Recently, we participated in the IFRS 17 event hosted by InsuranceERM. The conference was well attended with over 120 senior finance leaders present. It drew speakers from major insurers across Europe including Allianz, AIG, and Ageas Group as well as speakers from the IASB and the Transition Resource Group (TRG).
Our own IFRS 17 expert, Brian Heale, sat on a panel alongside Barney Wanstall of Chubb, James Clatworthy of Aviva, and Brian Birch of Randall & Quilter, which covered practical observations from IFRS 17 systems and software implementations.
There were a few themes that were consistent across the various panels and in the conversations that took place during the networking sessions. Below, we’ve summarized some of the most interesting and noteworthy topics that came up during the event.
The interplay of Solvency II and IFRS 17
When a speaker suggested that IFRS 17 was the most complex accounting Standard ever issued and significantly more complex than Solvency II, the audience agreed enthusiastically. The audience also got to weigh in on the cost of IFRS 17 compliance. To the question, “do you think that your IFRS 17 project will be more expensive than your SII project,” the audience answered yes by a significant margin. This aligns generally with market thinking that IFRS 17 is much more complex than was initially thought.
Attendees agreed that the difference between Solvency II and IFRS 17 is that IFRS 17 is transformational, effecting not just the reporting but the overall processes – and impacting the entire business and systems architecture. This complexity and the breadth of change is why the costs are going to be higher.
The fact that IFRS 17 is more complex than Solvency II doesn’t mean SII has completely faded to the background. In fact, it was mentioned in every session as it is a key metric for most insurers and typically more important than IFRS 17 in running the business. If anything, insurers are increasingly seeing the need to “walk-between” SII and IFRS 17 reporting once IFRS 17 transition numbers have been validated.
There was also a dedicated session on the differences between SII and IFRS 17 which covered the need to harmonize the two Standards. Potential areas included groupings (HRGs and Portfolios) and using the same discount rate and BELs. The view was that the pillar one SII discount curve prescribed by EIOPA was possibly inappropriate for IFRS 17 since auditors believe it is not on a “market consistent” basis, and that perhaps harmonizing with the pillar two curve (ORSA – Insurer defined) is more relevant.
The key takeaway is that Solvency II can no longer be viewed in isolation and that the impact of IFRS 17 on SII must also be considered.
Data complexity is still an issue
Data complexity remains a key theme and several sessions focused on the complexities inherent in extracting data from multiple legacy systems and actuarial models, maintaining data governance, and accessing data at the level of granularity needed. Data remains a key challenge, particularly for insurers who did not go through a SII project.
Still, insurers recognize the value of IFRS 17 in forcing them to get their data in order and make it available for analysis. One insurer, ASR, spoke about IFRS 17 as a driver for finance transformation which will lead to more efficient reporting, the integration of IFRS 17 and SII processes, and a reduction in the number of data silos.
Areas of hidden complexity
PAA remains an area of complexity that has surprised many insurers and several sessions highlighted the fact that PAA is significantly more complex to implement than was originally envisaged. Primary areas of complexity discussed include:
- PAA eligibility testing
- Data Granularity – Loss Reserving level to IFRS 17 grouping – Allocations
- Dealing with changes to contracts (e.g. Mid-Term Adjustments, Cancellations etc.)
- Onerous Contracts/Loss Component
- Generating the Fulfillment Cash Flows for the LIC
Another area of hidden complexities is around reinsurance, specifically as it refers to PAA. It's a topic that is not well covered in the Standard and that is causing delays in projects. The hope is that matters will be clarified by the IASB in the next few months. Recent clarification around exemptions for Equity Release Mortgages, Credit Cards, and reinsurance Loss Recovery have helped.
The timing of the standard
The view from the various regulators speaking at the conference was that the IFRS 17 effective date will be delayed until 2023. Most insurers felt a delay would give them a chance to take a more strategic approach to compliance in addition to giving them the time to test and validate their processes and results data. We expect this decision to be confirmed by the IASB in the next few months. Once speaker noted, “the standard has already taken 17 years to get to this stage, so another year won’t make much difference!” Not a single insurer mentioned that this delay would pause or slow projects down.
Thank you to InsuranceERM for putting on the conference and inviting us to speak and sponsor.
*photo credit: Insuranceerm.com