IFRS 17, “Insurance Contracts,” was issued to enhance principles of transparency and integrity in the financial reporting process related to insurance contracts, optimize the quality of disclosure, and set controls for providing clear and accurate data for the decision-making process.
Emphasizing its commitment to delivering corporate social responsibility, Baker Tilly audit firm, under the sponsorship of the Kuwait Insurance Federation, will hold a FREE workshop entitled IFRS 17 “Insurance Contracts”: Legislation, Application, and Challenges, on Wednesday, 22 May 2024 at Jumeirah Messilah Beach Hotel. The workshop will be attended by an elite of CEOs, actuaries, CFOs, and underwriting managers in KIF member companies, in addition to a group of other experts in the insurance industry, to highlight the IFRS 17 aspects of legislation, application, and challenges.
From Legislation Perspective
The International Accounting Standards Board issued IFRS 17 “Insurance Contracts” in 2017, with an application effective from 1 January 2021. However, the application was postponed to 1 January 2023 based on the request of international insurance companies to be provided an appropriate grace period to align with the standard’s requirements.
In the State of Kuwait, in accordance with Companies Law No. 1 of 2016 and its Executive Regulations, as amended, the International Financial Reporting Standards should be adopted and applied by all companies operating in the State of Kuwait.
In this context, Kuwait Insurance Regulatory Unit issued the following circulars regarding the application of IFRS 17:
- Circular No. 12 of 2022 regarding the Application of IFRS 17 “Insurance Contracts,” which required insurance companies to adopt the Standard.
- Circular No. 2 of 2023 regarding the Application of IFRS 17 “Insurance Contracts,” which required insurance companies to observe the timeframe for the dry run transitional phase of the Standard implementation. This included developing a plan to implement the gap analysis report by 31 July 2023, the first dry run of Q2 financial statements by 14 August 2023 and the second dry run of Q3 financial statements by 14 November 2023.
- Circular No. 4 of 2023 extending the deadline for submission of financial statements as per IFRS 17 for Q1 2023 to 13 July 2023.
From Application Perspective
Insurance companies initiated the application of IFRS 17 as per the requirements and timeframe set by the Insurance Regulatory Unit, taking into account the requirements outlined in the Standard itself.
The IFRS 17 application process can be summarized as follows:
-
Assessment and planning
The insurance companies initially assessed the impacts that IFRS 17 would have on their operations and financial reporting. This included analyzing their existing accounting practices, systems, and processes to identify the areas that needed to be updated or modified and developing a detailed implementation plan.
-
Gap analysis
Once the assessment was completed, insurance companies conducted a gap analysis exercise to identify gaps between current practices and the IFRS 17 requirements. This helped insurers understand the scope of changes required and the resources to be deployed for the implementation.
-
Data and systems enhancement
IFRS 17 application required extensive enhancements to data management systems and processes so that insurance companies would have the data infrastructure enabling them to collect, store and analyze the information required to meet the new requirements of IFRS 17, including the initial recognition of insurance contracts, acknowledging the onerous contracts, and releasing the necessary disclosures.
-
Actuarial and financial modeling
Insurance companies developed new actuarial models and financial reporting frameworks to align with the IFRS 17 requirements. This included measuring insurance contract liabilities, cash flows, risk adjustments, etc.
-
Process redesign
IFRS 17 required changes to the existing processes and procedures related to accounting for insurance contracts, financial reporting and disclosures. Therefore, insurance companies reconsidered the policies and procedures in place to ensure compliance with the new requirements and enhance efficiency and accuracy.
-
Training and Awareness
Insurance companies have held extensive training programs to train their employees in the application of the new Standard and its resulting implications in relation to their job roles and responsibilities. The insurers also provided awareness sessions to all stakeholders with a view to updating them on the new changes and implications resulting from the application of the Standard.
-
Testing and validation
As part of IFRS 17 implementation, insurance companies conducted thorough and rigorous testing and validation of their accounting systems and processes to ensure quality, accuracy and reliability, including performing a dry run for issuing financial statements and analyzing scenarios to verify the results under different scenarios.
-
Monitoring and compliance
After completing the implementation of IFRS 17, insurance companies continued to monitor and assess their compliance with the standard requirements on an ongoing basis. This includes evaluating the effectiveness of internal controls, addressing any issues or challenges that emerged in the course implementation, and making the necessary modifications to ensure continued compliance with the requirements of the Standard.
