Now for the real thing

Why 2021 is the key year for IFRS 17 testing and transition

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With comparative figures required for the financial year starting in 2022, the real deadline for IFRS 17 for many insurers is not far away. What do you need to do between now and then? How can you get on track?

The real reporting deadline

Imagine you’re an architect working on the blueprint for a new city centre skyscraper and the client calls up to say that they want to start moving in a year early. The IFRS 17 transitional arrangements contain just such a bombshell. 

While the effective date for the new insurance contract standard is 1 January 2023, the real reporting deadline is 2022 (Q1 or H1 depending on your financial reporting schedule) when most insurers will need to calculate the opening balance sheet position, coupled with obtaining board and audit sign off of numbers on an IFRS 17 basis (‘comparatives’). 

In order to start preparing comparatives you will need a final set of opening balances for 2022 (a restatement of your 2021 year-end balance sheet) on an IFRS 17 basis. Analysts and investors may also want to see real IFRS 17 numbers in 2022.

The need to report comparatives has always been there in black and white. But the real surprise with IFRS 17 is the scale of the transition demands and the amount of new data that must be included. This includes enhancing and testing your systems, fixing any problems and reviewing the results. You also need to get all the key people involved up to speed, including your board and internal audit team.

We’ve been working with insurers at different stages of this journey. Invariably, the more they know, the more they realise how much they need to do.

Working back from the end

The good news is that with some upfront planning, you can make testing and transition far more manageable. A good place to start is charting what needs to be in place by the end of 2021, and then working back along the milestones leading up to there. 

Rolling back from the finishing line brings greater clarity about the sequence of steps and how much time and resources to allocate. What we often find is that high-level design and build receive a lot of time and attention, but testing is often tacked on as an afterthought. 

In reality, you can’t really know whether the design and its implementation work properly until you’ve run it with real numbers and in real live conditions. 

Operationally, are you going to meet the tight turnaround times? Reputationally, you need to be sure the results are accurate as they can’t be adjusted after the comparatives are signed off and/or after the effects of IFRS 17 have been communicated to the market. From a financial reporting perspective, you need to know what the new IFRS 17 numbers look like and consider how analysts and investors might react.

The other big risk is underestimating how many moving parts there are, how many people are involved and how many critical dependencies there are between them. 

IFRS 17 requires a whole new data set and an overhaul of systems, models and ledgers. Think of how many people would be working on each of these components and how much co-ordination is needed. Then think about how you test all that.

Similarly, your board needs to be able to review and sign off an unfamiliar set of accounts knowledgeably and confidently. A key part of this is understanding all the assumptions and adjustments that go into them, and based on this understanding, some may want to revisit decisions made earlier which impact the numbers. 

It’s most likely that your board will want to very carefully consider the messaging around the impact of IFRS 17 to the market as well as the timing of when the numbers are to be disclosed.

Five tips for smoothing transition

Having worked with so many clients around the world, we’ve been able to identify the common snags that can delay or disrupt testing and transition and have come up with ways to overcome them. While all insurers are different, these are our five tips for smoothing the process.

1. Create a clear roadmap

The roadmap should set out what needs to be done, by whom and by when. The key is understanding and managing the dependencies between all the steps and the various people involved.

2. Ringfence time and resources

A lot of the people needed to get the numbers ready may have many other calls on their time. Alongside accounts preparation on the current non-IFRS 17 basis, the demands range from dealing with the impact of the pandemic to regulatory and policy shifts such as the European Green Deal. 

However, meeting the IFRS 17 deadline is going to be difficult without a core of dedicated personnel. It’s important to identify these people and ringfence the resources so they can concentrate on the tasks ahead, while honing their expertise. 

Similarly, set aside time in the board schedule so they can concentrate on understanding, reviewing and, where necessary, challenging the results.

3. Do it for real

As far as possible, try to test how data collection, systems, preparation and review would work within the timelines that are needed once IFRS 17 goes fully live. This will reveal the potential roadblocks and how to clear them.

4. Put oversight and controls in early

Work with your board, internal audit and external audit teams to establish what oversight and controls are needed and how to meet their expectations.

5. Be realistic

While some of you are targeting minimum compliance, others have set more ambitious goals for finance transformation. The big question is, given your ambition level, will you be ready to go at the end of 2021? 

If you’re not sure, options include going for basic compliance for now, along with deployment of off-the-shelf reporting or a managed service solution. Eventually, you will be able to bring accounts preparation back in-house and achieve wider goals, but this route can help ease the immediate pressure whilst giving you the benefit of having something against which you can compare your in-house results. 

Making 2022 easier

There’s quite a lot to do and less time than you might have assumed to do it in. However, the more effectively you test and prepare for transition in 2021, the more confidently you can go to market. And you’ll be in a much stronger position to begin building IFRS 17 into business as usual in 2022 and 2023. Any delays could see you scrambling to catch up, while facing unwelcome disruption and a heightened risk of misstatement. 

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Alex Bertolotti

Alex Bertolotti

Partner, UK Insurance Leader and Global IFRS 17 Lead, PwC United Kingdom

Tel: +44 (0)7525 299694

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