Accountants moot new insurance reporting rules

Insurance Regulatory Authority acting CEO Godfrey Kiptum is expected to oversee sector changes . (Photo: File/Standard)

The International Accounting Standards Board (IASB) has issued new guidelines for insurance contracts.

The move will compel insurers to account for insurance obligations using current values instead of historical cost.

The new standard, known as International Financial Reporting Standard 17 (IFRS 17) replaces the 2004 standard called IFRS 4. According to IASB Chairman Hans Hoogervorst, IFRS 4 was not comprehensive, leading to different approaches in different places for various types of insurance.

“If you look around the world, we see the use of myriad national standards, which are divergent and often a bit antiquated, so the quality of information used is often substandard and certainly not comparable,” IASB Chairman was quoted as saying in news wires. The new rules introduce a single accounting language for insurers in the financial reporting, in an industry whose accounts have often been labelled as ‘black box’.

With IASB warning that some countries may experience more changes than others, it has given insurance firms three years as grace period. Full adoption will come in January 2021.

Changes are expected for life insurance firms as they will have to factor in the aspect of time value for money.

Under the new standards, the insurance industry will have to change the way in which liabilities are measured. They will in addition be providing higher levels of disclosure compared to existing financial reporting processes.

According to audit and advisory services firm Deloitte, the new standards will stretch the budgets of insurance firms since it comes with changes in actuarial and finance reporting processes, systems and data of insurers. “This effort will likely generate significant implementation costs and resource requirements,” said Deloitte in an email statement.

“Insurers will thus need take these into account in their strategic and budget plans leading to the 2021 effective date.” The firm adds that life insurers will require more resources than general insurers to implement the standard.

This, it explains, is due to long-term nature of life insurance policies, together with the investment related guarantees for these policies, which will require better sets of accounting and actuarial data.

Life insurers will also have to disclose in their balance sheets the value of future profits expected from existing life insurance policies.

This will allow potential investors evaluate future profit potential of a life insurer.

Ernst & Young predicts the impact of the new standard will be felt even before implementation date. “Investors are likely to ask for expected impact ahead of the implementation date, and the decisions by insurers... will have impact on future profitability,” it said.