Across industries today, one of the most critical business needs is creating resilience and adaptability in operations – to do more with less, faced with the reality of shrinking budgets. For the insurance industry, sweeping regulatory changes such as International Financial Reporting Standard (IFRS) 17 Insurance Contracts, and risk-based capital combined with global changes such as an increased focus on climate and sustainability, rapidly evolving customer needs, and the ongoing global health crisis, add many layers of complexity.
These factors fundamentally change the way in which insurers account for insurance contracts, and how external stakeholders analyse insurance financial statements. As a result, there are profound effects on a range of business functions aiming to increase consistency, comparability, and transparency in financial reporting across the insurance industry.
This is an opportunity to rethink and revamp reporting models and solutions in insurance.
Financial reporting under IFRS 17
It has been nearly five years since the International Accounting Standards Board (IASB) published IFRS 17 and we are now approaching the go-live date of 1 January 2023 in over 100 countries and regions across Asia and the rest of the world.
The primary goals of IFRS 17 as set out by the IASB were:
- To standardize insurance accounting globally and create unprecedented comparability;
- To have a single IFRS accounting model with an explicit expected profit reporting; and
- To increase transparency on the impact of all variables on the reported insurance profit.
The standard and related changes affect a range of transactions of an insurance company, including insurance and reinsurance contracts issued, reinsurance contracts held, and investment contracts with discretionary participation features.
IFRS 17 is the first-ever IFRS to require the explicit reporting of expected profit for a transaction contractual service margin (CSM). It includes a mandatory requirement to reflect current variables (financial and non-financial) on the balance sheet. The expected profit CSM will absorb volatility in most cases but loss-making blocks of business are required to report the loss immediately. The resulting new insurance revenue and expenses amounts will now be comparable across life and non-life.
However, the implementation of IFRS 17 has been challenging for many insurers. As the effective date draws near, insurers continue to experience unforeseen roadblocks and delays in their IFRS 17 implementation programmes. In addition, insurers also face challenges in embedding the newly implemented IFRS 17 reporting systems and processes in their existing business-as-usual (BAU) operations.
Data challenges: Larger volumes of data at greater granularity drive the complexity of the data architecture. Challenges regarding data quality, data management, data reconciliations, and end-to-end integration have surfaced during IFRS 17 implementation. The capability of data storage and audit of historical cash flows projections covering technical, operational, and financial assumptions.
Technology challenges: A wide range of technology upgrades are required for existing architecture components such as actuarial models, general ledger, finance, actuarial data warehouses, and reporting tools.
Operating model challenges: There is a large-scale impact on end-to-end financial processes, necessitating redesign and re-engineering. Financial processes and underlying systems need a major overhaul to keep up with the new reporting requirements of IFRS 17.
Future of reporting in insurance: tech and talent transformation
Transformative digital solutions
Data volumes are exploding – at a macro level, IFRS 17 generates 250-400 accounting events, with each accounting event potentially generating multiple journal postings leading to a 3-3.5 times increase in data volumes. Current practices such as manual extraction of information, exchange of copies on email, and offline storage of data are no longer viable.
Therefore, there is an increasing focus on strong data management and data transformation capabilities to be able to accurately identify, isolate and separately manage the various types of financial data. There is a strong preference for solutions that can prove to be compliant “out-of-the-box.” From a control perspective, a critical element of any solution is to implement the necessary controls and governance to ensure different data models are kept in sync and changes made to one data model are reflected as necessary in the other. This risk could increase significantly depending on the solution approach – standardized across the organization (better control) vs. localized (very challenging).
Diving deeper into the record-to-report process, accounting for premiums, claims and expenses may be processed in parallel with actuarial reserving processes under current IFRS 4 Insurance Contracts practices. IFRS 17 necessitates the availability of all underlying cash flows to perform CSM calculations.
To expedite IFRS 17 compliance, insurers have implemented multiple new architecture components including accounting rules engines, IFRS 17 sub-ledgers, or IFRS 17 calculation engines. Additional components such as reporting tools and workflow automation solutions have become essential, given the complexity of requirements and granularity of the analyses.
