Insurance sector operators across the globe were required to migrate from International Finance Reporting Standard 4 to IFRS17 by January 1, 2023. In this report, Ebere Nwoji looks at how Nigerian insurers have fared in the face of development.
Four months after the January 1st deadline for insurance firms across the globe to migrate from International Finance Reporting Standard (IFRS) 4 to IFRS 17, insurance sector operators in Nigeria are yet to come to terms with the regulator on the need to ensure smooth migration to the new accounting system.
Feelers from some market operators show that while the regulator, the National Insurance Commission (NAICOM) is eager to see that Nigerian insurers measure up to the global standard of operation by benchmarking their operating system with those of their counterparts in other parts of the globe, some insurance managers see the development as disturbance and unnecessary burden on them.
Rather, they have continued to question how the migration would impact their business growth.
The operators said though the new system would place them on par with other global operators, regulators and promoters of the new accounting system were yet to explain to them how the new financial reporting system would address the continued apathy of Nigerians towards insurance patronage and how it would lead to higher turnover. They insisted that any policy that has nothing to contribute to the change of this anomaly could not be regarded as a priority of operators at this time.
Insurers’ Complaints
The insurers lamented that whereas finance markets of the Western world where Nigerian regulators copy the system they paste on Nigerian markets, especially insurance were far much more developed and their financial inclusive rate very high; the reverse is the case in Nigeria but regulators were fast to copy the system and try to force it down the throat of Nigerian operators.
Describing the development as a mere copy-and-paste system, in which even the regulator at present does not have enough personnel that have a firm grip on its workings, the insurers said the adoption of IFRS17 has set the stage for a rush by Nigerian insurers to Western world software market in search of new software for the new system which has obviously discarded entirely the former software in use by insurance firms under the IFRS 4 system
Experts’ views
But accounting experts said insurers reasoning along this line was talking out of ignorance adding that the knowledge gap in IFRS reporting was a problem among some of the insurance sector managers most of who were more interested in turnover and quantum of premium generated rather than proper accounting and finance reporting system.
The experts said to have good knowledge of the workings of the IFRS17/, which is a global reporting standard used in virtually all insurance markets across the globe Nigerian insurance chief executives and even the regulator needed to seriously engage their workforce in intensive training on the IFRS17.
NAICOM at a recent meeting with directors of various insurance firms in Lagos said that insurance managers could submit their 2022 annual report based on IFRS4 but that their unaudited report for the first quarter of 2023 should be based on IFRS17.
Accounting experts said IFRS 17 is an International Financial Reporting Standard that replaces IFRS 4 accounting for insurance contracts and has an effective date of January 1, 2023.
According to them, IFRS 17 Insurance Contracts is a complete overhaul of an accounting system for insurance contracts, with new requirements for data and processes that impact teams across the organization, including actuarial, accounting, and IT. The IFRS 17 insurance accounting standard, according to accountants, establishes the principles for the recognition, measurement, presentation, and disclosure of insurance contracts. Its objective is to ensure that an entity provides relevant information that faithfully represents those contracts. Such information 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.
It was issued in May 2017 and was billed to apply to annual reporting periods effective from January 1, 2023.
Deloitte’s view
Recently, the Insurance Industry Financial Reporting Working Group (IIFRWG) was set up by the National Insurance Commission to develop guidelines that could be adopted by the Commission for the effective implementation of IFRS 17 in the Nigerian insurance industry. Finance expert Oduware Uwadiae, a partner in charge of the IFRS implementation unit of Deloitte had explained that the IFRS17 if successfully implemented would make such a difference in the insurance industry that whereas currently when liabilities were being measured, they were measured based on events that occurred, the new financial reporting standard would be forward-looking in risk assessment. According to him, the IFRS is looking at the risk of the entire contract and also the contract to the last mile.
He said the current standard used by insurers in their financial reporting only looked at the risk as of today, what risk insurers are having today but that the new standard was going to look at the entire risk from now till the end of the contract.
He said it was such a model that ensures that if an insurer signed a contract today and it was going to expire in the next six years, the insurer had to measure his risk from the date of the commencement of the contract till the end of the six years and as he was measuring it, if the risk was increasing each year, he could recoup the additional loss on the instrument.