In a related context, the IFRS 17 application proceeds as follows:
-
Initial recognition of insurance contracts
Insurance companies recognized the group of insurance contracts they issue from the earliest of the following:
- The beginning of the coverage period of the group of contracts;
- The date when the first payment from a policyholder in the group becomes due, and
- for a group of onerous contracts, when the group becomes onerous.
-
Recording the accounting entries for the premium allocation approach (PPA)
Insurance companies have recorded accounting entries according to the premium allocation approach (PPA).
-
Presentation of financial statements
Insurance companies have modified the presentation of financial statements in accordance with the IFRS 17 requirements.
-
Disclosures
Insurance companies incorporated the necessary disclosures to comply with the IFRS 17 requirements, which included the following:
- Disclosures on recognized amounts
- Material estimates disclosures
- Risk disclosures
Additionally, various departments within insurance companies play specific roles in implementing IFRS 17, including the following:
-
Financial Department
- Full understanding of IFRS 17, its requirements, and accounting options
- Aggregating contracts and updating the accounting system’s chart of accounts (COA).
- Updating administrative expenses distribution approach.
- Restating the financial statements for the year ended in December 2022 to reflect the IFRS 17 variables.
-
Actuarial Department
- Setting average estimates for assumptions and reserves
- Cashflows and risk adjustment
- Determining discount rates
- Onerous contracts and their related reserves
-
Information Technology Department
- Aggregating contracts according to underwriting periods
- Upgrading the accounting systems for administrative expenses and their classification
- Disclosure requirements, particularly those related to reinsurance and risk management.
IFRS 17 Challenges
The implementation of IFRS 17 has posed a range of challenges for insurance companies, varying with each company’s level of preparedness to meet the standard’s requirements. Broadly speaking, these challenges include:
-
Operational and Technological Challenges:
Many insurance companies have encountered various operational and technological hurdles due to IFRS 17, which mandates alterations to their accounting systems and processes. This includes adjustments to the automated software used to record and manage financial data to comply with the standard’s new requirements.
-
Shortage of Specialized Technical Personnel:
A number of insurance companies have struggled with the lack of in-house actuaries to handle the actuarial tasks required for measuring insurance contracts, whether for less or more than a year and for classifying insurance contracts based on specific services. To address this shortage, many of these companies have turned to external sources, outsourcing these actuarial tasks to specialized and licensed firms.
Additionally, several insurance companies have encountered challenges stemming from a lack of knowledge and technical expertise among their human resources in relation to implementing IFRS 17, affecting both operational teams and those in financial and accounting departments.
-
Data and Information Quality Issues:
As companies began implementing IFRS 17, significant gaps became evident in the quality of the data and information used to prepare financial statements. Additionally, discrepancies emerged between the comparative figures in the trial balance and the numbers extracted from the insurance automated engine, largely due to the companies’ failure to make the necessary adjustments.
-
Assessment of Risks and Reserves
IFRS 17 includes specific guidance on methods for assessing risks and required reserves, which requires performing complex and precise analysis to assess the tolerated risks and estimate the required reserves.
-
Changes in Financial Reporting and Disclosures
IFRS 17 requires changes in the way financial statements are presented and financial disclosures provided to shareholders and investors, which requires insurance companies to amend their COAs and accounting policies for preparing reports and financial statements and improve disclosure procedures.
-
Effect of Estimates and Financial Differences
IFRS 17 includes the use of certain estimates in evaluating risks, reserves, and discounted cash flows, which may result in differences in the declared financial value and expected values of insurance transactions.
-
Challenges related to innovative insurance products
Certain insurance companies have faced challenges when applying IFRS 17 to novel and unconventional insurance products, necessitating the creation of new procedures and techniques for their assessment and analysis.
-
Deadline Challenges
Several insurance companies experienced unexpected pressure to comply with the regulatory deadlines for submitting reports and financial statements under the IFRS 17 requirements, requiring additional resources and substantial effort to ensure the proper application of the standard.
Given these circumstances, it’s evident that everyone involved in the insurance sector must intensify efforts to tackle the challenges arising from the implementation of IFRS 17. This should help enhance the quality and reliability of financial statements, thereby contributing to the stability of the insurance industry in Kuwait and elevating the quality of services provided to clients.