Kenya’s insurance sector is staring at another headache, following a decision by accountants’ body to change the way insurers will report their performance.
Starting January 2021 – three and half years from now, insurance companies will be switching from 13-year old International Financial Reporting Standard (IFRS) 4 to IFRS 17.
This is expected to promote uniform reporting guidelines for all insurers, in an attempt to open what has been described as a sector operating in a ‘black box’ according to the International Accounting Standards Board.
Analysis of the IFRS 17 by audit and advisory services firm, Deloitte, cautions Kenyan insurers that the changes may catch them unawares, forcing them into consolidation if they do not prepare adequately.
Deloitte East Africa’s actuarial and insurance leader, Thomas Njeru, in an interview said insurers are in for huge compliance costs as they invest in skilled staff and sophisticated systems.
“The cost of implementation and compliance are significant. The amount of data you require when you receive that single premium and split it over the years call for high level Information technology (IT) systems,” cautions Njeru.
He says insurers will have to acquire new IT systems, actuarial processes and financial reporting processes.
This will complicate the landscape of insurance sector that is already staring at other changes. Come 2018, general insurers will have to double their capital to Sh600 million, life insurers to 400 million and those offering both will have to have at least Sh1 billion.
At the same time, sector regulator, the Insurance Regulatory Authority is set to be merged with other three agencies in what has been termed as move to strengthen regulatory practices.
This makes 2021 too close for the Kenyan sector, as it moves to comply with the new standard. Njeru says IFRS 4 was just an interim standard that did not adequately prescribe the measurement of insurance contracts. “It used to allow different companies to use different practices based on local regulatory environment and insurers’ judgment. This eliminates comparability,” said Njeru.
As a result, it has not been easy for an investor from one country wishing to invest in an insurer in a different jurisdiction to make an informed decision.
For insurers operating in more than one country, consolidating their performance is a headache. This is because of much leg room that had been left to insurers to make their own judgements and influence from local regulators.
However, with the new IFRS, firms will be restricted on how they report on both the investment markets as well on core business. The new standard will require firms to have two sets of reports: insurance results and the financial results.
“Currently, just a movement in NSE index or interest rate can easily change numbers significantly yet the core underwriting business has not been affected,” explains Njeru. But under IFRS 17, insurance performance will stick to profit or loss that a firm books for providing insurance services while financial results will be on net investment income earned from managing the underling financial assets like premiums.
Mr Njeru says reporting the two separately will improve the decision making of a potential investor unlike now when the two are reported together.
In getting present value of future cash flows (PVFC), or simply how much all the money an insurer expects in a given period is worth now, IFRS 4 had also left insurers with a lot of subjective decision making.
However, the new IFRS 17 will compel insurers to split the PVFC or obligations into three components: Best estimate of future obligations, present value of future profits expected and the risk accompanying those contracts. “Long term insurers will feel the change more since they are handling contracts spanning many years – meaning a lot has to be done before recognising profits,” says Njeru.
Another key change will be on how insurers treat premiums in their books.
Currently, it is directly recorded as revenue. However, under the new standard, the computation of revenue will not be straightforward.
“Insurers will have to calculate exactly what to recognise as revenue for a given year based on exposure. They will need to split the premium received over the years and recognise premium received for that particular year against the claims paid,” says Njeru.
Njeru sees Kenyan insurers ending up with two sets of financial statements – one for IRA and another one to fulfil IFRS 17. Auditors will have to reconcile the two. He predicts that some insurers may face more challenges in complying to the new standards.