Deloitte: What are the organisational impacts of IFRS on insurance?

04 November 2013

The Deloitte member firms use a four-dimensional assessment (reporting to the market; strategy and governance; organisational, people and culture; and infrastructure) to describe the impact of financial reporting changes on an insurance business.

1. Reporting to the Market 

IFRS rewritten

• Insurance liabilities: the first set of IFRS rules on insurance liabilities introducing a transparent way to report insurers’ estimates of future cash flows and expected profits. This would move insurers from the current IFRS regime where grandfathering of inconsistent national practices has been hiding under the IFRS label.
• Financial assets: the key focus of the new rules is to respond to the financial crisis issues with fair value moving to a balance sheet role rather than playing a key role in the earnings of insurers. This shift is permitted because of the introduction of a more sophisticated and forward looking approach to impairment losses
• Consolidation, Revenues and Leases: not insurance specific but part of the overall re-writing of financial reporting rules and likely to hit insurers earlier (e.g. the new consolidation rules are effective from 1 January 2013)

Impact on external reporting

KPIs need to be reconsidered and a plan to move the market to potentially new ones is a very delicate matter involving all internal stakeholders and often done well over a sufficiently long period of time. The “wait and see” option may not be the most rewarding one.

2. Strategy & Governance

Strategy

• How IFRS fits with company’s business strategy – it is universally accepted that the IFRS Insurance implementation would be a major undertaking for all insurers around the world. Positioning it in the context of an insurer’s strategy is very important because its delivery will absorb material resources for at least three years in the insurer’s life and maximising the benefits from it would appear compelling.

Benefits

• Benefits Realisation to company’s stakeholders and enhanced market perception – A fully compliant organisation is a “must have” from the IFRS Insurance implementation. However, it is the insurer that is capable of reaping extra benefits from the implementation that will be able to build and present to the market its new competitive advantages. Early planning is essential to achieve this with desired outcomes and associated benefits identified upfront.

Portfolio Effectiveness

• Catalyst for the enterprise’s strategic change portfolio – An early planning that deliberately links the IFRS Insurance efforts with those from other in-flight initiatives (e.g. Solvency II) offers the opportunity for resource optimisation and to lower implementation costs. Building a portfolio of projects and actively govern their interdependencies has proven to be a superior project governance model when overlapping timelines and requirements exist.

Governance

• Optimal governance approach during company’s programme and post implementation – The multi-dimensionality of the IFRS Insurance implementation both from an operating model impact and from a stakeholder management perspective suggests a parallel between the governance approach for the implementation programme and the approach that would be in place when the new IFRS becomes business as usual.

3. Organisational, People and Culture

Structure

• Impact on company’s organisation structure – The obvious changes in the finance, risk and actuarial functions alone would make IFRS Insurance a major source of organisational change. In realty many other functions will be affected. A Target Operating Model will provide clear structure, defined scope and measurable outcomes. Linking the model with the realisation of benefits would help to control and manage the large IFRS Insurance implementation programme.

Culture

• Behavioural changes may be needed culturally to enable a sustainable approach for IFRS – The new transparency and comparability that would emerge with the adoption of IFRS Insurance removes the ‘smoke and mirrors’ to give a clearer understanding of the business which makes insurance more appealing to investors. The whole organisation need to be aligned with the new way of presenting success to the Market.

Performance Management

• Use IFRS metrics to incentive company’s business – A key step to achieve alignment is to introduce a performance management system that is based on the new IFRS Insurance metrics. Transforming management information from planning to forecasting is not an aspect of the implementation programme that should be left for later. Successful transformations move from internal dimensions towards external stakeholder. Retrofitting internal performance measures to market expectations carried a higher risk of failure.

4. Infrastructure

Operations

• Maximise economies of scale, creating an integrated solution across functions – The arrival of the new IFRS Insurance rules and the reform of insurance solvency rules (e.g., the EU Solvency II reform) bring consistency in measuring profit and capital that offer major opportunities to increase operational effectiveness through the integration of finance, risk and actuarial functions.

Process, Systems, Models and Data

• Manage the impact on legacy processes, systems and data – The adoption of the new IFRS Insurance requirements demands an extensive restatement of data associated with past performance. The reconfiguration of systems to cope with this exercise and to set the foundation for a new data management strategy going forward is a key step that should be planned at the earliest possible stage to ensure a smooth implementation trajectory and maximum benefits.

Synergies

• Realise cost efficiencies from enabling sustainable infrastructure solutions – The significant investment in Solvency II infrastructure is a fact that most European insurer have to face. The need to safeguard this asset against the overlapping requirements from the IFRS Insurance reform should be an imperative for all insurers during 2013 as the final draft of IFRS Insurance requirements are published and the timelines for adoption of all the new regulations is hopefully clarified. The equally material benefit of a less expensive IFRS Insurance implementation is available to those who will move early enough to seize these strategic synergy benefits.

Press release

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