Heading towards the IFRS 17 quagmire?

FTI Consulting’s research suggests that, although insurance companies are making good progress with implementing the new accounting standard, they may be overlooking some opportunities for proactivity, particularly in terms of managing risk, accelerating technological upgrades and embedding effective communication strategies.

FTI Consulting’s in-depth research with C-level executives across the insurance sector suggests decent progress in implementing IFRS 17, with board members fully aware of the scale of the change and often directly involved in its implementation. However, in the following three areas it seems that best practice is not being universally followed. We advise insurers to address these shortcomings urgently in order to avoid errors seen in previous transformations, some of which had adverse effects on companies.

Navigating the transformation minefield

The new international financial reporting standard for insurance contracts, IFRS 17, is the latest of a series of change exercises that have been high on the industry’s agenda over the past decade. FTI Consulting recently conducted research to find out how well firms are positioned to avoid the mistakes of earlier transformations. Some of these mistakes, particularly around strategy and external communications, which have been the focus of our study, were apparent from the Solvency II implementation exercises across the European markets. Two
examples come to mind:

• Many companies failed to identify key “what-if” scenarios that have significant implications on solvency as well as strategic decisions. For instance, many companies were subsequently caught by the increased volatility in capital requirements as a result of changing credit spreads.
• The share prices of Delta Lloyd and Aegon (see Figure 1) tumbled in the wake of announcements about missed capital targets, amongst others. Although a drop in share price is to be expected following such announcements, it is our opinion that better communications strategies would have cushioned the fall.

Our study consisted of a series of in-depth discussions between FTI Consulting and senior executives from a number of insurance firms (including reinsurers) to understand their views on IFRS 17’s implications for their businesses. These conversations took place in late October and November 2019. We also spoke with analysts and supplemented our research with observations from our day-to-day work with clients. We would like to express our thanks to all those who participated in the study.