Insurers globally have been extremely busy for many years now with the implementation of new statutory and regulatory reporting requirements such as IFRS 17 and 9, LDTI in the US and Solvency II / RBC in Europe and Asia. IFRS 17 and LDTI specifically have been major undertakings.
The first discussions about the need for a new accounting standard for insurance contract liabilities were initiated by the main standard setters IASC and FASB way back in 1997. Due to the complexity of the task and competing priorities, a “temporary” GAAP standard for insurers called IFRS 4 was implemented in 2004, which ended up lasting almost 20 years.
So here we are, with the new IFRS 17 standard implemented since 2023 in many jurisdictions across the world. It has been a very long ride and one year (and counting) since the new accounting standard has gone into effect. Everybody would agree that this is the most complex and only industry-specific standard of all the IFRS standards, including IFRS 9 (for financial instruments on the asset side of the balance sheet).
However, what we probably did not know back then, is that it would not only be very difficult to implement the new standard but also to do it in such a way to make financial reporting under the new standard sustainable as part of the “business as usual” duties of the combined finance and actuarial function of insurers.
If, for example, an insurer used to have a financial closing time of T+10 working days, now they may at best be able to do T+15 or even T+20. As a result, many insurers are struggling to close their books on a timely basis. Even with the help of extra contractors, they are looking for more sustainable ways to improve the efficiency of their financial close cycle.
However, rather than looking for temporary workarounds and tactical solutions, the efficiency of the whole end-to-end (E2E) financial reporting chain, from source to report, will need to be reengineered to achieve this.
This E2E financial close process can be subdivided into two main parts, from “record to close” and from “close to report.” The longer it takes to close the books (the first part), the less time you have to report and analyse the results (the second part).
So, it’s important to spend less time on the data preparation, calculation and reconciliation processes so you have more time to spend on the financial reporting and data analytics processes.
If you look at the entire financial close process, there can be many different data sources and sub-processes involved, covering multiple departments, from underwriting, distribution and operations to IT, finance and actuarial.
These all need to work together seamlessly, like an orchestra, to make it work well, playing to the same tune. If you try to do all these subprocesses manually, you can imagine how much work and time it takes to produce reliable and insightful financial results every time you close the books. When we looked at the main inefficiencies of the financial close process, we found that many of the controls are still done manually.
Large insurers can literally have thousands of internal financial controls to execute for each closing cycle, many of which are unique to each reporting entity due to different legacy source systems and local statutory/regulatory reporting requirements. However, when we looked at the nature of these controls, we found that there are roughly 20 different types of controls being used. More importantly, we found that when the control is very repeatable in nature and follows a specific pattern, it’s most likely a good candidate for control automation.
Keeping in mind this need to incorporate more financial controls automation, several solutions have emerged over the years to enhance efficiency for insurers. Current market solutions offer great insights into what your current versus potential level of automation for each control step is.
Some look specifically at the potential efficiency gain per control and where you can get the biggest “bang for your buck” when automating your internal finance controls framework. By implementing suggested changes, insurers can further automate their financial end cycle processes.
Future reporting requirements might require the weighing up of even more data that impacts company performance, such as climate change and other ESG metrics. Shifting towards a more automated and streamlined workstream can free up time for insurers to critically analyse results that inform future financial planning and significantly reduce the delay in the “record to close” process.
The views reflected in this article are the views of the authors and do not necessarily reflect the views of the global EY organisation or its member firms.
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Martyn van Wensveen EY Asia-Pacific IFRS 17 Implementation and Finance Transformation Leader |
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Narayan Devanathan EY GDS, Senior Manager AI Enabled Automation, Tech Consulting |
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IFRS 17: Making your financial controls automation truly work for you
Martyn van Wensveen, EY