difficult is that all of the insurer’s legacy reporting must be made to conform with the new standard. Most insurers have multi-generation, complex lines of products to navigate. Some of the policies will have been in force not just for years, but decades, and older records may even have been retained solely on paper. The information collected historically may also not meet the insurer’s current standards for data management. time.
It is easy to spin wheels in approaching the collection of historical data, so it is critical to define the new accounting policies and standards and then work back to ascertain what data is required. The right processes are essential; manual processing is not an option and data quality is critical.
It is also important not to lose sight of the importance of testing. Policies and guidance can only be refined up to a point and then they need to be applied. It pays to keep it practical – develop the policies, gather the data, process the information and then report on it. At the end of the day, the goal is to produce a set of reliable and understandable financial statements.
Building momentum within the organization
As IFRS 17 timelines have been extended it is easy for project fatigue to set in. Where momentum has been lost or slowed, it’s critical now to get initiatives back on track. This means getting past the red and amber flags, or the roadblocks impeding progress, and turning program flags green to reach the finish line.
How can insurers regain that momentum? We have identified five techniques to put implementation programs back on track and speed their progress:
- Check right to left: It’s all about focus. Clearing obstacles and focusing on the direct path to implementation is the first step organizations can take. The finance function has been pulled in multiple directions, especially with the pandemic, and more focused attention is now required. This is the time for insurers to think right to left – focus on where you need to get to, what you need to do to get there, and make sure you are prioritizing those tasks.
- Focused short sprints: Working on projects in focused, short sprints can be a way to cut through process clutter that may have built up over time and home in on the critical tasks. With the time that is left, traditional ‘waterfall’ approaches to building new systems with functions working in silos are not the answer. This is a time for agility. Collaborating is essential and working together in sharply defined sprints can be the best way to move tasks forward most effectively.
- Bring your people in: With pressure increasing, there can be a tendency for project teams to hunker down, thinking that is the most efficient way to address the task at hand. But with IFRS 17, that can be counterproductive. It is better to engage the wider business in the effort in order to harness the full finance function and other resources.
- Work in parallel: Think creatively about what tasks can be done in parallel and where you can make working assumptions
- Functional first, then refine: This is an important time to distinguish between must-haves and nice-to-haves. It is important to determine the minimum viable proposition for your IFRS 17 solution and make that the focus. Refinement can come, but first the new systems put in place have to be functional.
This article is featured in Frontiers in Finance – Resilient and relevant
Implementing IFRS 17 can surface potential weaknesses in existing systems and architecture. In the long run it pays to approach IFRS 17 not as a narrow, compliance exercise but as an opportunity to take a wider view, identify areas for improvement and make decisive changes. With less than two year to the effective date, updating your TOM and following a decisive plan of action can ensure meeting the 1 January 2023 deadline as well as making finance operations more resilient in 2021 and beyond.