Also speaking on the workings and relevance of the IFRS 17, a fellow of the Institute of Chartered Accountants of Nigeria(ICAN) and a management staff of Financial Markets Dealers Quotations (FMDQ), Mr. Ebenezer Nwoji said a major objective of the IFRS 17 is to standardize insurance accounting globally to help users of accounts make sensible comparisons between companies, their performance, their current financial position, and risk exposure.
He said the benefits of IFRS are that it increases transparency and comparability of insurers’ financial statements, and ensures risk-sensitive measurement of insurance obligations to ensure it better reflects economic reality. Allows stakeholders, especially regulators, to gain important insights into the insurance companies’ exposures and financial performance.
He also said IFRS 17, which is released by the International Accounting Standard Board establishes the principles for the recognition, measurement, presentation, and disclosure of insurance contracts within the scope of the standard.
Fitch’s view
On its workings, global rating agency Fitch in its analysis of the model said IFRS 17 introduces a new approach to accounting for insurance contracts, replacing IFRS 4.
The agency said the standard affects any entity issuing insurance contracts that need to report according to IFRS standards. “We believe IFRS 17 will bring greater transparency and consistency across regions. Major Changes in the Income Statement Insurers’ profit recognition pattern, as well as the P&L components, are set to change under IFRS 17. The standard requires insurers to present a market-consistent balance sheet measurement of insurance contracts, with recognition of profit over the period that services are provided”, the rating agency said in its analysis.
On the areas of difference between the current accounting system and the IFRS17 system, Fitch said with the IFRS system, there would be uniformity in accounts reporting style by insurers across the globe.
According to the agency, IFRS17 will ensure that insurers present a market-consistent style of balance sheet in measuring insurance contracts. In addition, it would allow for the recognition of profit over the period that services were provided.
Fitch further said the IFRS reporting system would ensure Change in equity and financial reporting
thus allowing for insurance contract liabilities to be valued at their estimated market value too and also calculated as the present value of future insurance cash flows with a provision for risk.
Fitch further said it would reflect the change in the way and manner of profit identification, pointing out that while profit under the IFRS 4 usually reflects an increase in the first policy years but a lower figure, under IFRS 17, going forward, the development would typically be based on IFRS 17 requirements, unlike the accounting policies that were currently applied to insurance contracts under IFRS 4.
In other words, profitability may be similar but the timing would vary. The agency said over the coverage period of the insurance contract, the most fundamental change would involve profits booked in the income statement. Similarly, the Contractual Service Margin (CSM) concept which entails the unearned profit that an entity expects to generate as it provides services would be used for profit recognition in line with the provision of the insurance services under the contract.
Dividend distribution
According to Fitch analysis, return on equity, return on assets and the combined ratio will remain key ratios in terms of calculating earnings over the lifetime of a contract. However, the parameter value could differ considering separate guidelines for companies switching to IFRS 17.
It further said with the use of new information available under IFRS 17, new financial performance ratios could enhance analysis reflecting a variation on the return on equity and organic capital generation, the net Contractual Service Margin (CSM) would also increase as an additional earnings component, which could resemble ROE calculated on a current IFRS basis. It further said tax represents a significant process of financial statements and would be considered with every step along implementing IFRS 17. Expectedly, IFRS 17 will lead to taxation implications on transition and ongoing calculations that will need to be addressed by insurance entities as well as on indirect taxation.
On the companies’ bottom line, Fitch said IFRS 17 was expected to change the accounting system for all entities that issue contracts within the scope of the standard for insurance contracts.
Reacting to the development a management staff of one of the insurance firms in Lagos, said the migration will no doubt affect many operators and would bring a lot of expenses. According to him, with this system, insurance firms will have to rush to market for the acquisition of new software that will enable them to migrate to IFRS 17.
According to him with the introduction of the IFRS 17 insurance firms will discard the accounting software they used with the IFRS4 to purchase a new one.
He said his firm has already engaged the services of actuarial scientists that will help them ensure proper migration.
Insurance sector analysts said both the regulator and the regulated needed to embark on intensive training of staff and other stakeholders of IFRS17. They said NAICOM was supposed to have gone far in training not only its workforce but also stakeholders, the media, and various company directors. The insurers themselves according to the analysts should engage the services of actuarial scientists in training their workforce on the rudiments and core concept of IFRS.
They advised that the training should be across the board including CEOs, Company Secretaries, and every other staff that matters in the new development.
