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Automation as a response to IFRS 17 challenges

By , Mbhali is a qualified CA, James is a qualified Non-Life Actuary
13 Oct 2023

This Opinion Piece was co-written by Mbhali Mashigo and James Wanjiku.

Mbhali Mashigo.
Mbhali Mashigo.

The recent adoption of International Financial Reporting Standard 17 (“IFRS 17”, “the Standard,” and “the Accounting Standard”) has brought about significant changes in the financial reporting landscape for insurance companies in South Africa.

In the insurance industry, system and process evolution has often taken place in a piecemeal fashion, made without considering the broader business goals. The default approach has been to extend legacy systems and add spreadsheets to perform new functions. Over time, this has led to slower systems and more manual work.

The objective of IFRS 17 is to establish principles for the recognition, measurement, presentation, and disclosure of insurance contracts within the scope of the Standard. Regarding requirements, the Standard entails insurers providing clarity and consistently measured information and disclosing it in a uniform presentation.

Despite the complexity and the work involved in being IFRS 17-ready, insurers will benefit from putting the challenge in a broader context and approaching IFRS 17 as a more comprehensive business improvement project. One that can add value to the business.

While the advantages of this Standard are enormous, it also presents several challenges during implementation for life and non-life insurers. A recent survey by the Prudential Authority of South Africa highlights the most significant challenges for insurers in implementing IFRS 17. These challenges include a lack of data, uncertainty in interpreting IFRS 17 requirements, and limited project budgets and qualified resources.

Data integration and quality pose a challenge for non-life insurers who must consolidate and validate data from various systems. The complex language in the Standard makes interpretation difficult, and a shortage of qualified resources, including actuaries and accountants, adds to the implementation challenges.

Upgrading financial and actuarial systems is another necessity to capture required data and perform calculations under IFRS 17. This process can be costly and requires technical expertise.

James Wanjiku.
James Wanjiku.

Insurers who successfully implement IFRS 17 can reap considerable benefits despite these challenges. These benefits include improved accuracy in financial reporting, enhanced decision-making processes, increased transparency in reporting and enhanced governance and accountability.

In addition to meeting compliance requirements, insurers who take a holistic view of their processes and systems can use robotic process automation (RPA) to control calculations, introduce better governance and controls, and explore cloud computing to scale up and down computing power as needed. This can free up expensive actuarial resources to focus on tasks that add value to the business.

Automation is critical in helping insurers overcome implementation challenges and optimise outcomes, particularly in data collection, accuracy enhancement, and cost reduction.

By employing automation tools, insurers can streamline data collection, reduce errors, and enhance overall efficiency in the reporting process. Automated data validation and processing generate reliable financial statements, boosting transparency and instilling greater stakeholder confidence.

Moreover, automation enables insurers to respond promptly to changing regulations and market dynamics, expedite reporting timelines, and make well-informed decisions based on granular insights and advanced analytics. Despite the uncertainty regarding guidelines for aligning SAM reporting to IFRS 17 to be issued by the Prudential Authority, South African insurers can easily report their IFRS 17 results for regulatory reporting.

IFRS 17 also promotes better governance and accountability in insurance companies. It requires comprehensive disclosures, including information about assumptions, judgments, and sensitivity analysis. This encourages insurers to apply more rigorous governance practices and fosters stakeholder trust. All the improvements to the Accounting Standard offer investors a golden opportunity to gain proper insight into insurance companies, allowing them to compare one firm to another more consistently.

Overall, IFRS 17 offers significant benefits for insurers. It promotes transparency, comparability, risk assessment, investor confidence, governance practices, regulatory compliance, and a long-term focus, ultimately enhancing the overall financial reporting quality in the insurance industry. Despite challenges related to data integration, system upgrades, and qualified resource shortages, automation proves to be a vital tool to address these hurdles, achieve better outcomes, and navigate the evolving regulatory landscape.

Mbhali is a qualified CA [SA] and heads the accounting team at The Shard, South Africa []. She is skilled in analytical skills, technical accounting, financial risk management and corporate governance. Mbhali is a well-rounded CA with an array of financial expertise.

James is a qualified Non-Life Actuary at The Shard South Africa with experience spanning the following critical areas of non-corporate actuarial in insurance and re-insurance businesses: Technical reserving, IFRS 17 implementation, Capital modelling and stress testing, Product design, development and pricing.

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