BY OXFORD BUSINESS GROUP
As insurance companies prepare for the most significant change in global accounting standards in close to two decades, how well prepared are operators in emerging markets for the transition?
On January 1 the International Financial Reporting Standard 17 (IFRS 17) will come into effect.
Replacing the previous standard, IFRS 4, which was issued in 2004, IFRS 17 aims to standardise insurance accounting globally in order to improve comparability and increase transparency by applying an uniform approach. This is expected to help those in the industry better understand individual insurers’ financial position, performance and risk exposure.
The forthcoming standard will be the first time that a single IFRS accounting model applies to all types of insurance contracts; it also seeks to align insurance accounting as much as possible with the general IFRS accounting of other industries.
Given that a lack of transparency and consistency in financial reports was seen as a major factor discouraging global investors, the implementation of the new standards is expected to facilitate an increase in capital and finance in the insurance industry.
The standards for IFRS 17 were developed by the International Accounting Standards Board, an independent body of the IFRS Foundation, with 144 jurisdictions fully adopting the standards to date.
While seen as a positive step towards aligning accounting practices and improving transparency, the introduction of the standards poses several challenges for insurers in emerging markets.
At a fundamental level, the transition to IFRS 17 will require a large number of insurance firms to alter their reporting practices.
In addition to changes to financial statement presentation, industry analysts expect the new standards to be accompanied by considerable data and IT upgrades, as they require greater depth and quality of data to fulfil.
These requirements present challenges for emerging markets, as insurers seek to balance the financial costs and human resource demands with the benefits of adoption.
Preparation in emerging markets
As the implementation date for IFRS 17 nears, the level of readiness among insurers varies by region, country and company.
Indeed, in a May report assessing MENA countries’ readiness, US credit ratings agency AM Best noted that despite the fact that few companies in the region were fully prepared for the transition, the region’s more mature financial markets had demonstrated a greater level of preparedness, particularly with regards to larger market-leading insurers.
Saudi Arabia has been particularly proactive on this front, with sector authorities requiring insurers to comply with a series of preparation and implementation milestones. For example, in December 2018 the Saudi Arabian Monetary Authority – now known as the Saudi Central Bank – launched a four-phase plan for the insurance sector to transition to IFRS 17.
In countries with less regulatory oversight and engagement with IFRS 17, AM Best notes that the level of preparedness has been less consistent, and that the transition has been largely market-driven and led by large insurers.
A similar market-driven approach has been seen in Latin America. Indeed, many insurers across the continent have begun implementing IFRS 17, despite the fact that Brazil, Colombia, Mexico and Peru are not signatories.
In some cases, the region’s insurance companies operate internationally, in markets where IFRS 17 compliance is required. In other cases, the insurers either have or are subsidiaries of foreign insurance companies, in which case they have already been IFRS compliant for a number of years.
Mixed readiness in Asia-Pacific
The Asia-Pacific region, for its part, hosts some of the world’s most prepared countries, led by South Korea, but also includes Australia, China, New Zealand and Singapore, which are all expected to implement IFRS 17 by the beginning of next year.
Meanwhile, in another example that underscores the relative preparedness of countries with mature financial services sectors, Malaysia is on track to meet the 2023 implementation deadline.
Despite this progress, several other countries are tipped to experience delays and difficulties in implementing IFRS 17 standards.
For example, Thailand has delayed its start date to January 1, 2024, while Indonesia and the Philippines have both pushed their implementation dates to 2025 in order to give the insurance industry more time to prepare.