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IFRS17 Time to act, now

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One of the most challenging regulatory changes for finance in decades is here with only three years remaining for compliance, with significant impacts to insurers.

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IFRS17 Time to act, now

  1. 1. IFRS 17 Time to act, now One of the most challenging regulatory changes for finance in decades is here with only three years remaining for compliance, with significant impacts to insurers
  2. 2. 2 IRFS 17 - Executive Summary In May 2017, the International Accounting Standards Board (IASB) published IFRS17 Insurance Contracts (the Standard), to be effective for annual periods beginning on or after 1 January 2021, with earlier application permitted. The key objective of IFRS 17 presents itself as providing a consistent set of principles across all elements of accounting for insurance contracts. More than 20 years in development, the new financial reporting standard IFRS 17 certainly represents the most significant change to insurance accounting requirements in over 20 years with implications not only on the financial disclosures of insurers, but also at operational level across all aspects of the organization. In November 2018, as a response to stakeholders’ concerns and implementation challenges regarding the new insurance contracts standard, the IASB raised the possibility to defer the mandatory effective date of the IFRS 17 by one year, to 1 January 2022. Nevertheless, the proposed deferral of one year to the go-live date does not put insurers in a safer position given the numerous implementation challenges linked to the new standard. When regarding the question of potential challenges that may arise for insurers with the implementation of IFRS 17, a series of conceivable scenarios can be brought to light. Most prominently the implementation of IFRS 17 may cause challenges within matters ranging from IT systems and architecture, people management and the financial statement, where the common denominator presents itself as being a shift in processes which require comprehensive updates to comply with the new regulation. It is therefore imperative that insurers anticipate these potential hurdles in advance, in order to ensure a smooth and timely transition. Accenture has identified four possible architectural evolutionary scenarios, spanning from minimum compliance with IFRS 17 requirements and supporting synergies with frameworks already in use, to a strategic end-to-end integration solution that will enable a more radical transformation towards becoming a Data Driven Company. Accenture emphasizes the urgency in a timely start to the implementation process, as it may take between 12-24 months. Once in place, IFRS 17 will require insurers to excel in data management, and those who welcome the challenge and realize the regulation to its full potential, may lead the race in becoming the Data Driven Company of the future.
  3. 3. Starting January 1st 2022, the new International Financial Reporting Standard on the accounting of insurance contracts, IFRS 17, will take effect and replace IFRS 4. What should insurance companies be doing in the transitional period? There are two choices. Between now and 2022, insurers can either continue applying the accounting standards required by IFRS 4 or adopt IFRS 17 in advance with the contextual application of IFRS 9 (i.e., Financial Instruments) and IFRS 15 (i.e., Revenue from Contracts). From a market player standpoint, IFRS 17 is expected to disrupt the way insurers look at profit and cash generation as well as to force the market to enter a new phase of heavy implementation that will extend beyond the finance and actuarial functions with a significant impact across IT and reporting systems, people, data and processes, on top of a significant allocation of personnel and costs. The key objective of IFRS 17 is to redefine the approach to the calculation of technical reserves as the current value of future insurance cash flows, discounted at rates that reflect the current structure of market interest rates. As of day one, expected profit is amortized over the duration of the contract, while the expected loss is accounted immediately. IFRS 17 IN FIGURES 144 Impacted countries representing 54% of Global GDP 450 Insurance Companies $13 TRILLION Assets of the impacted companies, 8 of which in Europe 1/1/2022 Adoption of the new standard 3
  4. 4. KEY OBJECTIVES OF IFRS 17 Unambiguous definition of what constitutes an insurance contract Consistent valuation models and new valuation methodologies Consistent international accounting standards Aligned reporting standards for assets and liabilities “IFRS 17 provides consistent principles for all aspects of accounting for insurance contracts. It also removes the diversity in insurance accounting for companies that have been applying IFRS Standards, enabling investors, analysts and others to meaningfully compare companies, contracts and industries.” 4
