IFRS 17 Transition: It’s the journey that matters, in the end
John Bowers, Director of Consulting, EMEA, RNA Analytics
As part of my ongoing work with IFRS 17 client implementations, I am often asked how best to approach transition. I’ve seen the transition approached in many different ways, and generally speaking, those that planned early, and work in time for considering different methods and options offer the best outcomes. And in the end, auditors will also be interested in the journey that you took to get you to your destination!
The sooner companies start to consider IFRS 17, the more flexibility they will have, and therefore the better placed to really understand the key factors applicable to their own business and how best to manage them under the new standard. From the outset, it is helpful to remind ourselves that the entire purpose of IFRS 17 is to create comparability with accounts, which must start with the transition arrangement.
Naturally, there will be a number of factors that influence the approach a company might take – these include data range, the age of the company, and available resources. Taking the full, retrospective approach may be the most accurate, but it is labour-intensive and data-heavy. It could be argued that for a company established 30 years ago, a full retrospective approach would be impossible as the calculations and therefore the projections are simply not available; data can be a severe restriction. For companies that opt for this approach, all members of both the actuarial and accounting teams will need to work together.
At the other end of the scale, smaller firms with less resource favour the fair value approach, which is the simplest and less resource-intensive option. The fair value approach has its own challenges, however, as it is more of an accounting concept than it is actuarial. Easily the number one question RNA has been asked over the past couple of years when speaking to clients regarding IFRS 17 implementations is “What do you mean by fair value, or policyholders’ share of change in fair value?”. Overall, the method is the simplest to implement and it does lend itself more easily to certain product types.
Finally, the modified retrospective approach falls somewhere in the middle of the two main approaches. This approach has a similar cost impact from the accounting side, with fair value being the cheapest to implement. Each company is going to start from a different point, with different systems, varying established capabilities, different levels of historical data quality, and – something that you might not be front of mind - different internal attitudes to the available options!
Whilst it is arguably always useful to see what peers are doing, the key is to engage the early involvement of the auditors; every company is unique, and auditors will want to know that interpretation is appropriate and proportionate. It is worth noting companies don’t have to choose one method across the board for their entire business. There may be newer products for which the full retrospective approach is achievable. For other blocks they may also apply a combination of methods like fair value up to one point, and then full retrospective from that point onwards, which combines efforts and creates a merged end-result for the transition.
All the main actuarial software providers and accounting tools have IFRS 17 packages, so there is no limit to choice. Functionality wise, in my experience of working with a range of life and non-life re/insurance clients, there is something of a sliding scale in terms of how much of a black box the tools operate as, and different companies will have different preferences for where on that scale they want a solution to be.
When it comes to sourcing data, there is no escaping the fact that this is a labour-intensive exercise for both the accounting and actuarial departments. Systems integration, or the emergence of what you might call the Technical Consultant – as opposed to an Actuarial Consultant – is, I believe, a growth area to identify and remove pain points in the movement, preparation and manipulation of data that can certainly add value to creating a robust solution. In terms of the calculation engine, being homed in an actuarial modelling tool (for which doing future projections and modelling cash flows is what the R³S Software Tool or IFRS17 Model, is all about), then it’s very easy to conduct a range of what-if calculations to see what the transition and future balance sheets and profits may be.
Having managed both internal and external development and implementation projects, I wholeheartedly encourage companies to build in to project plans what you might call an extended period of user acceptance testing to give themselves time to really understand the key factors and drivers that influence the calculations. Companies might like to consider what using method A might look like compared to method B – or what effect grouping products in such a way might have compared to grouping them in another…
Success comes when companies can use a tool that offers them the flexibility to do this kind of analysis; that are transparent so the mechanics and drivers of the results can be truly understood; and that can be integrated into a robust end-to-end process that is an inter-connected and as automated as possible – this is where IFRS 17 may be challenging but can be so rewarding if it’s done right.