Picture a global insurance company approaching its first IFRS 17 reporting deadline. In London, actuaries are busy doing time-consuming calculations for the Contractual Service Margin. In Singapore, accountants are figuring out how to reconcile data for multiple legacy systems. In the headquarters, executives are asking why they can’t see a complete overview of the company’s finances. This scenario is typical of insurance companies all over the world. It illustrates why Business Intelligence is the unsung hero of IFRS 17 implementation.
The IFRS 17 insurance standards is the most significant change to insurance contract accounting in decades. While the standard is complex, the challenge of implementation lies in the massive data, taking the intricate calculations needed for compliance. This is where modern Business Intelligence platforms come in. They are turning compliance from a burden into a strategic opportunity.
Understanding the IFRS 17 Challenge
International Financial Reporting Standard 17 alters how contracts issued by insurers are accounted for. While IFRS 4’s approach was to implement flexibility in how insurers recognized contracts thereby allowing multiple accounting practices in various jurisdictions, IFRS 17 accounts for contracts in the same manner by requiring insurers to measure insurance contracts using current values instead of historical costs. Most significantly, the standard introduces the CSM, which obligates insurers to recognize profit over the coverage period.
The data constraints posed by IFRS 17 are unprecedented. Detailed measurement and tracking of contracts is required, often including data points that haven’t been captured in accounting data to date, to ensure all the elements of the standard are fully satisfied, including discount rates, risk margins, and future cash flow projections. This is particularly the case for large insurers who operate in many regions of the world, offering various and numerous contracts to clients.
Unsatisfactory performing accounting and spreadsheet models for report preparation will become a regulatory risk. Reliance on more sophisticated BI tools will become a necessity in order to meet data targets and the demands of regulation.
The Role of Business Intelligence in IFRS 17 Implementation
As a starting point, Business Intelligence, in general, refers to the different types of technologies and strategies a business applies in analyzing data and making decisions. In the case of IFRS 17, the Business Intelligence tools are the critical link between the unprocessed data and the processed data to be used for financial reporting. These systems analyze data from various and different sources such as policy administration systems, claims databases, finances, and even extra data sources to produce the information required for IFRS 17 compliance.
Recent BI Platforms have advanced functionalities that are very useful in the implementation of IFRS 17. For instance, data integration tools, used in the unification of disparate systems, allow the merging of several unconnected systems into a single data model. Also, the calculation engines in the platforms assist users in performing complex calculations required for CSM amortization and liability measurement. Furthermore, the visualization functionalities aid in reporting by creating automated dashboards and reports to which stakeholders can more easily access and comprehend the results.
Most importantly, Business Intelligence systems allow for the provision of the audit trail and data governance required for compliance. Each figure in every IFRS 17 financial statement must be traceable, and Business Intelligence systems provide this traceability. It helps auditors and, more importantly, the insurers, who can explain their financial results to their investors and for regulatory purposes to the external stakeholders.
Data Management: The Bedrock of Compliance to IFRS 17
The compliance to IFRS 17 and Business Intelligence both hinge on effective data management. The new standard requires a level of detail and granularity that most insurers have historically not maintained. Data on coverage periods, contract inception dates, premium patterns, and claims experience must be captured and organized to the extent that the necessary calculations can be performed.
Under IFRS 17 the importance of data quality is critical. Faulty data either incomplete or inaccurate would result in a distorted measurement of insurance contract liabilities which can lead to a fundamental error in the company’s balance sheet. Business Intelligence systems tackle this concern as well through the implementation of validation rules, automated error detection, and the data-cleansing processes that guarantee the information used in IFRS 17 reporting is dependable.
The data architecture for IFRS 17 compliance often entails building a centralized data repository that acts as the single source of truth for all information pertaining to insurance contracts. This repository which can be a data mart or a data warehouse will underpin all calculations and reporting of IFRS 17.Business Intelligence systems will be able to provide the necessary analytical components to help convert standard data to financial data for reporting purposes.
Insurers are starting to realize that the data governance methodologies formulated to meet IFRS 17 obligations are useful for other purposes besides regulatory reporting. The thorough data management approach optimizes organizational performance across the various functions in the enterprise, including pricing, underwriting, claims management, and overall strategic management.
Calculations and Analytics: Data to Insights
This is where Business Intelligence truly shines and the IFRS 17 framework demands extensive and complex computations. It entails the execution of intricate computations that must be done uniformly across thousands to millions of contracts. BI systems with inbuilt calculation engines are capable of automating these tasks and preserving accuracy, saving countless hours of manual work in the process.
Insurers must compute, justify, and document future cash flow estimates for CSM calculation, including discounting to present value and risk adjustment, and these changes must be made for each reporting period to reflect changes in the assumptions and the actual experience of the business. Intelligent systems can automate these rather iterative and routine tasks of business.
The need to make forecasts is one area in the IFRS 17 standard where predictive analytics becomes essential. Insurers make assumptions for any number of future events: potential mortality rates, lapse rates, returns on investments, claims, and various patterns. Analytics tools on predictive analytics can draw insights from historical data, thereby enhancing other unreliable IFRS 17 measurements.
