The new insurance accounting standard - International Financial Reporting Standard (IFRS) 17, which was published on May 18, 2017, heralds fundamental changes to international insurance accounting.
The standard is expected to give users of financial statements increased comparability and transparency about the profitability of new and in-force insurance business on an international scale.
It will bring both benefits and challenges for insurers.
The effective date will be January 1, 2021, which may seem a long way off – but IFRS experts say that the implementation effort will be significant.
An audit partner and IFRS expert at KPMG Kenya Alex Mbai said the standard aims to promote uniformity in insurance accounting.
This is because under IFRS 4, current insurance contracts being replaced by IFRS 17, underwriters have been using local laws, practices and policies to report on insurance.
“The new requirements will reshape the primary statements and change the disclosures in insurers’ financial statements. There will be increased transparency about the profitability of new and in-force business, which will give users more insight into an insurer’s financial health than ever before,” said Mr Mbai.
Specifically, separate presentation of underwriting and finance results will provide added transparency about the sources of profits and quality of earnings.
Premium volumes will no longer drive the “top line” as investment components and cash received are no longer considered to be revenue, and accounting for options and guarantees will be more consistent and transparent.
Mr Mbai said underwriters will be required to produce more data than they have been keeping, and contracting with policyholders will also change.
“Significant changes to the data gathered and maintained will be needed and as a result, this could be a complex exercise for many companies,” said Mr Mbai.
“The requirements have the potential to reduce the cost of capital for leading insurers. Greater comparability could facilitate merger and acquisition activity, encourage greater competition for investment capital and help gain the trust of investors.”
Equally, there are likely to be a number of other effects. For instance, there could be greater volatility in financial results and equity due to the use of current market discount rates. Underwriters may also need to revisit the design of their products and other strategic decisions, such as investment allocation.
The new standard will provide a peek into how insurance liabilities are measured.
The insurance contract will be made up of four building blocks; the future cash inflows and outflows for the insurer to fulfill a contract, an adjustment for the time value of money for fulfilment cash flows using appropriate discount rates, a risk adjustment to the cash flows, and a contracts service margin.
The standard is also expected to curb fraud as it will bring a lot of scrutiny and uniformity in reporting, therefore people will not work in isolation.
They will share information with stakeholders and customers will be involved in premium pricing.
KPMG insurance surveys in East Africa have in the past indicated that about 25 per cent of premiums charged by insurance firms go to cover fraud risks and related costs incurred by the insurer whilst underwriting insurance risk.
The IFRS experts said Kenyan underwriters should be able to adopt the standard on time, with the right and timely preparation.
Already, Insurance Regulatory Authority (IRA) is engaging standard-setting bodies and will be advising firms on compliance to the international standards.
“The authority will require companies to implement the standard once we issue guidelines and circular later,” said IRA acting commissioner of insurance Godfrey Kiptum.
While the 2021 may seem a long way off, the timescale will still be a challenge for many and a co-ordinated response will be essential.
Finance, actuarial, IT and audit functions are expected to work closely together and underwriters need to start the implementation process now.
Insurers are being advised to start with an initial impact assessment, then move onto analysing their insurance contracts for product-by-product impacts.
Actuarial and financial services provider firm - Kenbright chief actuary and managing director Ezekiel Macharia said predicted the effect will spur mergers and acquisitions.
“Mergers are part of the solution but not the only solution.
Changes in business operation and understanding the insurer’s risk will be the likely routes insurers take. This will include hiring more analysts and actuaries to understand the business. In addition, development of IT systems which monitor the business will increase,” said Mr Macharia.
The new standard is also expected to boost insurance uptake in Kenya and close the trust deficit.
Official data from IRA shows that as at December 31, 2016, insurance penetration rate in Kenya was at 2.73 per cent which is considered low compared with the world average of 6.28 per cent.