Tracking down unprofitable parts of your business with IFRS 17

10 August 2017

Blog snapshot

  • Many insurers view regulation as adding complexity and cost.
  • Analysing data and tracking performance will help identify unprofitable business.
  • Management can then make better informed strategic decisions to retain and generate profit.

 

Regulation often causes a grimace on the face of many of my clients in insurance. I include changes to the accounting regime in this and, most recently, IFRS 17. They are seen as adding cost and complexity to an already expensive back office. At a time when margins are thin, this is the last thing most CEO's want to spend money on.

However, I am starting to see hidden benefits in the new accounting regime which, if adopted sensibly and with appropriate engagement of the business, could actually help boost returns for shareholders. Am I losing my mind, I hear you ask? Let me explain.

 

Performing or onerous?

Hidden in the depths of the IFRS 17 standard are the concepts of unit of account and groupings. These groupings are designed to identify parts of a business that are performing less well. These typically force management to track the performance in more detail and book a loss at the point at which these are considered onerous or not profit making.

In many high performing organisations we actually see management analysing portfolios of business in many different dimensions. Be that size of client, geography, distribution channel or office location. However, many organisations still don’t analyse these things. And even if they do it will be, at best, sporadic or adhoc. The requirements of IFRS 17 will now force businesses to identify a consistent way of analysing their portfolios and will bring with it financial rigour to the identification and tracking of unprofitable business.

 

Genuine business benefit

The normal earnings lag associated with historic insurance accounting will disappear, shining a bright light on underperforming classes of business. For once I can see real business benefit from an accounting standard. It will require finance departments and the underwriting community to really analyse their portfolios of business to identify the high performing profitable groupings and those which are challenged. They will then be able to better decide which capital should be withdrawn, or stringent underwriting actions taken.

In a nutshell, IFRS 17 will act as a driver for better business planning within the insurance sector.

 

If you would like to discuss any of the issues I’ve raised here in further detail please do get in touch.

Nick Wilks | Partner
Profile | Email | +44 (0)20 7804 7872

 

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