Published by Wan Hsien Heah on
Estimated reading time: 2 minutes
You could almost hear a collective sigh of relief as more and more insurers begin to turn their attention to what is turning out to be a more complicated accounting standard than they first thought. This coming so closely after the implementation of Solvency II has meant that most European firms are now exhausted and/or reluctant to consider any major operational changes arising from IFRS17 in the first instance.
On the non-life insurance side, there was talk in the market of being practical with IFRS17, even before the announcement of the deferment. There is nothing wrong with being practical – unless it defers a problem into the future.
Example of practical issues
Take for example the Premium Allocation Approach (PAA). Non-life insurers who have looked at the PAA may well rub their hands with glee over the existence of the simplification as a means of avoiding process change. After all, if one could use existing Unearned Premium Reserve (UPR) calculations as a proxy in IFRS17, then why would you not? You may not because you would still have to prove that the PAA is similar to the Building Blocks Approach (BBA). The PAA is also not applicable to the claims provision or to long term contracts. As insurers would have to build processes for the BBA approach anyway, they could consider incorporating the premium provision calculations into that very process.
“How about the approach of not implementing any system changes but instead using the existing Solvency II process to come up with IFRS17 compatible results? ”
While IFRS17 was created in the image of Solvency II, it is not equivalent to Solvency II. For example, the concept of the Contractual Service Margin (CSM) is new and the calculations behind that more involved, especially if you disclose the discount unwinding in the financials. It points towards a system driven solution, especially where firms have a high volume of policies going back several years or a complicated structure owing to legacy mergers.
Let us also not forget that while the standard is now expected to come into force on 1 January 2022, insurers should ideally have comparatives ready in time for that date. In practice, that means having an IFRS17 solution in place for 1 January 2021. If insurers adhere to best practice, then you would build in at least two quarters of dry runs ahead of January 2021. That leaves less than two years to implement a non-trivial standard on top of the existing GAAP and Solvency II Business As Usual processes, Brexit and other uncertainties in the current market climate. The one year deferment was therefore much needed, and not a signal to leave solution formation for your future self!
Sounds like a lot to do? It is! Insurers need to act quickly while weighing up how practical their solutions are versus how much pain they would have to take in the future.
The good news is that there are tools and accelerators to help insurers understand how to navigate the path ahead without kicking the can into the long grass. All that they have to do is act now.
Wan is an Associate within the Barnett Waddingham Non Life team, and leads the IFRS17 proposition.