The insurance industry has witnessed major accounting transformations in recent decades, driven by the Long-Duration Targeted Improvements (LDTI) in the United States and the International Financial Reporting Standard (IFRS) 17 globally. The introduction of these regulatory frameworks – intended to bring greater transparency, consistency and granularity in financial reporting – has marked a turning point for insurers.
Rather than just complying with regulatory checkboxes, LDTI and IFRS 17 present a powerful opportunity for insurers operating across multiple markets to gain a strategic advantage. By embedding these standards into broader financial and operational strategies, insurers can unlock data-driven insights to enhance risk management, profitability and investor trust.
The Broader Implications of LDTI and IFRS 17
Insurers are exploring the broader implications of LDTI and IFRS 17, particularly how the standards re-shape financial storytelling, performance measurement and strategic decision-making. In this context, understanding the interplay between the two is crucial for insurers whose operations cover multiple markets and geographies.
While both frameworks stem from similar foundational concepts, differences in their measurement and reporting requirements can impact the timing and disclosure of profits. Furthermore, they may necessitate changes in financial reporting and accounting processes, actuarial models, data management and systems architecture. Such nuances hold implications for portfolios, discount rates, risk adjustments and financial disclosures – making it imperative for insurers to fully understand and address them.
1. Financial Transparency and Comparability
Legacy reporting methods often face inconsistencies and data quality issues. LDTI and IFRS 17 push insurers toward a granular reporting approach that standardizes data formats and definitions, ensuring greater accuracy and facilitating efficient analysis by regulators. The transparency in financial disclosures also enables comparability across companies and regions, allowing insurers to set performance benchmarks and align global operations under a unified reporting framework.
This is borne out in the real world, where a major global insurer reported that IFRS 171 enabled it to improve comparability in its financial reporting across different business lines and markets. The standard clarified distinctions between contracts with varying risk profiles, allowing stakeholders to precisely understand the company’s risk exposure.
2. Data-driven Decision-making and Profitability Insights
Complying with LDTI and IFRS 17 requires detailed cash flow projections and assumptions. So, insurers need to have robust data governance and analytics capabilities.
By investing in advanced data analytics, insurers can meet compliance requirements and extract actionable insights on profitability by product line, market or customer segment.
One global financial services firm leveraged its LDTI compliance journey to improve its profitability analytics. The firm integrated a sophisticated data architecture that enabled real-time monitoring of cash flows and risk adjustments.2 As a result, the firm was able to strategically shift resources toward higher-margin products, and the insight was highlighted during its Q2 2023 earnings call.3
3. Risk Management and Capital Optimization
Under LDTI and IFRS 17, insurers must provide more detailed risk disclosures, including granular data on contract obligations and risk margins. This allows insurers to proactively manage risk, re-assess risk exposure and optimize capital allocation.
One of the world’s leading insurance providers took a strategic approach to IFRS 17, leveraging new insights to optimize capital more efficiently across its portfolio. According to its 2023 annual report, the IFRS 17 requirement for detailed contract-level data enabled the company to streamline capital deployment in its re-insurance segment, reducing exposure to high-risk contracts and freeing up capital for re-investment in growth initiatives.4
4. Operational Efficiency Through Digital Transformation
The rigorous reporting and data requirements under LDTI and IFRS 17 have accelerated digital transformation in many insurers. To keep up with frequent reporting, insurers have adopted advanced data management systems and automated workflows that provide faster and accurate financial close processes.
A global insurer, for instance, invested in a cloud-based finance and reporting system as part of its IFRS 17 transformation. This system has streamlined data collection, minimized manual processes and significantly reduced reporting timelines.5 In addition to simplifying compliance, the framework provided the finance team with faster insights, which was instrumental in driving agile decision-making during market volatility.
Real-world Implementation of IFRS 17 and LDTI: Select Experiences
1. Building Trust & Transparency with IFRS 17
A British multi-national insurer proactively embraced IFRS 17 as a strategic initiative to improve its financial transparency and operational efficiency. In December 2022, the company emphasized that IFRS 17 would be an accounting change with no impact on the underlying economics of its business, strategy or operations. Additionally, it confirmed that there would be no impact on Solvency II metrics, cash generation, dividend guidance or anticipated capital returns, affirming its commitment to maintaining financial stability and shareholder value, underscoring their commitment to maintaining financial stability and shareholder value.6
In 2023, the insurer provided a transition update, sharing re-stated comparative results for the year ending December 31, 2022, that were consistent with the guidance provided in its Annual Report and Accounts 2022.7 Such transparency aims to assist stakeholders in understanding the financial implications of IFRS 17 and to ensure comparability in future reporting periods.
