The implementation of IFRS 17 results in a major transformation in actuarial and finance reporting processes, systems and data. SAICA recently hosted an event at which some of the challenges and insights were discussed.
The insurance industry saw the effective date of the IFRS 17 Insurance Contracts standard being deferred by two years from the initial effective date to annual reporting periods beginning on or after 1 January 2023. This was mainly due to amendments aimed at helping companies implement the standard and making it easier to explain their financial performance. Although the deferral could bring about additional implementation costs, it has been well received by the insurance industry, as there had been pressure to finalise systems; the additional time allows them to run IFRS 17 in parallel with IFRS 4 and note differences between the two as well as the impact of the new standard.
One of the main challenges with the implementation has been the shortage of persons with the necessary skillsets, along with the risk of hiring resources that would be redundant post implementation. The use of consultants has proved an effective solution when dealing with new requirements, but they are used more on technology (system building and automation) while work on policies and methodologies are mostly done by internal staff. (System needs in the industry are unique and depend on the size of the entity, with some building new systems and refining them, while others refine off-the-shelf systems. The industry would ideally like to have a fully automated reporting system to ensure minimal manual interventions and an effective control system and environment.)
The early involvement of auditors is necessary to ensure that queries about policies or systems are addressed timeously. However, given the complexities of the standards, this at times results in lengthy dialogue and debate. These are mitigated by robust internal discussions and bringing in consultants and/or auditors at a stage where a draft policy is already in place to serve as the basis for the discussion. However, the use of consultants and/or auditors may have independence implications, taking into consideration that the industry has but a small pool of consultants/auditors and the Companies Act and its rotation requirements limit the audit and non-audit services that may be offered. This challenge is exacerbated by the industry having to consider and plan for the joint audit requirements which the Prudential Authority is finalising, as well as the Independent Regulatory Board for Auditors implementing mandatory audit firm rotation effective 1 April 2023.
Given the demographics of groups and subsidiaries, there is also a concern that head office may take the lead with implementation and leave subsidiaries out of discussions. It should be noted that in some instances, this is addressed by making sure that everyone is brought on board through ensuring that subsidiaries assign project owners to take part in the policy discussions.
With IFRS 9 Financial Instruments being effective for reporting periods beginning on or after 1 January 2018, the banking industry, which was the most impacted by the standard, had concerns around transitional numbers. This resulted in lessons being learnt for the insurance industry, which is what led to considerations about starting the parallel run of IFRS 17 and IFRS 4 as early as possible. This will ensure that the impact of the changes be analysed and transitional numbers determined timeously. It also raised concerns around the need to educate business and the market about the difference between the two standards and the impact IFRS 17 will have on reporting.
This leads to the next point, namely that for communication to the market to be effective, the industry (and individual companies) must be able to provide transitional figures. This will have an impact on disclosures used by the market. It further highlights the overall financial impact of the new standard.
It was refreshing to hear that although some KPIs may not be required by IFRS 17, the industry is considering retaining them, as they are deemed relevant metrics needed to make financial decisions − an example being the gross written premium.
Transitional numbers impact engagements with SARS for tax consideration purposes, as the numbers are needed to assist National Treasury with amending any legislation. Ideally, communicating these before the budget cycle would help to ensure that they are factored into any tax legislation amendments before the implementation date of the standard.
With all the changes that the industry has recently gone through − including the new Insurance Act, significant accounting standards becoming effective (IFRS 9, IFRS 15 Revenue from Contracts with Customers and IFRS 16 Leases), as well as the introduction of conduct standards from regulators − we look forward to 2023 when the dust settles for the industry so that we can move forward to the next aspects, which are a consideration of the effectiveness of implementation and the impact the standard has had on reporting and investor decisions.
AUTHOR | Kedibone Pilusa CA(SA), SAICA Project Director MIB Technical
