Johannesburg, 04 May 2018
The International Financial Reporting Standard 17 (IFRS17), issued by the International Accounting Standards Board, marks a new dawn for insurance reporting by enhancing the comparability of accounting practices through improved disclosure of valuation, performance and risk information, says Darrel Orsmond, Financial Services Industry Head at SAP Africa.
The new standards were developed to address shortcomings in the consistency and transparency regarding how insurance contracts are valued, reported on, and assigned risk. To meet the deadline of 1 January 2021, insurers will have to undergo extensive changes in the design of their valuation and reporting systems, while also educating stakeholders on how these changes will impact them.
By 2015, global gross written premiums (GWP) totalled $4.5 trillion, with GWP market share for emerging economies reaching 18.7%. The industry is also experiencing a phase of unprecedented disruption and change as new technologies such as IOT and machine learning up-end traditional business models, while a new generation of digital-first fintech disruptors challenge incumbent insurers with specialist niche offerings. This has forced insurers to not only adapt existing products and services, but to undertake full-scale digital transformation processes to enable greater agility and adaptability within the organisation and fast-track the development of new customer-centric offerings.
Watered-down digital transformation not feasible
Insurers have often approached their digital transformation by starting with the outer layers, mobile apps, client Web site portals, innovative pricing structures, and attractive reimbursement models, in an effort to keep pace with changing consumer demands. However, this hasn't solved any of the issues with increasing contact with customers, anticipating new insurable events, or delivering offers that are built on deep customer behaviour insights. Effective digital transformation of the sorts that set organisations up to innovate and quickly launch new business and revenue models requires an end-to-end process re-imagination, from the front-end all the way to the back-office.
Without true digital transformation, insurers are unable to effectively incorporate exponential technologies such as IOT and machine learning into their business models, putting them at risk of losing market share to faster moving young upstarts disrupting the insurance market. In the case of IFRS17, insurers unable to successfully undergo full digital transformation of their core business systems will be put at further risk of non-compliance with a new global standard in reporting practices.
According to EY, total IT spending by the global insurance sector reached $185 billion in 2016. The looming IFRS17 reporting changes will add cost and put further pressure on insurers' IT departments to not only meet the new requirements, but to effectively leverage IT spend to enable greater innovation. The new requirements under IFRS17 that all insurance data needs to be consolidated, and in such a format that insurers can provide accurate insights into contract valuations, risk assessments, and balance sheet implications, demands a process of digital transformation. And with the deadline set at 1 January 2021, time is running out for insurance companies to get their systems in place and thoroughly tested. In some cases, this will mean updating or replacing systems that are 30-odd years old.
With change comes opportunity
Despite the challenging time ahead, insurers stand to benefit immensely from the process of digital transformation required to comply with IFRS17. The biggest currency in business right now is data, and insurance companies have this resource in abundance. Due to antiquated systems, many insurers struggle to realise the true business value of their data. However, by undertaking a well-designed process of digital transformation ahead of the IFRS17 deadline, insurers can create effective data models that enables them to activate predictive capabilities in their insurance offerings.
For example, life insurers can start predicting major life events at an individual customer level and offer personalised products and services to customers when they are most likely to be invested in understanding and purchasing such products. They also begin to build the data structures required for ongoing reporting and assessment, which avoids ad hoc responses to business and regulatory change.
In Africa, insurers are under pressure: a concentration of a small pool of very large insurance companies means even a minor change to their reporting standards result in changes to their earnings. This is likely to have a distinct impact on shareholders, especially since insurers will now have to provide more granular insight into how the figures on the balance sheet, including how they report on risk valuations, were calculated. Due to a prevailing specialist skills shortage, many insurers will struggle to find local consultants who can help them develop the systems and models required.
Insurers on the continent should therefore look to global firms that can partner with their internal teams and provide the technology, skills and global insights required to make their process of digital transformation a success. This is particularly important for companies that do business across borders, especially European ones, as new legislation, such as the General Data Protection Regulation, further forces changes in how customer data is collected, stored and protected.
In an ideal world, insurers will start their digital transformation journeys today. There is great benefit to being first mover: by making the necessary investment now, insurers can start gaining insights into their customers and business processes that can improve their ability to change customer offers, reduce loss rates, and gain deep insights to the factors influencing their valuations. Being late to the game with this may knock years off an insurer's competitiveness, and by the time they catch up, their market share may have been claimed by current competitors or new upstarts. Those insurers that act now, however, will be able to get ahead of the curve and be far better prepared to take advantage of the opportunities of this new age.
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