  5. 5. KNOW YOUR CHALLENGES Accenture has identified several business challenges and impacts that need to be properly understood, communicated, and addressed to all stakeholders. Impact on Systems and Data There will be a significant impact on existing IT systems and architecture because IFRS 17 mandates changes in valuation models as well as changes in reporting and reconciliation. As a result, appropriate data governance practice must be applied. 1 2 3 4 5 6 APPLICATION SYSTEM DATA GOVERNANCE MANAGEMENT REPORTING RECONCILIATIONGENERAL LEDGER 2 3 4 5 6 VALUATION MODELS1 - With the new valuation methodologies defined by IFRS 17, the current valuation models and systems will need to be updated - Depending on how the actuarial databases are currently used, they may also need to be reorganized - There may be a small impact on application systems, depending on the information being captured and the related granularity - Potential implementation of a rational data architecture and development of a solution to manage Data Lineage - Accounting solutions will demand a high level of integration between ledgers, actuarial calculations and general ledger postings - Major impact on the General Ledger, as IFRS 17 requires the redesign of the chart of accounts - Data flows from the various ledgers to the chart of accounts may need to be reorganized - Preparation of a management reporting system and upgrade of existing management reporting / business reporting tool - Redesign of current dashboards and KPIs - Assessment of new KPIs - Integration of Accounting department, Actuarial function and Risk Management to facilitate reconciliation activities between different metrics in use (IFRS, Solvency II MCEV) - Redesign of existing reconciliation logic Very High High Meduim Low Very Low 5
  6. 6. Impact on Processes The changes in accounting principles will drive changes in the current accounting, reconciliation and closing processes. Due to this increased complexity, insurance companies may want to refocus on fast close initiatives and closing processes for optimization. Process changes will also be required to align to financial statement generation and reporting processes. 1 2 3 4 5 VALUATION MODELS APPLICATION SYSTEM DATA GOVERNANCE GENERAL LEDGER MANAGEMENT REPORTING Defining Data Quality processes (accounting entry, data extraction, data aggregation, design and implementation of controls, data quality reporting etc.) Changes to accounting processes due to chart of account reorganization as well as to accommodate changes to the P&L structure and introduction of new margins. Changes to the existing reconciliation process due to accounting changes. Arrangement of reconciliation statements of values at the beginning and at the end of period for insurance contracts Development of methods and timing for the drafting of financial statement templates and notes to the consolidated financial statements Due to the increased complexity, companies may want to refocus on fast close initiatives and closing processes for optimization Lo 6
  7. 7. ow Impact on People The new accounting standard will have an impact on people and their way of working. Increased automation and fewer manual processes will require new working methods and tools, increasing the need for new training. 1 2 34 5 ALIGNING ACTUARIES • With the new valuation models being implemented, actuaries will need to learn the new valuation methodologies set by the new regulation • Actuaries may also need to align themselves with any changes in existing actuarial databases NEW ACCOUNTING PROCESS • Definition of ownership and collaboration approach between business functions (Accounting department, Actuarial function, Risk Management, Controlling, Portfolio Management) to set initial modeling activities and subsequent management model NEW ROLES FOR DATA GOVERNANCE • Identification of roles and responsibilities for each area (Data Quality Leader, Data Owners, Data Managers, Data System Owners) TRAINING AND DEVELOPMENT FRAMEWORK • Structured training framework to build expertise in the organization as well as to explain regulation changes, accounting changes and new KPIs RESOURCING STRATEGY • Insurers will need a clear and well defined resourcing strategy to secure the required skillset and knowhow that is required to manage such a complex transformational program 7
