Insurance leaders race to address IFRS17 implementation challenges

Cynthia Ezekwe 

Facing the uncharted waters of the International Financial Reporting Standard 17 (IFRS 17), the insurance industry is navigating a course through complexity and uncertainty. With the goal of clarity, accuracy, and success, experts are collaborating to ensure a smooth transition.

The International Financial Reporting Standard 17 is the new accounting standard for insurance contracts, designed to provide greater transparency and consistency in the way insurance companies report their financial results. Under the new standard, insurance contract liabilities are required to be reported at their fulfilment value, which is the present value of all future cash flows related to the contract. This provides a more accurate picture of the company’s financial position and performance, as it takes into account both current and future cash flows, rather than only those that have already occurred. 

IFRS 17’s primary goal is to ensure consistent and transparent reporting of insurance contracts, so that users of financial statements have access to high-quality and comparable information. The new standard requires companies to recognise insurance contracts as either assets or liabilities on their balance sheets, based on the future cash flows associated with those contracts. This is a significant departure from the previous standards, which only required companies to recognise contracts that were already certain to result in a cash flow. 

With the  introduction of IFRS which took effect on January 1, 2023, the insurance industry is facing a period of major change. While the new standard brings a host of challenges, such as allocating expenses and ensuring accurate reporting, it also presents significant opportunities.

In response to the challenges and opportunities presented by IFRS 17, Mettlehouse Consulting Limited, a financial compliance and management consulting firm, convened a roundtable event, “IFRS 17 Insurance Industry Roundtable-Series 1.” The event brought together various experts and consultants from the insurance industry to discuss ways to meet the demands of the new reporting standard.

In his welcome address at the event, Barineka Thompson, chief executive officer of Mettlehouse Consulting Limited, emphasised the importance of the new standard in enhancing transparency and comparability in the financial statements of insurers. He noted that IFRS 17 improves the risk-sensitive measurement of insurance obligations, which better reflects the economic reality of the insurance industry. The new standard, he said, also provides useful information to users of insurers’ financial statements, such as investors and analysts. 

“We all know that NAICOM [National Insurance Commission], under the leadership of the honourable commissioner for insurance, set up the insurance industry reporting standard. We can all attest today to the credit of the commissioner that for the first time we have an illustrative financial reporting template for use in our industry which sets a premium  pace. And so if we  want to compare companies’ financials it becomes easier now than ever before,’’ he said. 

Thompson noted that since the release of IFRS 17 in 2017, a lot has happened in the West African region, with Nigeria leading the way in its implementation. According to him, while other countries are still struggling to get up to speed with the new standard, Nigeria has been at the forefront of adoption and is well on its way to meeting the requirements.

According to Thompson, the working group has identified several challenges that companies face while implementing IFRS 17. He noted that while they have developed potential solutions to these challenges, they recognize the importance of working with the insurance industry, the consulting community, and the National Insurance Commission (NAICOM) to develop comprehensive and effective solutions. 

During his keynote address, Sunday Thomas, the commissioner for insurance, emphasised the need for harmonised financial reporting practices across the industry. He commended Mettlehouse’s efforts in improving financial reporting practices and highlighted the importance of such initiatives in developing a strong and resilient insurance industry.

According to Thomas, the implementation of IFRS 17 will have a number of impacts on the insurance industry, including: improved comparability and relevance of insurance contract liabilities measurement; a more intuitive presentation of financial performance and position; enhanced disclosure and transparency; and a clearer distinction between insurance activities and investment activities. Thomas noted that achieving these impacts will require close collaboration between all stakeholders, including insurers, the regulator, and the consulting community.

“The commission is committed to the harmonisation of financial reporting practices among licensed insurance operators in Nigeria, so that we can achieve the needed and necessary comparability among industry players which remains the key objectives of IFRS 17,’’ he said. 

During his presentation, titled “Industry Perspectives on IFRS 17 Operating Expense Measurement, Recognition, and Allocation Challenges,” Emmanuel Otitolaiye, chief financial officer  at Linkage Plc, outlined the main objective of IFRS 17, which is to standardise insurance accounting globally and enable users of accounts to make meaningful comparisons between companies, their performance, financial position, and risk exposure. Otitolaiye highlighted the complexities and challenges of implementing IFRS 17, noting that it is a significant change for the insurance industry.

Otitolaiye noted that IFRS 17, which was issued by the International Accounting Standards Board, establishes the principles for the recognition, measurement, presentation, and disclosure of insurance contracts that fall within the scope of the standard. 

Speaking on cost  allocation within the industry, he said, “Of course, one of the important aspects of IFRS 17 is the measurement and the disclosure. So, in essence,  measurement has to be done accurately, as well as the disclosure and classification. This is so because you must get to a point where you must calculate  your Liability for Remaining Coverage (LRC).’’

Otitolaiye added that to properly implement IFRS 17, insurance companies must analyse their costs in great detail, breaking them down to the basic minimum level. This, he explained, allows them to assign costs to specific policies and determine whether they are directly attributable to the product, either as acquisition costs, maintenance costs, or insurance savings. He emphasised that this level of analysis is critical for accurate financial reporting under the new standard.

On the flipside, Otitolaiye noted that the successful implementation of IFRS 17 may be hindered by several challenges, including poor data governance and policy practices, a reliance on manual processes that result in errors, a lack of experience and expertise in IFRS, and the cost of implementation.

“Some of the challenges that we face as an industry are caused by the poor management capabilities of manual excel. Basically we keep our record on excel, and there is limitation to which excel can do. And because excel is manual, allocation becomes difficult. Drilling down to granular level becomes difficult because our corporations are lagging even manually, and because of this, there is poor cost record methodology,’’ the Linkage CFO noted.

According to Otitolaiye, a lack of expertise and experience with IFRS among insurance professionals is a key challenge in implementing IFRS 17 in Nigeria. He noted that many companies do not have the accounting systems and software required to handle the new reporting requirements, or the know-how to properly implement the standards. He stressed that without this expertise,companies risk inaccurate financial reporting, which could have significant implications for their businesses.

Otitolaiye also noted that the lack of adequate funding is a significant challenge to the successful implementation of IFRS 17 in the insurance industry. This is as many companies may not have the budget to invest in necessary changes such as upgrading accounting systems and training staff.

To address the challenges of implementing IFRS 17 in the Nigerian insurance industry, Otitolaiye suggested several solutions. He mentioned that training for industry professionals is crucial to ensure they have the knowledge and skills to implement the new standards effectively. He suggested financial and technical support to help companies make the necessary changes to their systems and processes.  He also highlighted the importance of raising awareness concerning the benefits of IFRS 17 to encourage buy-in from industry stakeholders.

Furthermore, Otitolaiye highlighted the need for the Nigerian insurance industry to invest in technology and software that can help with revenue tracking and reporting. He also encouraged insurers to upgrade their accounting systems from IFRS 4 to IFRS 17, which is the new accounting standard for insurance contracts.

According to Otitolaiye, data identification and sourcing are also crucial to implementing IFRS 17 successfully. In addition, he noted the importance of establishing a robust reporting template to ensure that relevant information is communicated to stakeholders in a timely and accurate manner. This includes providing transparent and easy-to-understand reports that are aligned with the new standards.