Across the globe life insurers are seeing an unprecedented wave of new financial reporting requirements. These changes – the biggest in the last 40 years – will significantly impact how insurers manage their business.
The objective of US GAAP changes and IFRS-17 is to improve, simplify and enhance accounting for long duration contracts. This is expected to have a profound impact on the emergence and volatility of earnings for long term life insurance contracts. Additionally, implementation will require significant changes to systems, processes and controls and likely will require the accumulation of data that previously has not been captured and presented in financial statements and disclosures.
At SCOR, we are making rapid progress in transitioning to the new financial reporting environment. We are developing and implementing an entirely new architecture with a stronger actuarial dimension to support our business and enable automation, integration and efficiencies where our clients and our data are in the core of our business.
We see IFRS-17 and changes to US GAAP as a great opportunity to build a foundation for a “Gold Source” for our financial and actuarial processes, facilitating Agile decision-making based on robust information.
In the following Q&A, Jason Morton, a partner at Deloitte, offers expert insight on the fundamental changes underway and the expected impact on how life insurers and reinsurers manage and report business performance.
What are the primary goals of the new reporting requirements within US GAAP and IFRS-17, and how do these new requirements differ from current ones?
The number one goal of the Financial Accounting Standards Board (FASB) is to increase transparency in the assumptions that underlie reserves for long-duration contracts. They want to avoid the significant reserve strengthenings that can come from a block of business that has been deteriorating (but still passing the loss recognition test on a line of business level) which finally tips over to a loss recognition event. Along with that change they are truly simplifying how Deferred Acquisition Cost (DAC) gets calculated.
The new Long Duration Targeted Improvements (LDTI) requirements differ from current GAAP by impacting primarily non-interest sensitive life and some payout annuity products by doing away with assumption lock-in and for GMDB riders attached to variable annuities which will now be reserved for using fair value techniques. IFRS-17 also does away with assumption lock-in but also contains a new construct where reserves are the sum of a minimum amount to cover future benefits plus a contingent profit margin component.
Many believe that current reporting standards are not equipped to provide adequate insights into the performance of the business; for LDTI in particular the new disclosure requirements are meant to increase that insight.
What are the biggest challenges facing companies as they adjust to the new standards?
Data acquisition, reconciliation and analysis have emerged as one of the top issues to overcome in implementing the new accounting standards. When companies have assessed the need to perform more in-depth experience studies and have these studies stand up to audit, as well as replacing actual premiums and claims over previously projected components in reserve calculations, they have come to realize that much work is needed to build or refine front-end data systems and processes.
The same can be said for the back-end process of taking output from multiple reserve runs and constructing new disclosures that display the attribution of reserve movement. Existing data warehouses generally are not able to handle the new requirements without significant re-work, and this has resulted in system initiatives that require heavy involvement from companies' technology groups.
Can you comment on the need for greater coordination between finance and actuarial?
Initially, many viewed the new accounting as largely actuarial in nature, mainly affecting companies' core actuarial systems. But as time has gone by, it has become clear that a significant amount of interaction is needed between finance and actuarial functions to set new accounting policies for how best to interpret the new standards, for creating and supporting disclosures and financial results, and in some cases set new builds for accounting systems such as accounting rules engines to help facilitate the new reporting process in a controlled way. Many suspect that finance will have a greater degree of involvement in the development of actuarial reserves under the new standards going forward.
Given the profound impact on the emergence and volatility of earnings, what can companies do to educate key stakeholders – senior management, board members, investors, analysts, etc. – to prepare them for the new world and what to expect?
Significant analysis of draft results will be needed prior to the go-live dates of the new standards. Financial impact analysis will be key in this education, understanding the difficulty of performing such analysis while still building and testing the underlying systems.
Ideally, volatility and profit emergence analysis are performed after the new systems are in place, but senior management needs insight sooner so many companies are planning to use one or two representative product lines as pilots to meet this need. The analyst community is eager to see how the new accounting will impact insurers at transition and going forward, but they also realize that companies need to get to a certain level of comfort internally before presenting to external parties.
In their implementation roadmaps, many companies are planning to use the year prior to go live as real-life dry runs in order to get comfortable with the new accounting. However, the industry is generally behind where they expected to be at this time, which puts pressure on the ability to have as much insightful analysis prior to go-live.
After new systems and processes are built there is also much testing and operational readiness to carry out before results can be deemed accurate.
As challenging and onerous as these changes are, what advantages and opportunities do you see once we make it to the other side?
Insurers have been carrying out actuarial modernization initiatives for many years, some for a decade or more and still are far from ready to handle these new accounting requirements. Given the importance of published financial results and their scrutiny by external auditors and other bodies, companies have had to invest in modernizing their platforms – for many insurers the investments and resource dedication has been very significant.
But the outcome will be a modern-day platform involving a greatly reduced number of systems, many of which are vendor-supported, and improved support systems such as for experience studies, all of which provide increased insight into the business and its future expected performance.