The date for IFRS 17 taking effect is getting closer and implementation efforts are progressing for the insurance companies aiming to comply with the new reporting standard.
Now, before many of us are heading to deserved summer vacations, it is a good time to reflect on the lessons learned so far in IFRS 17 implementation projects and what operational impact they will have going forward.
At Systemorph, we have identified four important lessons learned that we recommend bearing in mind when evaluating the progress and the level of operational readiness of your IFRS 17 compliance project.
Firstly, recognize that operational complexity of the IFRS 17 reporting process is higher than expected.
Secondly, there is no one-size-fits-all solution.
Thirdly, it is not easy to adapt a chosen methodology once you start production. Changes after go-live can result in unpleasant surprises.
Finally, IFRS 17 will change the role of the staff involved in the financial close.
All these lessons learned should be considered when planning the next phase of your IFRS 17 implementation.
Address complexity with automation
Incorporating the new reporting requirements of IFRS 17 adds another layer of complexity in your organization and in your IT systems landscape.
Depending on your product portfolio, actuaries must spend more time gathering and preparing data for their models as well as moving the outputs into integration layers or subledgers. If done manually, this will most certainly become a severe bottleneck in your close process with substantial potential of delaying the closing timeline.
In this context, modern software architecture and integration technology can make a major difference and substantially reduce the time spent by humans processing data. Modern systems are fully capable of automating interpretation and processing of data including built-in sign-offs to automate audit and compliance requirements as well as keeping an overview of the business process status. (See Figure 1)
Improved insurance data management with increased automation also yields improved process security coupled with highly desired stability.
As a positive side effect, key person risk and operational risk are minimized. That means you eliminate the over-concentration of knowledge of how to navigate the spreadsheet jungle that can accumulate in one or two key staff members. Instead, the process itself captures the knowledge and most efficient path to closing.
There is no one-size-fits-all solution
We observe that timing of the IFRS 17 solution vendor selection process will vary depending on both the insurance company’s geographical location and the extent of its global footprint.
Many relatively small insurance companies with local focus are planning to select an IFRS 17 vendor at the end of 2019.
At the same time, most of the large insurance companies with international operations have already entered a second wave of vendor selection looking for a Plan B, hedging the initial selection done over a year ago.
Why is that? The only plausible explanations for both behaviors have the same root cause: the belief that the solution vendors will supply a generic one-size-fits-all solution to comply with IFRS 17!
Smaller companies somewhat understandably wait to receive access to a ready-to-use solution calibrated in larger projects.
Meanwhile, large companies have realized that their selected solution may not support the complexity of their organization and need to hedge their bets.
In our discussions with these companies, we are finding a general realization sinking in that every organization has its own product environment with a diverse source system landscape combined with company specific objectives, processes and ways of working. This means they require a tailored solution.
It is simply too complex to create a generic solution that caters to even the most common available scenarios if you want to be able to actively govern the outcome.
The importance of Dry- and Parallel runs
Like every change in life or new skill you learn, the more you practice the better you get.
This also applies for the new IFRS 17 reporting process and the underlying methodology you determine.
To really understand the implications of the standard in a real-world scenario you need to give your organization time to practice.
One hectic run during the last quarter before going live in 2022 will not be enough. Everything needs to be weatherproof and you need to understand where your methodology takes you.
How will your chosen methodology behave with changes in interest rates or the regulatory environment?
It is highly likely that there will be areas of your process that you must optimize, decisions that need to be reconsidered, methodology to be changed and technical changes that must be implemented before you are ready for your first public disclosure.
Delivering an IFRS 17 compliance project is comparable to building a railway. Wherever you lay the tracks today, is where the train will take you tomorrow.
Probably the single most underrated activity that requires multiple dry-runs is the initial computation of the Contractual Service Margin (CSM). As the opening CSM balance will influence your accounting profit for several future accounting years, it is crucial to get it right from start. Doing so requires more than one iteration of testing.
Performing dry-runs and parallel runs before going live also helps you find areas in both methodology and the process itself that can produce unexpected outcomes and unpleasant surprises.
Our advice is to start with your P&L, where we have observed unexpected results in first iterations using actual production data.
Key success factors for a smooth closing process
As many of your IFRS 17 project resources will be swamped with daily closing activities, it is crucial that active planning ensures their availability for dry-runs and exercises at least 12 months prior to going live. It will take time to plan and align processes and activities to reduce the inevitable fight for the same resources.
Another key success factor is flexibility in adjusting input data or calculations in your production lane. Rigid or fixed structures require time-consuming and expensive system development for even simple adjustments.
This applies in particular when you are onboarding all relevant Business Units, which always takes more time than expected. Therefore, the higher the level of automation and the more centralized critical components are, the easier and faster you can make changes.
It is also time to scrutinize current roles and responsibilities in the closing process and make changes if needed. There must be full transparency of who is delivering what at what time within the IFRS 17 closing process.
Sticking with an organically grown internal closing process evolving over time will not do the trick anymore. With IFRS 17 many elements of this process will be changed both from a content, responsibility and system perspective.
To succeed, it is critical to allow sufficient time to identify and improve any potential misaligned handovers, uncoordinated delivery times, or staff that needs additional training. You need to scrutinize and address anything that slows down the process or jeopardizes the quality of the results.
Last but not least, the more fragmented your financial data management system architecture is, the more effort and focus will be required to fix process issues.
For example, if large parts of your calculation and posting elements are pulled together manually with the help of spreadsheets or in-house built and maintained scripts, you increase key person risk by over-concentrating process knowledge in one or two individuals.
Looking for solutions to cover individual areas of shortcomings will most likely lead to a patchwork where only the best and brightest understand how it works and the rest of your staff is looking at a black box.
Importance of a master plan
January 1, 2022, when the standard takes effect, still seems to be in the distant future.
In theory this should leave you with enough time for your implementation. But in practice, now is the time to create a realistic masterplan.
Start with the go-live date and work backward in time to include all activities needed to finalize the project successfully.
Doing so will give you a clear picture of how much needs to be done in the remaining time and how much time you have for testing under several scenarios to ensure results with sufficient quality.
Each individual activity takes time on its own, but the true complexity is only revealed when you draw a network diagram including all interdependencies between all tasks in your project. Hence we recommend to start as soon as possible. Realistically, if you want to actively govern the outcome, this can’t be done in a short time and unfortunately there are no short cuts available.
Phases and Activities
With active governance we mean calibration through multiple iterations of dry runs and parallel runs, which must be planned with enough time in the project plans. This is also one of the key takeaways from our recent IFRS 17 roundtable discussion in May where Karthik Thilak of Zurich was spot on with his statement:
“If you don’t have a sense of urgency in your company, you better create one!”Karthik Thilak, Global Program Director IFRS 17/9, Zurich Insurance Group
Whatever you do, your IFRS 17 implementation plan and timeline needs to focus on the big picture. Details and which IFRS 17 milestones you include should be part of a realistic overall plan that ensures you have enough time for a test phase with multiple dry runs as well as parallel runs.
The process you establish for IFRS 17 compliant reporting represents a journey. Just like constructing a new railway, careful planning and foresight are necessary to lay the tracks properly to reach your destination.