Exclusive: A catalyst for change – Brian Heale, Aptitude Software and Eduardo D’Alma, Q_PERIOR in The Insurtech Magazine

Implemented correctly, the new IFRS accounting standard for reporting of insurance contracts could have a transformational impact on businesses’ digital and cultural frameworks. Brian Heale of Aptitude Software and Eduardo D’Alma of Q_PERIOR discuss their options. 

Insurers would be wise to treat the implementation of new global accounting standards for insurance contracts as more than just a tactical compliance project. They can use the opportunity to re-think finance and compliance processes and future use of data to modernise their finance function and achieve strategic value far beyond compliance. That’s the view of insurance experts at London-based Aptitude Software, which provides finance, accounting and regulatory software, and is working on IFRS 17 implementations with insurers across the globe, and change management consultancy for the insurance industry, Q_PERIOR.

We brought the two companies together to discuss International Financial Reporting Standards (IFRS) 17, described by EY as ‘the most significant change to insurance accounting requirements in 20 years’ in enabling more comparable and transparent financial reporting of insurance contracts across the world. The date for compliance was 2022. Although that has now been delayed by a year, IFRS 17’s complexity means there is still a lot to do in a short time.

Aptitude’s IFRS 17 Solution is purpose built, comprising of a calculation engine to manage groupings, cohorts, risk portfolios and supplement calculations, such as contractual service margin, and an accounting hub that consolidates accounting and actuarial data and provides advanced, multi-generally accepted accounting principles (GAAP), multi-entity, multi-currency accounting subledger capabilities with benefits for both finance and actuarial departments.

It also offers integration with actuarial, finance and policy systems, including SAP and Oracle General Ledger, and can deliver high-volume and large-scale GAAP accounting. The solution enables insurers to leverage all IFRS 17 measurement approaches, including the general measurement model (GMM), premium allocation approach (PAA) and the variable fee approach (VFA). Brian Heale, senior insurance and IFRS 17 consultant at Aptitude, says that whichever approach is followed, the standard’s introduction will mean the accounting and actuarial worlds will need to work closer than ever before. But there are both business and technical challenges to that, says Eduardo D’Alma, a partner at change management consultancy Q_PERIOR… here’s why.

The Insurtech Magazine: Do you think insurers underestimated the complexity of IFRS 17?

Brian Heale: In our experience of implementing more than a dozen IFRS 17 projects so far, most clients have significantly underestimated the complexity. To be fair, I think software vendors may have also underestimated the complexity: converting the actuarial results/transactional data automatically into accounting transactions has been particularly complex. In addition, the standard is principles-based rather than a static framework, as with Solvency II, so the interpretation of the calculation methodologies (e.g. loss component) and accounting choices that you have has also been a significant problem.

Eduardo D’AlmA: When the industry first started looking at it, IFRS 17 was seen as being very technical from a business perspective, but now we’re moving more towards the storytelling phase [using it in reporting], we need to think more about how we use IFRS 17 as a tool to influence the message we want to get across to investors. We also need to look at the comparison between IFRS 17 and all the other regulatory regimes that the majority of our international insurance customers have to adhere to.

TIM: What choices do insurers have when it comes to implementation of IFRS 17 and what impact will those choices have on their businesses?

BH: I think implementing IFRS 17 will have a significant impact across an insurer’s actuarial and finance operating model and this, to a degree,
will be reflected in the size of the project. Understanding those implications will be essential to developing the appropriate strategies and responses. The size and cost of an IFRS 17 project will vary significantly, dependent on the approach taken by an insurer, which can be categorised in three ways. One is minimal compliance – where the insurer has taken the view that this is purely a compliance exercise and is going to spend minimal time and effort to achieve the objective. This might be fine for small insurers but, generally, it’s not been adopted by the larger ones.

I think if you adopt an approach of minimal compliance, you’re almost taking a backwards step and doing what insurers did with Solvency II. Then there’s minimum compliance with added efficiencies to improve the reporting cycles and some automation. The third approach uses IFRS 17 as a catalyst for a full digital finance and actuarial transformation programme, that not only supports IFRS 17 but also a whole raft of other regulatory regimes. IFRS 17 will require insurers to look at all aspects of their finances, actuarial, reporting processes and governance systems, ideally based on a dedicated target operating model for IFRS 17, which we have seen very few of.

ED’A: I think it’s important to understand that we will have a major shift in responsibilities. The involvement of the actuarial departments in what goes into the balance sheet and income statement is rapidly shifting because of the way that IFRS 17 is collecting the numbers. That also means that every project has a change management component – from an organisational perspective – that we need to tackle as well.

TIM: How can insurers make sure the changes necessary for IFRS 17 have been implemented correctly?

ED’A: We recommend choosing the most stressful moment – either around the quarterly or year-end results, and use the closing calendar as a basis for use cases, or stories. That helps firms both understand the sequence of work they have to do and also whether there are any gaps in their design. It also helps them to determine what level of automation is needed to meet deadlines.

We also recommend testing very often and end-to-end, to ensure that the individual components operate before users put them together in sequence. It’s important to really use the opportunity to create something which is integrated, something, which has a clear ability to be scaled for other purposes. Because, let’s face it, the regulation is new and, once applied, will undergo changes. I think the endgame should be that
you have something in place that is measurably better than what you had before you started, that can be leveraged and is preparing you, in a much better way, for a regulatory future.

BH: Clients are going to need the ability to undertake simulation and forecasting activities because there are going to be new key performance indicator (KPI) metrics: the ability, prior to transition, to be able to look at a number of scenarios that generate results, change various assumptions and produce a whole range of outputs. So, contractual service margin, risk adjustment and insurance revenue is going to be important. Then the actuaries look through those and use their expert judgment to define what actually is a good set of IFRS 17 results.

TIM: What can insurers do in terms of their organisational culture to prepare for IFRS 17?

ED’A: It is important to operate in a lean fashion and also have a certain level of industrialisation available. My hope is that this is a good starting point for them to realise that there’s more to win if we try to unify, than there is to lose.

BH: Many insurers are looking at adopting a more integrated finance and actuarial type of approach. As Insurers delve more deeply into IFRS 17, they may learn from the experience from Solvency II, and take a more strategic approach and look at how to improve and automate their actuarial, risk and finance systems. Hopefully, that will help to reduce overall costs, which remains a key driver.

One of our clients has used our solution to automate their accounting structures for IFRS 17 and others and, as a result of that, had a 70-80 per cent reduction in manual processes. This has enabled skilled resources to be reallocated; they’ve had a reduction in their monthly close cycles by 60 per cent and, importantly, they’ve reduced the time they spend on manual adjustments and reconciliation through increased automation. This highlights Eduardo’s point, that automation of the process, right the way through from actuarial runs to final reporting, is critical. And, I think, if firms use IFRS 17 as a catalyst to do this, it provides them with benefits for the other reporting regimes, as well.

This article was published in The Insurtech Magazine: Issue #4, Page 14.