Responsible for managing insurer financials at public companies have spent five years preparing for the long-anticipated implementation of new accounting standards covering long-duration contracts such as life insurance and annuities.
- Insurance industry have spent between US$15-20 bn on finance transformation initiatives to adapt their systems
- Insurers should be focused on assembling their data and narrative to address questions about the execution and impact of these accounting changes
- Next big reporting challenge for finance departments is likely to be increasing demands for information about ESG issues—from climate risk in underwriting and investments
- What’s next for insurance tax leaders?
- Insurance tax departments should remain close to their business units, so they are prepared to respond to legislative and regulatory developments
According to Deloitte, this was no simple or inexpensive task, as the industry will likely have spent between US$15 billion and US$20 billion on finance transformation initiatives to adapt their systems, according to a survey of 312 carriers from 50 countries by WTW.
On January 1, 2023, International Financial Reporting Standards (IFRS) 17 goes into effect, determining how insurance contract assets and liabilities are presented on balance sheets.
While the United States is one of the few countries not to adopt IFRS 17, American carriers have been on a parallel regulatory track, facing the same deadline for implementing the US GAAP counterpart on Long Duration Targeted Improvements (LDTI) rules promulgated by the Financial Accounting Standards Board.
Insurers with both US and global operations have had to manage implementation of both simultaneously.
Insurers should have most, if not all, elements in place by now to comply. Tweaks will likely be necessary both during fourth-quarter testing and after the January 1 launch, but the tech and process infrastructure has likely already been laid (see about Insurance Sustainable Finance).
For the moment, insurers should be focused on assembling their data and narrative to address questions about the execution and impact of these accounting changes from federal and state regulators, rating agency and stock analysts, and other external stakeholders.
Additionally, the updated standards significantly increased collaboration between actuaries, accountants, and financial planning and analysis professionals.
Insurers should consider what changes to their finance operating models, organizational structures, and talent models may be necessary to execute the updated standards as efficiently as possible.
However, while IFRS 17 and LDTI requirements were catalysts for major finance system changes, these investments should also serve as the foundation for more comprehensive and proactive transformation initiatives. Insurers should be turning their attention next year beyond regulatory compliance to enhanced data management and utilization capabilities that ultimately generate greater insights and improved performance (see Transform Tax & Finance Operations).
For example, many carriers moved their ledgers to the cloud to make data more accessible for collection and reporting. But after that relatively modest goal is accomplished, the challenge ahead will likely be how to make data in general more actionable for innovation and growth through advanced analytics and artificial intelligence across the enterprise.
Keep in mind that nonpublic insurers—such as mutuals and carriers owned by private equity—are not due to be in compliance until January 2025.
Such carriers will likely benefit from lessons learned by public companies on their IFRS/LDTI journey. They should already be moving to lock in those trained and experienced resources becoming available now that preparation for public companies is nearing completion, to help guide nonpublic insurers in finance transformation and regulatory implementation.
Looking ahead, the next big reporting challenge for finance departments is likely to be increasing demands for information about ESG issues—from climate risk in underwriting and investments, to diversity and inclusion in staffing and leadership, to financial equity in coverage availability and pricing.
In this case, pressure for more data is coming from multiple sources—both governmental and private agencies. Yet, unlike with accounting changes, standards are lacking among nations and ESG assessment firms, often creating duplication of effort, additional time and costs, and confusion.
What’s next for insurance tax leaders?
Moving forward, insurance tax departments should remain vigilant and be prepared for the uncertainty posed by the potential for global tax reform, such as Pillars 1 and 2 put forth by the Organisation for Economic Co-operation and Development (OECD).
US tax reform will likely be needed to conform with these global tax changes. Specifically, OECD Pillar 2 introduces a global minimum tax based on book income with a number of tax adjustments.
Insurance tax departments should be proactive and invest early in analysis and modeling exercises to assess the impact of potential tax reform. Given the complexity and significance of these coordinated worldwide changes, reliable tax models will likely call for the aggregation of new and detailed data— much of which may not be currently collected and readily available.
These trends toward tax complexity and the recurring tax talent gap should prompt insurers to continuously assess their department operating models.
Insurance tax departments should remain close to their business units, so they are prepared to respond to legislative and regulatory developments prompted by economic uncertainty and changing marketplace landscapes.
For instance, insurers should be closely monitoring the impact of rising interest rates on their company’s investment portfolios, while considering tax planning opportunities and risks for potential investment losses.
Another example of uncertainty is the future tax treatment of cryptocurrencies. Insurers investing in the digital asset market or accepting premiums in such alternative currencies should be anticipating and managing tax risks of widely fluctuating crypto value, in part by complying with various jurisdictional tax regimes and closely monitoring upcoming legal and regulatory developments.
Meanwhile, with many carriers already developing ESG-targeted strategies, this may be an opportunity for insurers to assess their tax footprint and strategy, as well as articulate a narrative for their client base and regulators. Insurance company tax departments should stay close to the business initiatives being planned and implemented, as various countries may continue to introduce tax-specific ESG reporting measures.
Changing culture as the ultimate enterprise transformation
There will likely be plenty of “difficult situations” in the year and decade ahead— hopefully not as overarching as a global pandemic, but challenging, nevertheless. Yet that shouldn’t prompt insurers to be overly cautious or react defensively.
They should seek to maintain the entrepreneurial, can-do mindset often displayed during the COVID-19 outbreak, which helped them nimbly transform fundamental aspects of their operations for a more digital and virtual economy.
If insurers were able to adapt and innovate so quickly and effectively under such crisis conditions, what might be preventing them from doing so on an ongoing basis?
Rather than falling back on pre-pandemic operating procedures and business models, insurers should keep experimenting with new ways of providing coverage and serving customers.
They should remain on offense by positioning to thrive over the long term in a rapidly evolving, more socially aware market.
One path could be striving to engage more proactively and collaboratively with those in underserved communities as customers and employees, managers, and senior leadership. Another could be balancing the need to keep legacy energy risks covered in a global economy still heavily dependent on fossil fuels even while facilitating and accelerating the transition to more sustainable sources.
Internally, many insurers have already invested heavily to enhance legacy operations with a host of new technologies and data sources, while boosting the capabilities of their people to take full advantage of these upgrades.
The shift from laying this new foundation to fulfilling its potential is likely to remain a major challenge in the coming years, deserving of ongoing attention and investment.
However, to fully transform into the insurer of the future, carriers should also strive to keep evolving their foundational culture—from a focus on risk reduction to one marked by risk-taking innovation and broader, bolder reinvention.
As evolution in society, technology, and the global economy continues to speed up, insurers that can keep pace and maintain a commitment to transformative change will likely be among those best positioned to excel against slower-to-adapt legacy carriers as well as new forms of competition already here and yet to emerge.
AUTHORS: Karl Hersch – US Insurance leader, Principal Deloitte Consulting, Neal Baumann – Global Financial Services Industry leader, Principal Deloitte Consulting, Michelle Canaan – manager Deloitte Center