How regulatory compliance in insurance finance is driving ESG transformation

As insurers will know, in January 2023 IFRS17 came into full effect, becoming the mandatory industry reporting standard. IFRS17 is designed to improve the transparency of the reporting of a company’s financial position and risk. And the ultimate goal is to better evaluate the performance of insurers and how that performance changes over time. However, many in the industry view IFRS17 as just a further regulatory burden and drag on time. But what if IFRS17 was seen not as a burden but as a once in a generation chance for insurers to fix the financial process flow and within that, transform their own ESG reporting, boosting their own ESG compliance in the process? 

In this blog, Drushen Naidoo, from Business Advisory team, explores the opportunities IFRS17 and other new regulatory pressures present. We outline how they can aid insurers in carving out a competitive advantage with a new era of ESG-minded policyholders. 

Many insurers see the new regulatory pressures as a burden

The aim of IFRS17 is to improve the transparency around insurer’s reporting around profitability and create consistent principles for all aspects of accounting for insurance contracts, enabling investors, analysts and others to meaningfully compare companies, contracts and industries. 

Companies must now recognise profits as they deliver insurance services rather than when they receive premiums and provide information about insurance contract profits they expect to recognise in the future.

Understandably, for many insurers implementing and maintaining these changes is as a great expenditure of staff time and, potentially, company capital. Companies must now attempt to integrate data from multiple sources including insurance & asset management data and actuarial risk & market data. Current processes, with many using interim databases and spreadsheets are resource-intensive, risky, unsustainable and often only complicate the integration between transactional and accounting systems needed for IFRS17.

Further complication with ESG regulations

An added complication for many insurers is that most are currently also trying to improve their own ESG output and compliance. Two key factors are driving this improvement. The first being a changing consumer demographic that wants to support businesses that embrace sustainability, good governance and social responsibility. A Natixis Investment Managers Report found that 83% of millennials, 82% of Gen X and 80% of Boomers said that they want their investment and values to align. The second reason is new regulatory pressures.

A number of new regulations are now being introduced that will impact the corporate disclosures insurers will be required to make. EU insurers, for example, will soon need to adhere to the Corporate Sustainability Reporting Directive (CSRD) and report on the process by which they have identified and assessed the adverse impact they have on the environment and society and the most significant sustainability risks to their whole value chain.

This, too, is tricky. ESG data, such as emissions levels or climate risk exposure, is typically obtained from public sources, directly from corporate clients, or from ESG data providers. While ESG data providers are emerging and evolving quickly, ESG data remains scarce, particularly for small- and medium-sized companies (SMEs).

For many, ESG data and analytics are developed in silos for individual areas of a company and their own specific use cases. Currently, firms often build up several ESG data repositories, often using highly manual methods, that are not easily accessible across the bank. 

This level of reporting combined with IFRS17 requirements could be overwhelming for insurers. However, it doesn’t need to be. It simply requires a change of view and the right technology.

The reality? New regulation presents insurers with opportunities 

The focus of most IFRS17 implementations has largely been around the preparation of financial statements and note disclosures. However, it presents insurers with a once in a decade opportunity to overhaul their entire reporting infrastructure and fix their financial process flow. 

The most effective way to implement the change required by IFRS17 is with a high-level data management system. By making that switch you can meet the requirements regarding financial statements and note disclosures. And you can also improve the reporting of key performance indicators (KPIs) including those centered around ESG. This uplevelling of reporting can aid insurers in lowering operating costs, improving financial insights and even creating new use cases. 

From an ESG perspective, this allows insurers to keep compliant with current and future regulations. And it allows them to meet the needs of a changing consumer demographic that wants to support businesses that embrace sustainability, good governance and social responsibility.

Improving ESG compliance with the correct data management partner

But how can insurers go about building the appropriate data infrastructure to transform their financial and ESG reporting? 

A robust and agile data management systems should offer the following: 

ESG data management

It must provide a standardized framework for ESG data management which can help insurers to collect, store and analyze data more effectively.

Advanced reporting

A system must allow insurers to report on their ESG performance to stakeholders, including investors, regulators and customers. Reporting processes must be accurate and transparent.

High-level risk management

ESG risks can have a major impact on financial performance. An elite data management system should help insurers to identify, assess and manage this risk more effectively through a standardized framework for risk management.

Integration with financial transformation

Insurers are increasingly adopting new technologies and business models to transform their operations and improve their competitiveness. It should be possible to integrate these new technologies and business models more effectively into existing systems and processes. This enables insurers to optimize efficiency and savings.

SAP Fioneer Financial Service Data Model (FSDM) 

FSDM is a comprehensive data model designed to help financial services companies organize and manage their data more effectively. It can play a crucial role in helping insurers to meet their IFRS17 requirements, manage ESG risks, improve reporting, and transform their operations. By providing a standardized framework for data management, the FSDM can enable insurers to achieve greater efficiency, transparency and resilience in an increasingly complex and challenging business environment.

To find out more contact: 

Drushen Naidoo

SAP FIoneer Business Advisory MENA

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