With the new insurance accounting standard AASB 17 Insurance Contracts effective for reporting periods commencing 1 January 2023, the vast majority of Australian insurers are well-progressed in their AASB 17 implementation journey.
In many cases, insurers are in the final stages of developing the infrastructure that produces a set of AASB 17 compliant financial statements.
In this article, we take a look at the current landscape, the culmination of the work to date – the challenges and learnings – as well reflect on some future opportunities for insurers post AASB 17 implementation.
The current landscape
Over the past several years, Australian insurers have been progressively gaining momentum on their AASB 17 implementation. The extent of work required in transitioning from AASB 1023 General Insurance Contracts and AASB 1038 Life Insurance Contracts has been dictated by a range of factors including the complexity of the insurer, internal data and technology strategy, budgeting and resourcing. Insurers have assessed their own unique circumstances and developed an implementation plan that not only meets financial reporting compliance requirements, but is also in line with their strategy and risk appetite.
Although we have observed a range of implementation plans, both in Australia and internationally, we have found that the plans typically have two main stages, often operating interdependently. The first stage involves building out the IFRS 17 infrastructure, including developing accounting policies, data preparation/validation, building and testing the AASB 17 calculation engine as well as posting into financial statements and disclosures. The second stage is a governance and review process consisting of developing internal controls related to new reporting processes, board engagement, independent/auditor review of policies and results. At present, many insurers have substantially completed stage one and are progressing through stage two, with any material findings from stage two feeding back into stage one.
Whilst the main challenge for many insurers was initially in the interpretation and application of the principles set out in AASB 17, industry confidence increased as more publications and material became widely available. There is a process of getting up to speed with AASB 17 and we have observed efficiency savings in organisations which have leveraged the expertise and knowledge of those with prior implementation experience, as opposed to starting afresh. For more complex implementations, the use of multi-disciplinary teams of accountants, actuaries and software experts has also been beneficial in navigating the technical, operating and strategic challenges of AASB 17. Overall, the insurance industry has collectively grown as various AASB 17 working parties and task forces have come forward to discuss and advance the industry’s understanding of the standard. We note that whilst there has been much progress in coming to terms with the AASB 17 principles, the interpretation of the results including key performance and risk indicators and investor’s understanding are still areas requiring further work.
For many insurers with complex financials, AASB 17 implementation has been an iterative process rather than a linear one. For example, when the June 2020 amendments were released which allowed for some practical expedients and simplifications in the disclosures, some revisions in accounting policies and approach were needed. We have also observed cases where mounting time pressures and budgets have resulted in insurers switching from a strategic implementation of uplifting the insurer’s information system as part of AASB 17 implementation to focusing on a minimum viable product or tactical solution to meet compliance. Overall, Australian insurers have generally taken a pragmatic approach to AASB 17 implementation.
Unlocking future opportunities
Notwithstanding different insurers have their own strategic plans, we have observed a set of common emerging opportunities for insurers post AASB 17 implementation.
Delivering greater insights with enhanced management reporting and diagnostics
For many insurers, the main focus of their AASB 17 implementation is to produce a set of AASB 17 compliant financial statements. Despite AASB 17 offering a higher level of granularity in comparison to its predecessor, the level of detail contained in AASB 17 financial statements may be limiting from the perspective of management reporting on particular products, classes and distribution channels. Where organisations continue to apply existing management reporting information without AASB 17 modification, there is a risk of inconsistent analysis between management and financial information, leading to opaque insights. We anticipate an opportunity to enhance management insight by uplifting the management reporting process to be AASB 17 compatible, including reviewing internal metrics, advanced diagnostic tools and reporting dashboards. Internally within insurance companies, there will be a transition period where business performance measurement are increasingly aligned to AASB 17 outcomes. We also anticipate opportunities for external reporting such as enhancing the information provided to investors such as establishing key performance and risk indicators.
Lean up with technological and efficiency uplifts
As insurers progress through several AASB 17 reporting periods, areas of efficiency improvements and automation will be identified. Examples may range from automating the smaller tasks such as PAA eligibility tests for each new group, to more complex scenarios of implementing a software solution to reduce the amount of manual work from spreadsheet analysis. We also expect refinements to the methodology and models (including moving from tactical solutions to full solutions) as industry standards and best practices continue to develop. Cost savings, increased productivity, faster and greater delivery of information and insights through technological uplifts will provide a distinct commercial and competitive advantage in an ever increasing instantaneous, fast-paced business environment. More broadly across the world, we are observing more and more insurers modernise their entire data-actuarial-finance architecture, technology and processes; to use technology to automate insights. In years to come, we expect insurers in Australia to follow suit. This will lead to more data and finance processes to be automated, faster period-end financial reporting cycles, greater harmonisation of data assets, a greater integration between data warehouses and ERP technology, and more automation of actuarial models. In the long term, we will see more actuaries focused on providing insights than simply “turning the handle” and a culture shift of how business stakeholders perceive the role of finance professionals.
Unification of AASB 17 into the common insurance language
A well-known business axiom credited to Warren Buffet is “accounting is the language of business”. Whilst AASB 17 does not change the insurance operation, it has changed the pattern of revenue and expense recognition of certain insurance contracts. It is not uncommon that an understanding of the financial consequences of AASB 17 to be confined to only those involved in AASB 17 implementation, and other insurance professionals such as underwriters, portfolio managers, pricing and claims specialists which are critical for the success of an insurance operation to be immunised. The faster AASB 17 becomes common language, the faster there will be a collective understanding and alignment to maximise performance of the AASB 17 financial metrics. There is an opportunity for insurers to accelerate this process with targeted training.
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