I recently attended the IFRS 17 Forum put on by the Center for Financial Professionals. It was a great opportunity to network with colleagues in the insurance industry. Additionally, it provided me with a chance to reflect on some of the key themes surrounding this new regulation, which, once implemented, should improve financial reporting by providing more consistent, uniform, and transparent information to investors and policyholders.
Commonly occurring discussion points included: the lack of IFRS 17 skillset, concern over how to resource it (how many staff will be required? and at what cost?), and meeting the data sourcing and management requirements.
Crucially, another theme that was discussed was the go-live date, which is currently set for 1 January 2021. Whilst it is perceived to be a long way off, which it is, too many attendees also expected a mad scramble towards the end to be compliant.
Having worked on IFRS 9, I certainly saw this behaviour; having a date of compliance that seems far in the future and so is continually put off, only to scramble to meet the regulatory requirements just before the go-live date.
IFRS standards are not the only examples; I’ve seen this in my recent work on MiFID II, GDPR and the Senior Management & Compliance Regime.
I spoke with my colleague Mark Rees to see if he had any experience with projects/tasks with distant end dates being continually put off. He spoke in the context of his experience working on two major projects: the Y2K threat and the London Olympics. In summary, he said:
“My experience on Y2K and the London Organising Committee of the Olympic Games were both varied, but remarkably similar.
Leading up to the turn of the millennium in 2000, I was working with clients who were preparing their IT infrastructure to make the seemingly easy change of displaying the year 2000. Although this seems very trivial, the impact would have been significant because any systems or programmes automated for a certain date and time would not have run correctly. As businesses prepared there were a lot of unknowns – how real was the threat? what was a proportionate response? and what would be its impact (from nothing to the complete loss of IT infrastructure). Businesses were preparing for something that was nebulous, which made it difficult for people to get their heads around it. However, responses to it were very similar across businesses. Businesses I was involved with were busy: drafting, preparing and testing contingency plans, and creating roles – project managers, analysts and planners – to ensure every possible outcome was potentially covered. There appeared to be a constant pressure to be active and to be busy.
Conversely, there was nothing nebulous about the Olympics. Everyone across the nation, and indeed the world, knew what it was about and what to expect. Coming on the heels of what had been the most expensive Olympics ever in Beijing in 2008, the pressure to deliver was intense. For me, the time leading up to the opening ceremony flew by, in a blur of activity with more and more manpower being pulled into the numerous and rapidly multiplying project work streams. This activity was required to ensure everything was delivered.
The conclusion I drew from these two experiences was: in spite of a known end-dates on both occasions, programmes were compressed at the end with more and more resources being allocated to various work streams to ensure that they delivered. And some of them did.
Was this the right approach? Probably not, but in the midst of complex and difficult programmes, it seemed like it was the only answer.”
After this discussion with Mark, it prompted me to look at academic resources to see if the difficulty of meeting deadlines in the distant future had been examined.
In surveying the literature, I found that people do often underestimate the time needed to complete a task. In fact, they do it so often that it’s been named the ‘planning fallacy’ by psychologists Daniel Kahneman (of Thinking, Fast and Slow fame) and Amos Tversky. It is a form of optimistic bias where people underestimate the time it will take to complete a task even though they realise that similar tasks have taken longer in the past. The reasons for this stem from the wrong kinds of information that employees focus on, faulty memories of previous completion times, failing to consider sub-components of the task, and a desire to finish tasks early.
In making predictions for distant future events, people tend to base them on limited concrete details, in contrast to nearer events that are based on more concrete and contextualised details.
As a result, people predict they will finish a task earlier if the deadline is a long way off. However, as the task gets closer in time they start to think more about potential obstacles in completing their task and they become less confident in their prediction of completing on time. This supports the idea that people focus more on obstacles to complete a task that are closer in time.
A great and relatable example is Christmas shopping, we know what day it is but every year and we tell ourselves that this will be the year where we get it all done a couple weeks before the big day. Alas, rarely do many achieve it.
So how can we apply this literature to IFRS 17?
The research shows that when an implementation date for a regulation is released – in this case, 1 January 2021 – which is always many years in advance, people will make overly optimistic predictions about their ability to implement the regulation on time.
Helpfully, the research shows that you can avoid making this mistake by focusing on the obstacles that you will face (and you will face obstacles), which result in longer completion time predictions. To do this, you need to consider all the sub-components that you will need to complete to implement the regulation. To get you thinking this way, you can develop a blueprint that details all the steps, all the approvals, all the departments that will be involved and slow down the process of meeting IFRS 17’s requirements. After reading this article, hopefully you will be more aware of your optimistic completion time predictions and build in more time to deal with unexpected obstacles.