IFRS17: Insurers in Race Against Time

Come December 31, 2023, insurance sector operators will bid farewell to IFRS4 model of financial reporting to usher in the regime of IFRS17, a more detailed and more transparent system of reporting. Ebere Nwoji presents findings on level of insurers’ preparedness

Barely three months to December 31 2023 when insurance operators are expected to commence financial report filing based on the new IFRS17 model, insurance firms are dusting their tables and financial books to close the chapter on IFRS4  reporting model.

In a bid to be prepared, insurance companies invested in training. In fact, some employees of insurance firms sent to European and other western markets for training on the new model of reporting are just returning to work this week.

Some workers from Sovereign Trust Insurance, Leadway and AIICO said they are good to go on the transition and migration process. Yet there are some laggards who owned up that they have not done much.

The industry regulator NAICOM had directed insurance firms to migrate from IFRS4 model of financial reporting to IFRS17 model allowing firms to prepare their 2022 report based on IFRS4 but to convert to IFRS17 within a period of grace but that the converted report is not for public consumption.

The commission however said all insurance firms must file in their 2023 report in 2024 based on IFRS17.

Purpose of IFRS17 Migration

Finance experts said the purpose of IFRS 17 is to ensure that an entity provides relevant information that faithfully represents those contracts it undertook.

According to them, information from the IFRS17 gives a basis for users of financial statements to assess the effect that insurance contracts have on the entity’s financial position, financial performance and cash flows.

According to the experts, the IFRS 17 requires a company to measure insurance contracts using updated estimates and assumptions that reflect the timing of cash flows and any uncertainty relating to insurance contracts. This requirement will provide transparent reporting about a company’s financial position and risk.

Nigeria adopted IFRS in 2012 because the level and quality of disclosure prior to the adoption of IFRS was poor. The benefits expected to derive from the adoption and implementations include easier access to external capital and an increase in foreign direct investment.

IFRS generally is issued by London based accounting standard board (IASB) and addresses record keeping, account reporting and other aspects of finance reporting. It replaced the international account standards (IAS) in 2001.

Initially when NAICOM issued the directive on IFRS17, not many firms embraced it as many criticised and kicked against it but today the firms have all bowed to NAICOM as many firms are running around looking for how to upscale their operations.

Operators’ Level of Preparedness

Speaking on the level of preparedness of his company, the International Financial Reporting Standards (IFRS 17) Project Manager at AIICO Insurance Plc, Mr. Mayowa Korode said the IFRS 17 was developed to bring consistency to financial reporting around the globe for companies reporting under IFRS 17, and to compare insurance companies to those operating in other sectors of economy.

Korode maintained that AIICO Insurance was fully ready for the implementation, adding that the Company’s first and second quarters 2023 reports were done in IFRS 17 model.

Speaking at the annual training for members of the Nigerian Association of Insurance and Pension Editors (NAIPE) sponsored by AIICO Insurance in Lagos, Korode noted that the most fundamental element of change that IFRS 17 brought was the closer alignment of the accounting to the underlying economics of insurance.

He said AIICO Insurance as a company was ready for full implementation of the new standard.

“IFRS 17 is a comprehensive standard to account for insurance contracts applicable to companies that prepare financial statements under IFRS. It replaces IFRS 4, which was not a comprehensive standard. The new standard provides a single global accounting standard for insurance contracts, “he said.

Explaining the existing issues in IFRS 4 and how IFRS 17 addresses the problem, he said IFRS 4 has a variety of treatments depending on type of contract and company; estimates for long-duration contracts not updated; discount rate based on estimates does not reflect economic risks; lack of discounting for measurement of some contracts and little information on economic value of embedded options and guarantees.

He however said IFRS 17 provides consistent accounting for all insurance contracts by all companies; estimates updated to reflect current market-based information; discount rate reflects characteristics of the cash flows of the contract; measurement of insurance contract reflects time value where significant and measurement reflects information about full range of possible outcomes.

