International Financial Reporting Standard (IFRS) 17 is the first comprehensive global accounting standard for insurance and reinsurance contracts. For insurers and reinsurers it will mean a costly overhaul of their accounting practices and systems, with the exact cost depending on their size, nature and geographical location.
IFRS 17 is also set to transform the way that risk is integrated into insurers’ balance sheets, giving firms a more accurate view of their profits over the length of their contracts. Following other standards (such as Current Expected Credit Losses [CECL] and IFRS 9), it represents the next stage in a wider regulatory project of integrating risk into accounting practices, in line with other areas of financial services.
At the heart of IFRS 17 is an attempt to unite a diverse and globalized industry under one standard for contract measurement. Insurance contracts will be measured using one of three models, and the nature of an insurance contract will affect the complexity of the measurement model used. Some products may even appear less profitable on the balance sheet as a result – and less attractive. For insurance firms, implementing the measurement models and assessing whether contracts are eligible for them will be fundamental concerns.
Complying with IFRS 17 could be costly and complex, with considerable investment in skills and technology. But Chartis believes that it offers a longer-term opportunity for insurers to modernize and make their accounting processes more efficient. And a variety of vendors will have a lucrative opportunity to provide the technical infrastructure for the insurance industry’s transformation. Insurers’ move to market- standardized contract valuation, for example, is a vast undertaking. The granularity of data required, the complexity of the analysis involved, the scale and frequency of modeling, and the extent of storage required, are unprecedented in the area of insurance contract accounting.
For vendors, while the opportunity is good, the diversity in existing infrastructure will require a variety of approaches that will differ by region and the size and type of firm involved. The insurance industry has faced major challenges since the financial crisis, stemming in part from stagnating interest rates. In the past 10 years growth in the insurance industry has shifted toward emerging markets (such as those in Asia-Pacific, India and the Middle East), but the sophistication of accounting practices has failed to develop alongside it.
Many insurers in the EU will likely work with their existing contracted vendors so they can comply with elements of the IFRS 17 value chain. In emerging markets, vendors are attempting to establish new client relationships and develop solutions from overlaps in new and existing technology. The variability in end-user requirements, and IFRS 17’s principle-based nature, mean that IFRS 17 solutions at their core must be flexible.
Chartis has identified core areas of functionality in an IFRS 17 compliance solution, with a value chain that incorporates data management, insurance contract classification, valuation and modeling, accounting recognition and reporting. The current vendor landscape is varied, with some vendors developing end-to-end solutions, and a significant segment integrating their front-end capabilities with vendors that have established businesses in actuarial modeling.
Those vendors that currently have a strong presence in the insurance market dominate it, making it hard for new participants to compete. Entering the existing insurance market with a new solution is a challenge because of the sheer diversity of available models, and catching up with those vendors that have traditionally provided them is extremely difficult. Providing models is not the only way to penetrate the market for IFRS 17 compliance solutions, however. Alternative approaches to access the market include providing accounting rules, financial modeling and presentation functionality.
In this report we consider the evolving demand drivers for IFRS 17 technology solutions, before examining a possible technology architecture for IFRS 17, and analyzing the potential functional overlaps between IFRS 17 and other standards and regulations – notably Solvency II and IFRS 9.
A companion report, IFRS 17: The next stage in risk-aware accounting, looks at the three measurement models at the heart of IFRS 17 – the general measurement model (GMM). the premium allocation approach (PAA) and the variable fee approach (VFA) – which are designed to address the wide variety of available insurance contracts and provide some unity across a varied and complex sector.
To evaluate the vendor landscape and explain the structure of the market we use Chartis’ RiskTech Quadrant®. The RiskTech Quadrant® uses a comprehensive methodology of in-depth independent research and a clear scoring system to explain which technology solutions meet an organization’s needs. The RiskTech Quadrant® does not simply describe one technology solution as the best risk management solution; it has a sophisticated ranking methodology to explain which solutions would be best for buyers, depending on their implementation strategies.
This report covers the following providers of IFRS 17 solutions: Aon PathWise, FIS, IBM, Legerity, Moody’s Analytics, Oracle, RNA Analytics, SAS, SecondFloor and Willis Towers Watson.
We aim to provide as comprehensive a view of the vendor landscape as possible within the context of our research. Note, however, that not all vendors we approached responded to our requests for briefings, and some declined to participate in this research.