IFRS 17, which goes into effect in 2021, represents one of the most significant shifts to insurance accounting requirements in the last 20 years. Workday and Aptitude Software have partnered to create a seamless integration between Aptitude's IFRS 17 solution and Workday Financial Management to help companies deal with the challenge of transitioning to the new reporting standard.
In this article, Angela Borth, senior director, financial services at Workday and Martin Redington, chief technology officer at Aptitude Software discuss IFRS 17, the challenges organisations face, and how their companies will help businesses tackle the new regulations head on.
What is IFRS 17, who is affected, and what does it mean for those organisations?
Borth: IFRS 17 is a new standard that takes effect in January 2021. According to ifrs.org, it will affect at least 449 listed insurers with a combined $13.3 trillion in assets. IFRS 17 will transform how and when profit is recognised and disclosed across the life of an insurance contract, and mandates remeasurement every reporting period.
The overarching goal of IFRS 17 is to facilitate apples-to-apples comparisons of global insurance companies' financial statements, increase transparency of policy profitability, and reduce misvaluation. It is expected to have a significant impact on profitability, pricing, and market KPIs.
IFRS 17 compliance presents a number of technological challenges, such as the need to transform data and change certain processes. How can businesses best prepare?
Redington: A comprehensive gap analysis study is a prerequisite to compliance implementation, to assess basic compliance scope and effort and to analyse financial impacts. Once the scope and effort are understood, the right technology can be selected. This is critical for insurers, as the wrong choices can impact delivery dates. Data sourcing, validation, and storage are essential elements in the IFRS 17 compliance process.
From an actuarial perspective, new models will be required for IFRS 17 compliance. The biggest hurdles around that will be model execution frequency, associated processes, and the infrastructure changes required. And due to the granularity of additional IFRS 17 data requirements, existing ledger integrations will require modification; dedicated calculation and insurance subledgers strategies have been emerging for some time to support that.
Borth: To further emphasise the importance of data, getting accurate information at the right level of detail is essential. Insurance firms may have dozens of different systems for policies, claims, and commissions. Putting another manual process or spreadsheet on top is not an option. Many are planning or executing common data projects to clean and standardise data, both for IFRS 17 and to support advanced analytics. Understanding data frequency, volumes, and data quality rules early on can help ensure a reliable and scalable technology solution.
Actuaries typically have modelling tools in their portfolio to address IFRS 17 modelling, but other IFRS 17 capabilities around contractual service margin (CSM) calculation and multi-basis accounting usually are not covered by existing finance technologies. Legacy ERP ledgers generally do not have a robust, transparent, and configurable accounting rules engine.
Can you tell us about the partnership and how that will work in practice?
Borth: Workday performed a comprehensive market analysis of tools that could address IFRS 17, and that's why we decided to join forces with Aptitude Software. Both Aptitude Software and Workday are currently in the architecture and requirements phase of a technology project that will provide seamless integration of Aptitude Software's IFRS 17 solution into Workday Financial Management tenants. The integration will be designed to eliminate any dual maintenance, while also being flexible enough to adjust integration to the Workday general ledger tenant to accommodate future needs. The ability to adjust various dimensions after go-live will help organisations deal with future regulations or changes in reporting requirements.
Redington: That's right, and Workday Financial Management customers will be able to use an accredited connector that will be flexible and configurable for current requirements and future regulatory changes. The link between Aptitude Software and Workday will assist in accelerating project timelines and reducing IT risks associated with implementing compliance requirements. The flexibility, performance, and specialism of our joint solution specific to the financial services industry will help insurers operate in a highly dynamic and competitive market.
Given the transformative nature of IFRS 17 compliance, how long will it take organisations to source and deploy the right systems ahead of the deadline?
Redington: IFRS 17 compliance must be in effect on Jan. 1, 2021, giving insurers more than two years from now. Since insurers will need to produce IFRS 17 accounts for the 2020 year-end to give themselves a prior-year comparison come 2021, most insurers have 14 months at best to get ready. This is not a long time given the complexities involved and the many other conflicting priorities insurers face. While some of the largest insurers have made inroads with their gap analyses, there is work to do for the small to mid-size companies who may struggle if they don't start now.
Borth: One of the biggest dependencies is getting the data ready to feed to an IFRS 17 solution. However, with the right data and modelling tools, and Aptitude Software's configurable multi-GAAP posting engine and pre-defined IFRS 17 data models and calculations, Workday customers can expedite their IFRS 17 compliance implementations to increase their chances of meeting the deadline.
Are organisations preparing for IFRS 17 adequately, and what advice would you give to ensure their success?
Borth: We see organisations undergoing assessments to understand the full data, people, process, and technology impact of IFRS 17. The critical path to implementation is getting the right granularity of data from source systems and selecting the technologies, so we see clients starting with curating data and selecting IFRS 17 tools. Many are also looking to leverage this disruption to standardise data across the enterprise, as well as to streamline processes across actuarial and finance.
Redington: Yes, understanding the operating model is essential. We recommend clients create a cross-function process taxonomy for IFRS 17 impact, bringing together all the directly impacted functions across FP&A, finance and accounting, actuarial, and IT. It's also crucial to assess the impact on local reporting and on capital and the ability to pay dividends.
Also key to success is getting buy-in at the right level and then managing those stakeholder expectations to ensure the right story is communicated. Some are expecting IFRS 17 to result in more volatile results for insurers, and it may also affect the ability of companies to pay dividends and could impact executive bonuses. All of these issues need to be carefully and thoughtfully messaged back to the business and impact controls must be planned ahead of time.
For more information and resources on IFRS 17, please visit the Aptitude Software IFRS 17 resources page.