The Balance Sheet in IFRS 17, he noted, required a current measurement model, where estimates are re-measured in each reporting period.

The measurement, according to him, is based on the building blocks of discounted, probability-weighted cash flows, a risk adjustment, and a contractual service margin (‘CSM’) representing the unearned profit of the contract.

“For income statement, requirements in IFRS 17 align the presentation of revenue with other industries. Investment components are excluded from revenue. Under IFRS 17, entities have an accounting policy choice to recognize the impact of changes in discount rates in profit or loss or in other comprehensive income (‘OCI’) to reduce some volatility in profit or loss, “he added.

On Disclosures, he said, IFRS 17 disclosures will be more detailed than required under current reporting frameworks; disclosures will provide additional insight into key judgements and profit emergence, adding that disclosures are designed to allow greater comparability across entities.

On its part, Sovereign Trust Insurance said it was already on right track regarding the migration.

Spokesman of the company, Mr. Segun Bankole said the company already had prepared its 2022 account based on the new model and has converted same to IFRS17 as directed by the regulator.

Expressing satisfaction at the position of his company as one of the early adopters of the new model, he said he has just received about five employees of the company sent to foreign markets for training on the new model.

Also, Leadway Assurance Limited said it was already on course towards the implementation of the International Financial Reporting Standard17.

Mr. Raphael Akomolede of finance department of the company gave insights on the position of Leadway regarding the implementation of the IFRS 17.

He said the company had completed solution design which takes care of gap analysis, financial and operational impact assessment; designed future state of finance process/technology gap analysis; development, documentation and review of target operating model; preparation of technical documents and reviews and vendor selection for IFRS 17.

He said the impact of IFRS 17, included improved comparability for the first time; relevant and updated measurement of insurance contract liabilities; a more intuitive presentation of financial performance and position; enhanced disclosure and transparency and a clear distinguishing of insurance activities from investment activities.

While commending the National Insurance Commission for the roadmap for the implementation of IFRS 17 for the insurance industry in Nigeria, he said the commission was working seriously since 2019 towards ensuring the full adoption of IFRS 17 in the Nigerian insurance industry

NAICOM’s Roadmap

Since its announcement of the new model of finance reporting in 2019, NAICOM has not rested on its oars.

Indeed, the commission seems to be much more prepared compare to other stakeholder who seem to be foot dragging. Some operators have alleged that NAICOM has vague understanding of the new model of financial reporting.

The commission said in its efforts to get insurance firms ready for the new finance reporting model, it had set up sub-working groups to facilitate the migration.

Aside this, the commission had created a road map for the IFRS implementation, thus charging insurance firms to conduct awareness training and capacity building workshops, set up project groups and meeting committee, perform financial and operational impact assessment, design project implementation and covering technical, financial and operational impact assessment.

They are also to put up project implementation update and project status report and send same to NAICOM.

They are also to determine desired system landscape, tackle issues identified during the impact assessment as well as design actuarial and   financial target operating model and execute plan implementation. The insurers were also required to perform resource allocation, submit quarterly project status report to NAICOM and educate stakeholders and conduct core training on IFRS.

They were further required to implement new processes and system, new accounting policies choices and performance financial statements, etc.

Experts’ view

Meanwhile, finance experts said the Federal Inland Revenue Service (FIRS) has important role to play in the migration because the present tax payment system by insurance firms is not compatible with the IFRS system.

According to the experts, FIRS needs to amend its tax laws to suit the IFRS system.

The expert said with IFRS system, government cannot generate as much revenue as it used to generate from insurance industry before.

The experts also said with IFRS 17 implementation, organisations need a lot of data which they would use to run their cash flow and this as we know is one of the problems of insurance sector although stakeholders are making efforts in this regard.

The experts further said with migration to IFRS  17, organisations would pay heavily on new software developments, especially with the current high exchange rate, emphasising that the insurance companies would rely on Western market for new softwares for the new model, since Nigerian software developers are not yet conversant with the model.