Business Intelligence adds remarkable value in the area of Scenario analysis. IFRS 17 stipulates that insurers must explain how their measurements would vary across different scenarios. Thanks to the rapid analysis capabilities of BI tools, insurers can determine how sensitive their measurements are to any key assumptions and offer the information required for needed disclosures.
Reporting and Disclosure: Meeting Stakeholder Needs
The need for extensive disclosures about insurance contracts, the measures taken for the contracts, and how sensitive the measures are to changes poses a big reporting challenge for IFRS 17. Business Intelligence systems can satisfy this challenge and provide the desired flexibility to deliver both standardized and ad-hoc reports.
Financial reporting can be a challenge for insurers because IFRS 17 requires reports to be presented in particular formats that insurers may not be accustomed to. BI tools alleviate that work by automatically generating reports, using data from a centralized system, and applying the required calculations. This reduces the effort for reporting substantially.
Management reporting emphasizes the most vital aspects of reporting to assist stakeholders in running the business competently as opposed to outside reporting. Business Intelligence tools enable insurers to design tailored dashboards and scorecards that display IFRS 17 data in decision-making formats. Executives, for example, may be interested in tracking the CSM metrics across various product lines and in comparing the current position with initial assumptions.
Statutory regulatory reporting obligations entailing reporting other than financial statements extend to insurance regulators and other tax agencies and stakeholders. These varied reports can be produced by Business Intelligence systems at the cost of repetition, that is, the ostensibly differing report formats, and varied content, all adhering to the same core data.
Challenges of Implementation with Solutions
The complexity of the project makes IFRS 17 and the Business Intelligence tools that support it difficult to implement. System, process, and organizational structure changes all at once can be quite daunting. The most effective implementations to tackle such daunting tasks usually rely on the collaboration of multiple functional pillars such as finance, actuarial, IT, and the operating divisions.
Instances of failed data projects in insurance are very common in the industry. Typically, insurers’ historical data will not be up to the level of quality IFRS 17 requires. Business Intelligence applications can highlight the weak data quality that may need to be addressed to resolve related issues.
Integrating diverse systems is one of the challenges during IFRS 17 implementation. It requires policy admin, claims, general ledger, and specialized IFRS 17 calculation systems. Business Intelligence requires API and seamless data integration to interface with all systems.
Change management and the understanding of all stakeholders is the key success factor. Employees need to appreciate how IFRS 17 will transform the accounting and reporting of the insurance industry and how they will work with the new Business Intelligence systems. Effective implementation and operation will require skill development, which will be supported by training and communication.
Strategic Advantages of Business Intelligence
Most businesses will initially invest in Business Intelligence systems to achieve IFRS 17 compliance. However, after compliance, the use of systems will continue to provide other benefits. Data analytics developed as a compliance tool can be used to drive value in other areas of the business.
With IFRS 17, product profitability assessments can be performed with greater detail and accuracy. An insurer’s profitability will now be analyzed at the contract level, which is a new requirement. Previous accounting frameworks did not provide the insights now available. This profitability analysis can then be used with Business Intelligence systems to help identify which products are profitable and which are value destructive.
Risk management becomes stronger with improved knowledge concerning the insurance contract liabilities. The IFRS 17 measurement approach provides a more realistic view of the risks involved in insurance contracts, and the Business Intelligence system enables the risk managers to supervise and manage those risks more efficiently.
Strategic planning is enhanced by the value-adding and future-oriented perspective in IFRS 17. The standard has made it mandatory for insurance companies to provide future predictions, and the value of Business Intelligence is in leveraging such predictions to formulate and refine business strategies.
The adoption of IFRS 17 is a remarkable highlight in insurance accounting, and more improvements will surely come. As the standard is implemented in different countries, we will see more Business Intelligence systems obsolescence and enhancements.
The insurance industry is undergoing a digital transformation with artificial intelligence and machine learning emerging as pivotal tools. These tools are now part of Business Intelligence systems, which helps automate various processes and helps in drawing more value and insights from the IFRS 17 data.
The union of regulatory reporting and business analytics will likely continue, with the capabilities built for IFRS 17 compliance extended to other challenges in the business. Insurers who see IFRS 17 as more than just a compliance exercise will enhance their Business Intelligence capabilities and will be set for success in the future.
Conclusion: Turning Regulatory Challenge into Competitive Advantage
The implementation of IFRS 17 is one of the greatest challenges facing the insurance market in recent decades. Insurers who use Business Intelligence to comply with their IFRS 17 obligations are, and will continue to, realize the most compliance benefits that extend beyond the compliance work itself.
The data governance frameworks, analytical capabilities, and reporting tools built for IFRS 17 will continue to provide and improve decision-making value across the enterprise. What starts as a compliance effort will not be long until it carries a competitive advantage, allowing insurers a deeper and more effective control of their business.
Getting aligned with IFRS 17 is a long and complicated process, and one that Business Intelligence helps simplify. Insurers can thoroughly modernize and elevate their finance functions by accepting these technologies and seeing IFRS 17 as a chance instead of a burden. This positions them for success in the changing world of insurance.