Do it yourself or buy off the shelf?
Using your existing reporting infrastructure to comply with IFRS 17 might seem like the cheapest and most straightforward option. But is self-build really viable?
Many people who’ve taken on home renovation projects will at some point have wondered whether it might have been easier to knock the place down and rebuild from scratch. What’s taking the builders so long? Should I really have tried to do that bit myself? When can we finally move back into our home?
If IFRS 17 was a building project, then there would be plenty of people looking anxiously at all the scaffolding, rubble and dust right now.
The specifications for the new insurance contract accounting standard are more akin with rebuilding than renovation. This includes resetting the income statement and a whole new way of measuring returns (contractual service margin).
It’s a similar story from a systems perspective. Rather than a single, self-contained model, the environment encompasses assumption setting, new and unfamiliar data and a calculation engine built around multiple actuarial and accounting models. You also need the capabilities to extract, prepare and store all this new data.
Adding to the challenges are punishing new turnaround times for quarterly financial reporting and the need for much closer integration between finance and actuarial teams.
And all this has to be ready to go in time to generate comparative numbers in 2022 and full reporting in 2023 – while still carrying out your day job at a time of industry disruption and economic uncertainty.
Given all these demands, is it possible to adapt your existing reporting infrastructure to prepare the IFRS 17 numbers?
Some have tried, but few have succeeded. Even with multiple patches, buttresses and workarounds, existing systems are buckling under the strain. Spreadsheet calculations are especially difficult within such a complex and multifaceted environment.
And even if you can get this all to work in the short-term, the staff costs, time pressures and susceptibility for error make this approach unsustainable in the long run.
Can you develop your own models? Again, it’s possible. However, even finance and actuarial teams with considerable experience in model development have struggled to get to grips with all the moving parts, evolving data models, adjustments and interdependencies within IFRS 17.
Before embarking on this course, it’s also important to remember that data sourcing, process re-engineering and justifying assumptions are all just as critical and challenging as developing the models themselves.
Vendor solutions can help to take care of the IFRS 17 systems equivalents of plastering, plumbing and electrics. These include cash flow discounting, risk adjustment and contractual service margin calculations.
However, customisation will be needed. This reflects both the individual characteristics of your business and the choices available within a principles-based standard. Vendor solutions also tend to start from either an actuarial or accounting foundation, which will need to be reflected in their application.
The right vendor solution depends on your starting point and how much of your existing infrastructure you plan to deploy. It also depends on your ambitions – to what extent do you want to use IFRS 17 as a springboard for wider finance transformation and data insight?
The equivalents of the finished, furnished and ‘ready to move in’ home are also available. They include off-the-shelf and managed service solutions. These might be the best way forward if you want to comply on time without the risk and distraction of self-build. They are also useful contingency options if you need somewhere while your place is being renovated and you’re not sure it’ll be ready in time.
So how do you decide what’s right for your particular business?
If you’re yet to get started on implementation, or all you want to do is to comply, then ‘ready to move in’ would seem like the preferred option. Whether using your existing infrastructure or customising vendor solutions, it all takes time and creates significant demands for your actuarial and finance teams. You also need to be sure you have the necessary expertise.
If IFRS 17 is part of wider transformation ambitions, then you’ll want more than an off-the-shelf solution. Before designing your new infrastructure and deciding on vendor solutions, it’s important to clarify your objectives and their likely financial and operational implications. It’s also important to be clear about the necessary model scope, the functional interdependencies and the key personnel who need to come together.
You can then create a roadmap that tracks backwards from this end-state to include all the component milestones that need to be achieved, operationally and organisationally, as well as systems development. IFRS 17 will clearly be an important one of these milestones, both in itself and as a staging post for bringing in new data and developing advanced analytical capabilities.
The key message is don’t bite off more than you can chew on IFRS 17. Far from being the straightforward option, ‘do it yourself’ is likely to be the trickiest, riskiest and, in the long run, most costly option. If opting for a vendor solution, it’s important to recognise that what’s right for other businesses might not be for yours. New build is also available and may become more appealing as the deadline looms and the challenges of self-build become increasingly evident.
Partner, PwC United Kingdom
Tel: +44 (0)20 7212 2032