08-08-2019 | POINT OF VIEW
Between a rock and a hard place: why insurers must apply focus to both IFRS 9 and IFRS 17

In Greek mythology, the Symplegades were two giant rocks that would clash together whenever a ship attempted to sail through. The story goes that after being defeated by Jason and the Argonauts, these rocks stopped moving forever, leaving ships safe to navigate between.

Unless that is, your ship is an Insurer in the years 2019-2021 attempting to chart a course through the regulatory landscape. In this scenario the Symplegades represent the twin challenges of IFRS 17 and IFRS 9. In isolation both are a cause of concern for Insurers, however the combined delivery and implementation timelines magnify the challenge significantly.

Industry focus to date has been placed on IFRS 17 and the liability side of the balance sheet. In contrast, IFRS 9 has only garnered attention by association with IFRS 17, as Insurers look to harmonise the accounting treatments to avoid mismatch. This narrow focus may be because credit provisions are expected to be relatively low, and also because Insurers view their large investment portfolios as relatively simple from a credit assessment angle.

In reality Insurers will face substantial complexity in IFRS 9 implementation, over and above the aforementioned classification decisions. Based on our work supporting early adopters, we observed that firms have struggled with the establishment of staging and transfer criteria for assets, with the movement to lifetime expected loss, and with the operationalisation of IFRS 9 in regard to business processes and systems.

Equity release mortgages provide one example where Insurers may not have such a straightforward implementation. Significant deterioration in the credit quality (and subsequent asset staging) is not easily determinable due to the lack of interim payments ahead of a final bullet (i.e. no arrears to indicate a credit deterioration), whilst calculation of lifetime ECL is complicated due to the lack of a fixed maturity for these products.

A second example comes from the operational side, where we have observed that Insurers have not yet addressed their systems and data in view of IFRS 9. The need to track movement over time increases data requirements, with data capture during the 2021 parallel run period an additional consideration.

This point draws attention to the timeline overlap between IFRS 9 and IFRS 17, as both will require the embedding of new systems and operating models by end-2021. Whilst Insurers may perceive IFRS 9 as a simpler task in this respect, translating the IFRS 9 standard into business practices cannot be delayed. For example, the assessment of credit risk – an IFRS 9 consideration – has a direct impact on the fair value liabilities under IFRS 17 as a result of the discount rates applied.

To conclude by revisiting the Symplegades analogy, before his successful passage Jason released a dove, which made it through with only the loss of some tail feathers. Whilst industry veterans may consider the regulatory forerunner of Solvency II slightly more painful than the loss of a few tail feathers, it has for many firms created tools which can be leveraged to support the delivery of IFRS 9, not least economic scenario generators, although even these will need to be updated from the current 12-month basis.

We recommend that Insurers harmonise their IFRS 9 and IFRS 17 solutions with existing tools and processes to deliver in an efficient and cost-effective manner by end-2021. This requires an acceleration of IFRS 9 programmes, with the first crucial step to develop an understanding of the accounting standard’s impact on business performance and change requirements.

@p_f_g - Parker Fitzgerald