2023: A new dawn in financial reporting of insurance contracts
2023: A new dawn in financial reporting of insurance contracts
2023 is finally here, and it will mark a new dawn in financial reporting of insurance contracts. It will not only enhance the reporting within the insurance industry it will also ensure that insurers accounts are:
•Comparable between countries and industries
•Transparent and consistent
This is likely to make it easier for investors to make informed decisions about whether to invest in insurance companies or not.
East African (re)insurance companies are at different stages of their implementation journeys, with some only starting now and others have already performed their dry runs. Generally, IFRS 17 will provide insurance companies with an opportunity to refine their reporting and make better decisions going forward.
The accounting information under IFRS 17 is granular and disclosure requirements are more detailed. This additional information allows management and investors to drill down in accounts to understand how particular lines of business are doing. Some of the examples are:
•Performance is split between underwriting and investment activities
•Profit or losses are split at a “group of contracts” level meaning that profitability can be looked by year of entry and portfolio of risk. This will aid management in making decisions at a granular level
•Since losses are reported when “facts and circumstances” show that a group of contracts are loss making, it will “force” companies to be careful about the way they price their business and push companies to a risk-based pricing approach.
•Allocation of expenses is also at a group of contracts level under IFRS 17, further enhancing an insurance company’s ability to keep track of expenses it incurs in administering insurance business.
Investors have generally struggled to understand and compare insurance companies accounts to accounts of companies in different industries and different countries. Comparability is enhanced because:
•Under IFRS 17 companies recognise profits as and when insurance services are rendered, which is consistent with accounts of other industries
•The measurement of liabilities has defined rules that companies must follow, unlike IFRS 4 where different insurance companies could use different methods to value their liabilities.
Generally, under IFRS 17, accounts are more transparent compared to IFRS 4. Insurance companies are expected to report their profits at group of contract level, which is a significant shift from the reporting requirements under IFRS 4 where accounts were at an entity level. Additionally, under IFRS 17, the detailed disclosure requirements enhance transparency by allowing users of the accounts of an insurance company to drill down to a group of contracts level. These requirements also enable users to compare key assumptions and methodologies insurance companies have used to calculate their liabilities as well as the risks inherent within the entity.
IFRS 17 presents more opportunities than costs for (re)insurance companies. It is important for insurance companies to embrace the new standard to ensure they remain relevant in a fast paced and vibrant insurance market. It is expected that most companies in East Africa will comply with IFRS 17 by the end of 2023, with some already prepared to report IFRS 17 financials from the 1 January 2023. With the enhance reporting requirements under IFRS 17, the future looks bright for the insurance industry in East Africa.
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