  8. 8. Impact on Models Due to the change in valuation methodologies, existing models will need to be adjusted to the new accounting standard. Valuation models will require updating while new reporting models will need to be defined. Three different models will be impacted: 1. Valuation • Development of evaluation methodologies according to a forward-looking logic and based on the contract classification (e.g., Life, Non-Life) • Update of existing valuation models to incorporate the newly defined valuation methodologies. However, the number of changes required will depend on the existing valuation methodology used by the insurer 2. Accounting • Redesign of financial statements (Profit & Loss (P&L) and Balance Sheet) with the introduction of new elements/Key Performance Indicators (KPIs), such as: - Insurance Contract Revenue (ICR) instead of Gross Written Premium - Underwriting result - Investment result, by introducing the concept of “accretion“ - Other Comprehensive Income (OCI) • Disclosure on the adoption methodologies process 3. Reporting • Definition of an effective reporting model for the presentation of financial figures by the introduction of new KPI/measures 8
  9. 9. Impact on Financial Statements When IFRS 17 is first applied, it is likely that the amount recognized on the balance sheet for a company’s insurance contract assets and liabilities will change. This change will depend on how different the existing accounting policies are from IFRS 17. New definitions and build-up of P&L and Balance Sheet will need to be explained and communicated. 9
  10. 10. Impact on Architecture IFRS 17 compliance implies taking a wide variety of actions on the architecture framework including Data requirements, Data Governance & Quality, Extract, Transform, Load (ETLs), Accounting Data Storage as well as reporting and reconciliation applications. Storing capacity. Store all collected and calculated data in order to support stakeholder analysis and Financial Statement arrangement with the proper disclosure Necessary Data. Collect a new set of data (content and structure) from both internal and external sources aimed to support new regulatory requirements 1 ETLs. Modify the ETLs in order to collect and process data from Source Systems based on Accounting and Actuarial data-set evolution, necessary for IFRS 17 compliance 3 Accounting Data Storage. Adopt Accounting Data Storage and enrich Actuarial Data Storage in order to feed the IFRS 17 data calculation engines with the necessary data, the proper granularity and the historical depth 4 5 Applications Upgrade. Evolve the calculation applications and Actuarial (future cash flows) and Accounting (new methodologies for liabilities evaluation) evaluation, for IFRS 17 compliance 6Data Governance & Data Quality. Assure a strong and “end-to-end” data quality: accuracy and completeness. Data definition, identification and auditing are relevant 2 Reporting & Reconciliation. Develop a multidimensional reporting framework to support internal and external reporting needs 7 10
  11. 11. IRFS 17 and Architectural Evolution The ongoing regulatory revolution and introduction of IFRS 17 is triggering a technological transformation that in the coming years will see insurance companies engaged in the identification and implementation of new architectures. A wide range of transformation scenarios can be imagined, depending on the company’s strategic vision. The target solution must be flexible enough to offset any further changes to the regulatory framework and make full use of synergies with other projects already underway (in particular IFRS 9 and Solvency II). Accenture has identified four possible evolutionary scenarios, ranging from minimum compliance with IFRS 17 requirements and supporting synergies with frameworks already in use, to a strategic end-to-end integration solution that will enable a more radical transformation towards becoming a Data Driven Company. 4 POSSIBLE EVOLUTIONARY SCENARIOS MINIMUM COMPLIANCE ARCHITECTURAL DEVELOPMENT ARCHITECTURE RE-ENGINEERING FUTURE EVOLUTION 1. 2. 3. 4. 11
  12. 12. 12 Minimum Compliance This scenario involves limited intervention, both from the point of view of organizational and operational processes and technological investments. This scenario is applicable to companies that already have an integrated data layer and adequate information structures to support the large amount of data that will need to be managed with the introduction of IFRS17. Architectural Development This scenario is focused towards technological transformation. One of the key benefits is the integration of a single database for the accounting and actuarial component, leading to increased simplification, reconciliation and rationalization of data. Architecture Re-engineering This scenario involves a profound revision of the existing architecture, impacting the main applications and maximizing the benefits derived from adjustments introduced by the new legislation. It includes centralizing information from different sources (accounting, management, actuarial) in one, unique database. Data reconciliation is managed natively to ensure the smooth integration of new IFRS17 and Solvency II KPIs/Financial Statement items in the current reports for Management/Agencies.
