A look at remediation, modernization and transformationJuly 2022
With the effective date of International Financial Reporting Standard (IFRS) 17 approximately six months away, many insurers are turning their thoughts strategically to what comes next after their IFRS 17 implementation journeys are complete. Given the investments made to implement IFRS 17, insurance companies will be looking to ensure they have achieved the maximized program value and have enabled their finance and actuarial functions to continue to evolve toward being effective business partners to the rest of the organization.
A useful framework when looking beyond IFRS 17 implementation is to organize the road ahead into three broad categories: remediation, modernization and transformation.
Remediation (1-2 Years Post-Implementation)
The implementation of IFRS 17 has been a long and challenging process. Each insurance company set objectives for its implementation programs, ranging from a minimally viable compliance approach to a full finance transformation. As timelines compressed and defects in new information systems (IS) architectures were identified, it became common for manual workarounds to be introduced to help achieve compliance by the transformation date. IFRS 17 vendor solutions are evolving and maturing, and this is expected to continue well past the implementation date.
As a steady state begins to emerge post-implementation, focus will be required to remediate deficiencies and refine the systems, data and finance/actuarial processes that were developed. These areas of remediation will be in large part unique to the circumstances of the organization and its architecture and implementation.
The focus of implementation programs primarily has been on each insurance company’s ability to prepare the financial statements and note disclosures. As the time approaches to begin publishing IFRS 17-compliant financial statements, companies are identifying the key performance indicators (KPIs) and metrics that will become a critical part of explaining and managing their performance. For example, many insurers are likely to adopt a new business contractual service margin (CSM) metric as a key measure of value creation over existing new business measures.
The new KPIs will be important for communicating the company’s performance to its investors and other stakeholders. Following the development of a robust investor and stakeholder communication approach, these metrics will need to be embedded within a revised management reporting framework and financial planning and analysis processes as finance and actuarial functions look to become better business partners to the rest of the organization. The current state of business planning and forecasting at many insurance companies is heavily dependent on end-user computing and manual processes, is conducted infrequently and analyzed in a relatively nonrobust manner. With the additional complexity of IFRS 17, organizations must consider whether there is a better way to forecast results that avoids the use of manual and labor-intensive processes.
Once a steady state has been achieved, it will be prudent for insurance companies to complete a post-implementation review. It is natural to ask whether the objectives of the program were achieved and whether the resulting financial reporting process continues to meet the needs of management on an ongoing basis and to look at additional opportunities to maximize the output of the respective finance and actuarial functions.
Modernization (1-4 Years Post-Implementation)
With the increased complexity of the IFRS 17 financial statements and the continuing evolution of the business landscape, there is an increased demand on actuaries and other finance professionals to provide insights to support an insurer’s growth while being as efficient as possible.
For organizations that did not review their organizational design as part of their IFRS 17 implementation project, it likely will be beneficial for those companies to do so. Many insurers have benefited from the cross-collaboration and expertise of joint actuarial, finance and IS teams during the implementation phase. The need for this collaboration will continue.
To allow actuarial and finance functions to meet these demands, many chief financial officers (CFOs) are accelerating investments in automating and optimizing processes. For example, some insurers have automated their actuarial reserving process such that results become available very early in the financial reporting process, and some have introduced analytics and data dashboards that allow for the efficient review and analysis of results. Similarly, many organizations have automated their creation of financial statements and note disclosures through the use of last-mile reporting tools.
Beyond the existing requirements for financial reporting, companies increasingly are being called upon to report on climate and other environmental, social and governance (ESG) matters. This is being driven by both regulators and standard setters. For example, in Canada, the Office of the Superintendent of Financial Institutions (OSFI) has released a draft guideline, and the European Insurance and Occupational Pensions Authority (EIOPA) is consulting on climate change in own risk and solvency assessment (ORSA). The IFRS Foundation has created the International Sustainability Standards Board (ISSB) to develop a comprehensive set of standards to provide information to stakeholders about companies’ sustainability-related risks.
As these risk management and reporting requirements evolve, there is no doubt actuaries will be involved in assessing these risks and their implications for an insurer’s financial results. Seamlessly integrating these new ESG reporting requirements into a company’s plans will be key to maintaining the balance among profitability, capital management and stakeholder impact.
Transformation (2-5+ Years Post-Implementation)
Over the past four and a half years, the implementation of IFRS 17 has consumed a significant amount of the attention and resources of actuarial and finance functions to ensure a successful result. As implementation programs wind down, there is an opportunity to redeploy these resources to support the broader objectives of the insurance company.
Depending on the level of investment made to modernize and transform the underlying finance systems, it is possible to enable a change to the nature of work performed by actuaries and other finance professionals. As actuarial and finance functions modernize, it is common to automate manual workarounds and repetitive tasks. Instead of focusing on the preparation of the financial results, time may be spent on advising the business on the active management of KPIs. Providing more timely and actionable insights to maximize outcomes while working within the different environmental constraints will be a key differentiator as we move past core implementations of the framework.
For example, many insurers are introducing predictive modeling, machine learning and artificial intelligence (AI) into their underwriting processes. With the benefit of automation, actuaries in financial reporting areas will have the ability to review and assess the performance of business issued using these new underwriting techniques and provide feedback on emerging trends, so any underwriting algorithms may be validated or refined if needed.
As actuarial and finance functions review and plan out the path after IFRS 17 implementation, the pace of change within organizations will continue and even accelerate. With careful deliberation of the investments to be made, the actuarial and broader finance functions will shift to become more active business partners in advising on the strategy to grow the business in a sustainable manner.
Statements of fact and opinions expressed herein are those of the individual authors and are not necessarily those of the Society of Actuaries or the respective authors’ employers.
Copyright © 2022 by the Society of Actuaries, Schaumburg, Illinois.