Standards & Compliance

Accounting Change: The Path to Modernized Finance Technology

The response to IFRS 17 and LDTI for insurers calls for investments into agile and modernized finance technology that drive better business performance.

Excerpts from EY’s in-depth report on the emergence of the International Financial Reporting Standard identify for companies worldwide ‘opportunities to transform their operating models, along with the role of finance, risk and actuarial in their businesses.’  Read the full report here

While possible to view accounting change as a compliance exercise, nearly all insurance companies are viewing these changes as the trigger for long-overdue deferred investments ranging from targeted data, system or process upgrades to full-scale modernization. Accounting change is also an opportunity for management teams to identify opportunities to transform their operating models, along with the role of finance, risk and actuarial in their businesses.

As for the timeline for making these investments, although the prescribed effective dates have been deferred and many local adoption approaches are still uncertain, there’s no room for delay in working through the significant effort required.

Participation across business units and organizational functions will be essential for adapting to accounting change. Instead of an unstructured approach led either by actuaries, accountants or IT specialists, what’s required is a cross-functional approach based on a business case to modernize operations with flexibly architected insurance solutions that integrate finance, risk and actuarial functions throughout the business.

Implications of accounting change

The accounting of insurance contracts under IFRS and US GAAP will result in increased volatility in financial results and shareholder equity. This will result in heightened scrutiny by internal and external stakeholders over the judgments, data, systems and processes used to measure insurance assets and liabilities.

In response, management may need to reconsider pricing, business mix, sales channels and other characteristics of the business. Only time will tell which responses will be most appropriate, but it is certain that senior leadership will need timely and insightful data to inform its decisions.

The core challenge is that older accounting systems were built to aggregate actuarial and risk data for external financial reporting without the capacity for more granular estimation of the underlying cash flows. Meanwhile, older front-end business systems built to collect transactional information typically lack the precision or efficiency needed for integration with accounting systems. These legacy platforms, either on the accounting side or the business side, will be hard pressed to handle increased transparency and requirements for more precise data while still meeting quarterly and annual reporting deadlines.

Standing up a rules engine between legacy front-end and accounting systems is a significant endeavor, and one that few firms with legacy systems would be able to complete to meet the upcoming IFRS 17 and LDTI deadlines. Unless an insurer has completed an end-to-end transformation within the last five to seven years, accounting change requires modernization, not modification. By far, the fastest and least expensive path to modernization will be to utilize flexibly architected, cloud-based actuarial and accounting solutions.

Modernized insurance solutions:

  • Run in the cloud, substantially reducing the cost and time of delivery while generating tangible expense reductions
  • Allow convergence between finance, risk and actuarial functions through cloud-based APIs and other approaches to connectivity
  • Support “straight through” automated financial reporting to meet the requirements of accounting change

 Critical success factors

When developing business cases and strategies, there are six critical success factors for modernizing in response to accounting change.

Implementation will require an “agile” approach
If design decisions made early in the process are too rigid, there’s a greater chance that major midcourse corrections will be required once you fully grasp the extent of the business requirements.

 Actuaries may consider one set of solutions, while accountants may consider another. This involves not only actuarial and accounting, but also operations and frontline staff — so include everyone throughout the process, with the expectation that you’ll learn as you go...

Involve everyone early on
 Actuaries may consider one set of solutions, while accountants may consider another. This involves not only actuarial and accounting, but also operations and frontline staff — so include everyone throughout the process, with the expectation that you’ll learn as you go.

Assess your current competencies
 Some companies are excellent at liability valuation, while others excel at financial planning and forecasting. Knowing your company’s strengths and areas for improvement will affect your choice of solutions.
Make decisions after you understand the implications. Understand the impact on operations and financial reporting and the cultural ramifications, and then compromise on the best approach.

Build upon a solid technology infrastructure
 Look for a cloud-based platform with API-based connectivity, business rules that can be embedded directly into frontline operations and a user-friendly interface that allows business users to customize rules to their evolving needs without needing to bring in programmers. These capabilities have been proven to be essential for a modernized technology infrastructure.

Don’t delay
Given the industry-changing implications of accounting change, firms need to act now to transform investor perceptions, realign executive incentives and redefine how they operate.

Read the complete report here.