2. Developing Data, Modeling and Reporting Frameworks
A US-based financial services company partnered with WNS for a US GAAP LDTI implementation. The project addressed key changes required in cash flow assumptions, discount rates, retrospective unlocking, Deferred Acquisition Cost (DAC) amortization and market risk benefits.
The support spanned data, modeling and reporting frameworks, including disclosures and controls. On the data front, this involved understanding regulations, reviewing data adequacy, identifying challenges, data mapping, reconciliation and testing. Modeling efforts included implementing a new framework for measuring market risk benefits and DAC amortization, testing the model and validating outputs.
The reporting workstream focused on developing a new reporting framework, providing end-to-end support in quarterly reporting across various products, creating trend files for reserve roll forward analysis and detailed documentation of model changes. The project also included creating a roll-forward mechanism for balance sheet reconciliation and enhancing external disclosures with meticulous controls to ensure accuracy.
Driving Strategic Outcomes from LDTI and IFRS 17
Once the commitments to compliance are addressed, insurers can re-assess LDTI and IFRS 17 through a more strategic lens. An integrated implementation strategy for both standards can help achieve operational synergies, leading to building an insights-driven organization equipped to achieve growth even in uncertain times.
Improved Financial Steering and Enhanced Portfolio Analysis
Detailed financial reporting allows insurers to gain a clearer understanding of their financial performance and risk exposure. Both standards give insurers deep insights into their product portfolios and facilitate better forecasting and proactive management of future financial outcomes.
Better Capital Efficiency
With a clear understanding of the profitability and risks associated with different products, insurers can optimize capital allocation across the business and improve capital efficiency by identifying areas where capital is being under or over-utilized. This ensures better investment and product strategy.
Enhanced Re-insurance Management
As re-insurance contracts are treated with more granularity and transparency under IFRS 17, companies can evaluate the impact of re-insurance arrangements on their balance sheet and develop strategies that optimize the purchase of re-insurance.
Improved Relationship with Regulators and Investors
By adopting LDTI or IFRS 17, insurers and re-insurers can meet regulatory expectations for comprehensive financial reporting, improving their relationship with regulators. Additionally, the enhanced disclosures provide investors with intelligence on long-term business performance, potentially improving access to and lowering the cost of capital.
Facilitating Global Operations and Convergence
IFRS 17 has become the global standard for insurance accounting, and its adoption by international companies helps them streamline financial reporting across different jurisdictions. By aligning with a globally accepted framework, insurers and re-insurers can reduce complexities and avoid duplicating reporting efforts across various regions, thus lowering costs and improving operational efficiency.
Improved Product Design and Pricing Strategies
IFRS 17 helps insurers better assess the profitability of individual products and adjust their product offerings accordingly. This can lead to better product design and more competitive pricing strategies, ensuring the insurer meets market demand and financial sustainability.
From Compliance to Competitive Edge: What Should Insurers Prioritize?
While LDTI and IFRS 17 implementation can be costly and resource-intensive, the long-term rewards can far outweigh the effort if insurers take a strategic approach. To maximize the value of these frameworks, insurers should consider:
Investing in Data Infrastructure
Build robust data analytics and reporting systems to manage LDTI and IFRS 17 complexity and gain insights into profitability and risk.
Leveraging Compliance for Strategic Shifts
Use insights to optimize offerings, target profitable segments and refine risk management.
Harmonizing Digital Solutions with Human Judgment
Cloud-based reporting and AI-driven analytics enable swift, compliant decision-making, empowering insurers to innovate by aligning technology with human judgment.
How are you leveraging IFRS17 and LDTI to drive sustainable competitive advantage and build a more harmonized future?
Contact our experts to transform compliance into strategy!
References
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IFRS 17 Presentation - Allianz
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Prudential Financial, Inc. Announces Second Quarter2023Results
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2Q23 Prudential Financial, Inc. Earnings Conference Call
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Swiss Re Annual Report
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Faster P&L delivers greater financial confidence at AXA
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Aviva plc releases IFRS 17 update
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Aviva plc Releases 2022 Comparative Financial Information and 2023 Outlook