The Ledger

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The Ledger

Posted by Andrea Herbert

Momentum builds as Australian regulators urge insurers to progress AASB 17 projects

In March, when the world was hit by the COVID-19 pandemic, and during the subsequent months there was a clear divide between those organizations that accelerated their digital transformation projects and those who were more cautious and chose to focus technology spend on efficiency, cost savings and automation efforts. When it came to projects such as the impending IFRS 17 compliance requirement, we saw a slow-down – perhaps an effect of COVID or a response to the decision to delay the regulation until January 2023.

As we come to the end of a very long 2020, we have seen a global resurgence in IFRS 17 efforts. From Canada, to Ireland, to Latin America, insurers are ploughing ahead with their IFRS 17 projects. This comes as no surprise, as insurers are expected to be completing parallel runs by 2022 in preparation for the standard to come into effect.

Australia Regulators urge action

In Australia, we have seen both ASIC and APRA urging insurers to move on their AASB 17 (the Australian equivalent) projects for multiple reasons other than just the encroaching deadline. Perhaps the most significant of these drivers, is a push to understand the impact of the new reporting standards on financial results ahead of the deadline. ASIC is hoping for insurers to have a view on how AAS 17 will be affecting their company reporting by December 2021 – just one year from now.

In a recent press statement, ASIC Commissioner Cathie Armour said, “The new standard can significantly affect the reported financial results of many insurers and that insurers should be determining the extent of any impact now. Directors and management of insurers need to plan for the new standard and inform investors and other financial report users of the impact on reported results.”

This is perhaps one aspect of the new compliance standard that some insurers may not have front-of-mind as they are scoping projects and choosing vendors. However, as we’ve learned from previous compliance standards, such as the recent lease accounting regulation, insurers need to be aware of these impacts and be able to explain volatility to stakeholders. Many organizations who had to comply with IFRS 16/ACS 842, saw the lease accounting standard wipe significant amounts of the reported earnings from the balance sheet, which, in many cases, came as a surprise to investors and markets. This caused confusion and, in some cases, press attention on drastically unexpected reporting numbers. Had the organizations in question pre-prepared investors and other report users, would not have been a surprise.

Once IFRS 16 came into effect, basically all leases had to be added to the company balance sheet – in some cases billions of dollars of liabilities were added. As an example, the UK’s largest supermarket chain, Tesco, showed £34bn worth of liabilities on its statement of financial position after the standard came into effect and disclosed a further £11.4bn in future operating lease commitments.

The AASB 17/IFRS 17 reporting is not likely to have such a drastic impact on financial reporting, but it will have an effect – especially for those applying the GMM or VFA approaches. So, insurers should start estimating and preparing for that impact now.

APRA announces key projects to aide Insurers

APRA is keen to help insurers estimate the impacts and understand on a large scale what the impact is likely to be to the industry overall. To help support the process APRA recently announced that they were restarting some key projects, including their work on IFRS 17. As part of this initiative they are releasing an industry wide quantitative impact study (QIS), which they will be issuing to selected industry participants for completion now. There is anticipation that this will be followed by an industry wide version towards the end of 2021 or the first quarter of 2022.

They will also be completing an industry readiness survey, which is expected to report on the state of readiness of Australian insurers. The expected release date of the readiness survey is mid-2021.

APRA also has additional reporting requirements coming into effect on July 2023. These are the new prudential and reporting standards adapted for AASB 17. Additional changes such as product groups are included here too. There are a few reasons that these should be included in the initial scope and analysis for AASB 17. The first is the data granularity required. These are expected to be reported at benefit type level so APRA are encouraging all insurers to ensure they capture the appropriate level of data granularity when they are looking at systems and processes. The other is the dual reporting element. Since insurers will likely have to dual report for some time, this should be factored into implementation projects.

The comments and actions of both APRA and ASIC form a clear message for Australian Insurers. There are many actions that need to be taken – and some of these actions need to start right away if they haven’t already.

Global experience in IFRS 17

At Aptitude Software, we have IFRS 17 projects in motion across 46 countries globally and have frequently advised that insurers should not hold back on getting IFRS 17/AABS 17 projects moving.

This is the most complex regulation to hit the insurance industry since Solvency II – maybe ever. If carried out successfully, an IFRS 17 implementation can lead to many benefits beyond a compliance check box. Not only do we have the most comprehensive and IP-rich IFRS 17 Solution on the market, but we have also recently launched IFRS 17 Comply – a highly configured, out of the box solution for fast, efficient compliance. Our clients trust us because of our deep level of IFRS 17 expertise. We have been helping finance departments in insurers for 20 years and pride ourselves on our knowledge of the insurance industry.

 To find out more, you can make an appointment with an Aptitude Software IFRS 17 expert.

Alternatively – you can find additional information on the two industry forums via the links below:

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