  13. 13. Future evolution The Architecture Re-engineering solution paves the way for future use of Robotics, AI, Cloud and Analytics (automating manual tasks such as loading flows, reconciliations, standard reporting) and sophisticated data analysis (“what if” analysis) of accounting results based on the performance of interest rates and other macroeconomic conditions. 13
  14. 14. Accenture Approach 2018 is a decisive year. Every insurance company should have embarked on a strategic journey to identify the target architecture appropriate to its vision and completed analysis and planning activities in order to start implementation. Accenture estimates that the implementation period will vary between 12 and 24 months. This must be accompanied by a structured change management process that involves all the areas affected within the organization. 14 IFRS 17 TRANSFORMATION: POSSIBLE APPROACH
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  16. 16. IFRS 17 at the heart of the Data Driven Company The changes brought about by IFRS 17 will make the insurance industry more structurally complex. This will have an impact on various strategic aspects, such as new ways of representing company profits and profitability, redefinition of product catalogs, adjustment of incentive parameters to the network and revision of ALM strategies. Different business areas will have to equip themselves with the right tools to manage a growing amount of data from different sources in an integrated way in order to provide the market with fast, coherent answers and to make effective business decisions. Data management is therefore a critical success factor. This encompasses data quality and granularity, integration of historical, current and future data, data governance, appropriate tools and processes, application architecture as well as new technologies. As discussed above, based on their strategic vision, insurers can adopt different scenarios in response to IFRS 17, ranging from minimum compliance up to a full architecture re-engineering model. IFRS 17 is an opportunity for insurers to rethink their data management vision and adopt a holistic and integrated data model that can be accessed by all the functions involved. Those that place data management at the heart of their strategic decisions today, will take an important step towards becoming a Data Driven Company of the future. 16
  17. 17. Stephanie Elleboudt Stephanie is Senior Manager in Financial Services with Accenture Technology and the Luxembourg Tech FS Capability Lead. She has 13 years of experience in consultancy, project management and delivering large system integration programs for Banking and Insurance clients. In the Regulatory, Compliance and Financial Risks areas, she focuses on accounting migrations, operational transformation and M&A. Makram Ben Dbabis Makram is a Senior Manager with Accenture Finance & Risk practice. Based in Paris, he is the Actuarial and Advanced Analytics Lead for Accenture Gallia Region. Makram’s client engagements cover regulatory response, actuarial and advanced analytics, risk management, M&A, governance and actuarial modernization. He is a qualified and certified actuary and holds a PhD in applied mathematics. Nesrine Besbes Nesrine is a Senior Manager with Accenture Finance & Risk practice. After 10 years in our Paris and Zurich offices, Nesrine now serves as the Finance & Risk Lead in Luxembourg. Her experience is mainly with banking and capital markets clients, covering topics such as compliance transformation fraud and financial crime and regulatory response. Emiliano Luzzi Emiliano is a Senior Manager with Accenture Management Consulting and serves as the Insurance Practice Lead in Luxembourg. During his career Emiliano has been exposed to a wide array of industries characterized by different competitive dynamics. In the past decade, he has advised companies across the banking and insurance industries to ensure that technology enables and supports the transformation of their organizations and operations. About the Authors 17
  18. 18. ABOUT ACCENTURE Accenture is a leading global professional services company, providing a broad range of services and solutions in strategy, consulting, digital, technology and operations. Combining unmatched experience and specialized skills across more than 40 industries and all business functions – underpinned by the world’s largest delivery network – Accenture works at the intersection of business and technology to help clients improve their performance and create sustainable value for their stakeholders. With approximately 435,000 people serving clients in more than 120 countries, Accenture drives innovation to improve the way the world works and lives. Visit us at www.accenture.com. DISCLAIMER This document is intended for general informational purposes only and does not take into account the reader’s specific circumstances, and may not reflect the most current developments. Accenture disclaims, to the fullest extent permitted by applicable law, any and all liability for the accuracy and completeness of the information in this document and for any acts or omissions made based on such information. Accenture does not provide legal, regulatory, audit, or tax advice. Readers are responsible for obtaining such advice from their own legal counsel or other licensed professionals. STAY CONNECTED Accenture Insurance https://www.accenture.com/ us-en/insurance-index https://www.accenture.com/ fr-fr/insurance-index Accenture Finance and Risk www.accenture.com/us-en/ financialservices-finance-risk 18

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