In the past year, many finance leaders found themselves in an additional predicament: how to manage a period-end close with a distributed and virtual workforce. This heightens the urgency to take advantage of transformative digital solutions to increase automation, integrate information systems, and connect information systems between functions to reduce import and export processes, and facilitate the automation of processes to reduce manual error and version management of information.
The evolving role of finance professionals
Complex accounting and regulatory changes are no longer just affecting the accounts and finance team, they will also affect actuarial, operations, and IT teams.
Today’s finance professionals face many challenges: collaboration across different systems is not straightforward and requires constant workarounds, leading to uncertain working hours and a lack of transparency in the progress of completion and outcomes. IT infrastructure has shown its present limits and cybersecurity threats disrupt business as usual operations.
Process fragmentation, how operational processes are managed disparately at the desktop level, is a significant barrier to talent and operating model transformation. Adding a layer of complexity to this, finance no longer owns end-to-end analyses and current key performance indicators need to be re-drafted as per IFRS 17 requirements. Further, management reports are increasingly complex and granular and there is a competitive drive to accelerate period-end timetables.
At an operational level, insurance reporting outputs are sequential under IFRS 4 today. Actuaries produce projected cash flows and resulting change in reserves, with a hand-off to accountants, who produce financial statements and reporting. Under IFRS 17 most of the key steps or “movements” required to produce the CSM roll-forward necessitate actuaries and accountants to work together to provide the key data inputs.
Finance leaders of today have to be as comfortable with compliance as they are with company strategy, all while juggling growth, efficiency, and risk.
With a steep increase in the amount and specificity of information required, the corresponding increase in the level of resourcing needed to deliver financial reporting (if a solution cannot address existing operational issues) leads to a 10 percent to 40 percent increase in working day effort during the close period. On the contrary, 60 percent of finance leaders say that their team size has decreased over the past few years. Obviously, this is not feasible or sustainable over the longer term.
In the current global context, organizations are equipped with a geographically diverse workforce working in remote access-enabled work environments. They need to understand how to leverage this asset to:
- Meet the demand for additional insight from underlying data – outside of standard financial reporting metrics;
- Enable real-time and dynamic collaboration between teams;
- Minimize disruption to BAU while implementing new solutions; and
- Align across a wide spectrum of business stakeholders.
Integrating talent and tech into a cutting edge, sustainable operating model
When we combine the above challenges and opportunities with the overarching ambition to improve the auditability and traceability of financial data:
- Investors and regulators may request higher levels of transparency;
- Improving the auditability of data would reduce stress and help with the timeline of statutory audits, thus reducing stress on BAU; and
- Innovative, renewed metrics need to be analysed to recognize diverse new demands from external stakeholders such as shareholders, equity analysts, and rating agencies.
We see an increasing need to upgrade operating models to deliver an end-to-end integration of activities and cross-functional capabilities such as reporting and analytics “as-a-service” to an enterprise. Research shows that 90 percent of organizations believe increasing their digital capability is fundamental to achieving their objectives. However, only 26 percent employ digital assets such as robotic processing automation or even single-instance enterprise resource planning systems.
Many large insurers, especially in Asia, operate in a highly federated model – therefore digital solutions that do not break the bank but can integrate data and processes without requiring large-scale technology transformation can be critical enablers.
To convert these challenges into opportunities, organizations are increasingly open to adopting new technologies in financial and management reporting. Transformative digital solutions help break organizational silos and upskill finance professionals as members of a cross-functional team.
Four key takeaways
- Digitize. While it may take greater effort to digitize processes in the current environment and in parallel with multiple regulatory changes, the return on investment will be significant for the future of reporting in insurance.
- To create the greatest value, data powered by intelligent automation must be used to manage risk via smarter decision-making.
- To foster a long-term commitment to change, an organization must equip the workforce to operate effectively by delivering multichannel training and establishing virtual platforms for the finance team to collaborate.
- An emerging key trend is that organizations develop virtual Centres of Excellence (CoEs); where such CoEs already exist, many are evolving from enablers to become internal marketplaces for digital assets.
This article is contributed by Satyajit Venkatraman, Deloitte China Assurance Financial Services Industry Partner.