IFRS 17: challenges, opportunities and the road ahead for Nordic insurers

IFRS 17 represents a significant change in insurance reporting, with its implementation posing both challenges and opportunities for insurance companies.

In brief

• IFRS 17 is designed to provide a more comprehensive and transparent view of insurance contracts and the financial performance of insurance companies.
• Insurers have been investing in new systems and processes to ensure compliance with the new standard.
• As businesses are still new to IFRS 17, it is important to look out for challenges and opportunities while staying attuned to market practices.

After a slow but simmering build-up of 20 years, the IFRS 17 reporting standard was made effective as of 1 January 2023. IFRS 17 replaces IFRS 4, a reporting standard issued in March 2004. IFRS 4 allowed insurers to use a wide range of accounting policies and practices, which created a chaotic system of disparate practices that made it difficult to assess the underlying economics of insurance contracts.

IFRS 17 was developed to address these issues by introducing a consistent, principles-based approach to accounting for insurance contracts. The new standard requires insurers to use a global, uniform accounting model for all insurance contracts, with the aim of making it easier for investors and analysts to compare the financial performance of different companies.

The IFRS 17 implementation landscape is challenging

IFRS 17 represents a significant change in the accounting of insurance contracts and its implementation is posing challenges for insurance companies. Some of these challenges include:

• Complexity: IFRS 17 is a complex standard that requires a thorough understanding of insurance contracts and the underlying financial and actuarial concepts. Companies have, over the last few years, already invested time and resources to understand and effectively implement the requirements. The data-intensive nature of IFRS 17 makes access to granular data effort-intensive. For Nordic insurers that have to adhere to local reporting frameworks, IFRS 17 will be another layer on top, adding additional complexity and work to an already busy reporting landscape.
• System and process changes: IFRS 17 requires companies to make significant changes to their systems and processes, to ensure compliance with the new standard. This includes developing new or adapting existing actuarial models, implementing new software systems, leveraging opportunities for automation and expanding existing financial reporting processes.
• Data and information management: IFRS 17 requires companies to collect and manage a large amount of data on a very granular level. This require companies to ensure that they have the necessary systems and processes in place to collect, store and report this information accurately.
• Model risk: IFRS 17 requires companies to use actuarial models to estimate the expected cash flows from insurance contracts. This creates model risk, as the accuracy of the financial results will depend on the accuracy of the underlying models. Insurers will need to carefully manage this risk and ensure that their models are robust and transparent.
• Cost of implementation: Implementing IFRS 17 has been a costly exercise for insurance companies, requiring significant investments in new systems, processes and people.
• Time and resources: IFRS 17 has been taking up a significant amount of time and resources for effective implementation until now, and there is still a majority of work left to be done. Businesses will need to allocate sufficient time and resources going forward to ensure that they are able to meet the requirements of the standard and maintain compliance over time.

IFRS 17 represents opportunities to overhaul financial reporting processes

While the challenges described above may make IFRS 17 look daunting, it is important to note that this new standard also presents exciting opportunities. Below are a few of the biggest opportunities presented by IFRS 17:

• Improved collaboration: By promoting collaboration across different departments and stakeholders — primarily the actuarial, finance, IT and risk management teams — IFRS 17 can help to break down silos and improve communication and coordination within insurance companies. This can help insurers make more informed decisions, better manage risk and achieve better outcomes for their customers.
• Expose weaknesses in your processes: IFRS 17 can help expose process weaknesses by requiring insurers to take a comprehensive approach to data collection, analysis and reporting. IFRS 17 requires insurers to separate out the components of insurance contracts — including the measurement of cash flows — which can help identify areas where current processes may be lacking. The standard also requires regular reassessment of insurance contracts, which can help uncover any discrepancies that may have gone unnoticed. Ultimately, this can enhance the overall performance of the business while ensuring compliance with the new standard. 
• An opportunity to automate: IFRS 17 requires insurers to collect data on a more granular level and handle complex data from different systems. This process can be made easier with automation tools that can help streamline data collection and analysis, weeding out manual work and driving efficiency.
• Better insights into business: The implementation of IFRS 17 enables new insights into your business, especially on profitability. Again, the granularity of data collected empowers a more comprehensive understanding of the risks and opportunities present in the business, which can be used to inform strategic decision-making.

How can Nordic insurers achieve success with IFRS 17?

As insurers slowly tread the first few months after implementing IFRS 17, there are a few key areas they should focus on.

A necessary step for Nordic insurers currently is to train their resources — especially people who haven’t been involved yet — on IFRS 17. This is because often, only specific resources within actuarial and accounting are involved in the planning and implementation. A broader group of people will begin to show interest in IFRS 17 as the numbers get reported externally and get used for internal management purposes. This could also be a risk in the projects, as it will start new discussions and potentially challenge assumptions and decisions that have been made. 

Market practice is another area of interest. Following market practices closely and aligning with best practices is critical in ensuring that you are reaping the best out of your IFRS 17 implementation, while learning from the latest updates and experiences.