Pricing and profitability for UK life insurers: the IFRS 17 opportunity

Pricing and profitability for UK life insurers: the IFRS 17 opportunity

“The new financial reporting standard IFRS 17 will undoubtedly represent the most significant change to insurance accounting requirements in over 20 years.” - EY

When the International Accounting Standards Board (IASB) announced the new reporting standard IFRS 17, insurers immediately recognized it as a significant change to ‘business as usual.’ The new reporting standards require a significant transformation of insurers’ accounting practices, and there’s a lot of work to be done. When the IASB announced a second extension of the original January 1, 2021 deadline to January 1, 2023, insurers around the world breathed a collective sigh of relief. But even with the new extended deadline, there are many things to consider.

The implementation journey required to shift to the new standards demands a concrete understanding of the data, processes, systems, and teams involved in the shift, as well as how they work together. Insurers who use the extended time to deepen their knowledge and better incorporate it throughout the transition will reap better customer and shareholder outcomes.

As insurers around the world have prepared to shift to IFRS 17 standards, there’s been plenty of talk around its implications for compliance and valuation. Meanwhile, an element that has an enormous impact on insurers' profitability under the new rules has been glaringly absent from the conversation -- Pricing.

The key pricing considerations relating to IFRS 17

Actuarial processes, including pricing, are an integral part of the IFRS 17 implementation journey. IFRS 17 significantly changes product grouping and profit recognition rules, meaning products must be grouped by risk characteristics and cohort as well as expected profitability. A clear understanding of how the pricing process impacts product profitability is necessary in order to make the most of this new configuration.

This comes at a time when actuarial pricing teams and processes are already straining. Pricing is a key piece of the insurance product puzzle, and life insurance products continue to become more nuanced and tailored to fit customer needs. Increasingly, pricing is a feature through which life insurers are seeking to demonstrate their responsiveness to customers priorities and purchasing habits. While the demands on pricing teams are greater than ever, their capacity and tool sets haven’t kept pace.

IFRS 17 highlights a broader opportunity to change the pricing process and the tools used by pricing teams for the better. As a powerful lever in determining both customer and shareholder value, life insurers investing in their pricing teams, including their tools and analytical capabilities, will see a greater return on their IFRS 17 implementation than those that do not.

What would this transition look like?

There are several implications for life insurers’ pricing processes during the IFRS 17 transformation.

Pricing strategy and trade-offs

Pricing strategies are improved through strong data integration and improved understanding of the trade-offs between margin and volume. 

Use of data

Insurers now collect data (customer, market, competitor) at a scale unlike ever before. Changes to the way this data is organized, managed, and integrated into processes like pricing can increase customer centricity and value throughout the product development journey.

Balancing autonomy and control of pricing function

As IFRS 17 changes the way insurers report and how actuarial and financial functions interact, there’s an opportunity to reevaluate how pricing works independently and collaboratively. 

Transparency and granularity

Increased data integration in pricing means greater granularity - and further transparency. These changes, coupled with increased cross-team collaboration in the pricing process, allow insurers to better understand how to engage pricing as a lever for growth and business value.

Agility, speed, and efficiency

A more integrated, data-forward pricing process improves pricing strategy dramatically, making it faster, more responsive, flexible, and efficient.

The key is not to wait for December 2022 in order to think about the pricing process in the context of IFRS 17 implementation. While the industry grapples with the impacts of COVID-19 and prepares for the IFRS 17 transition, it might be tempting to wait until the unknowns have cleared - but by then it will be too late.

“Speaking with quite a few life insurers, it’s clear that not all the impacts of IFRS 17 are known,” says Shelley Cox, Chief Customer Officer at Montoux. “What I would say, having been involved in many transformations, is there is a risk in waiting until you have all of the answers as opposed to acting on what is already known. We  know there will be implications for pricing, and working on those implications sooner rather than later will yield better outcomes for life insurers.”

How does this impact UK life insurers specifically?

UK life insurers have a good grasp on the importance of frequent repricing, indicating a strong understanding of the importance of flexibility and responsiveness in the pricing process. Despite this, there’s a clear gap in the conversation when it comes to IFRS 17 and the pricing process.

The pricing process has a dramatic impact on business operations, retention, and profitability.  As UK life insurers prepare to transition to IFRS 17 reporting standards, they should consider the ways this will affect their operating model - from metrics and objectives to governance to people, process, and technology.

Kicking off this process begins by asking the right questions about a life insurers’ business operations, needs, and objectives. Determining where the capability gaps are in the pricing process helps isolate the places requiring more focus and investment. Does it have to do with the pricing strategy and understanding key trade-offs and objectives? Is it centered around governance and the role of the pricing function? These questions need to be answered first and foremost.

COVID-19 and pressure from life insurers has delayed IFRS 17 implementation - what are the opportunities?

IFRS 17 represents a massive commercial initiative for life insurers - and an equally significant opportunity. The integration of actuarial and financial functions in insurers’ business operations means a better understanding of how to leverage pricing to improve products and prices for customers while generating more value for the business. 

The required shift to IFRS 17 standards should be used as a chance to determine how the pricing process can be improved to better suit market demands. This helps reflect life insurers’ ultimate goal: to deliver valuable, relevant, and personalized products and services to their customers. The 2023 delay gives life insurers an additional opportunity to more fully reconsider their approach to IFRS 17 implementation in order to maximize this goal.

Montoux specializes in decision science software, specifically designed to help maximize the value of life insurers’ businesses. To continue this conversation and learn more about IFRS 17’s impact on pricing, we'd love to chat!

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