Run for cover will need longer strides: Insurance experts RAGHU MOHAN
They say one can expect a deadline extension for the implementation of IFRS 17, given the Covid pandemic
“INSURANCE FIRMS WRITE POLICIES WITH SPECIFIC AND EXOTIC RISKS. IT IS ASSUMED THAT THEY CAN MANAGE THE RISK, AS WELL. WITH IFRS 17, THEY WILL HAVE TO CHANGE THE WAY THEY GO ABOUT IT” NILESH SATHE
FORMER BOARD MEMBER, IRDAI
Insurers will have to take a fundamental relook at the way they do business to align with IFRS 17 — International Financial Reporting Standards-2017 — which are set to kick in from January 1, 2023.
“Insurance firms write policies with specific and exotic risks. It is assumed that they can manage the risk, as well. With IFRS-17, they will have to change the way they go about it,” said Nilesh Sathe, former board member of the Insurance Regulatory and Development Authority.
Sathe explained the accounting standards will combine the current measurement of future cash flows with the recognition of profit over the period of contracts. It calls for the presentation of insurance service results — including the presentation of insurance revenue — separately from insurance finance income or expenses. And insurers will have to make a choice whether to recognise all insurance finance income or expenses in profit or loss; or recognise some of the same in other comprehensive income.
Sathe was part of a panel discussion at Business Standard’s webinar, organised with SAS, on ‘IFRS17: From Compliance to Business Transformation’. Others on the panel were Asha Murali, appointed actuary at ICICI Prudential Life Insurance, Niraj Shah, chief financial officer (CFO) at HDFC Life Insurance, Avdhesh Gupta, appointed actuary and head data sciences at Bajaj Allianz Life, Mandeep Mehta, executive vice-president and deputy CFO at Max Life Insurance, Subhrajit Mukhopadhyay, executive director, Edelweiss Tokio Life Insurance, and Joshua Teng, senior solutions advisor-risk research and quantitative solutions at SAS. The discussion was moderated by Tamal Bandyopadhyay, consulting editor of Business Standard.
“This (shift to IFRS 17) is very complicated and has many nuances. It will give you more insights into the business. It’s not to suggest we are quite there, but we will get access to more granular information. Rather than just being reactive to market developments,” said Murali.
“There will be a need to better educate customers and shareholders, and the board of directors about the way data is collected and processed,” noted Shah. He felt that given the magnitude of changes that IFRS 17 will entail, “there will be a need for a time-frame to transition and do a dry run of the new framework, as well.”
And this will mean heavy capital pressure — for human resources, and investments in the data domain. More so, given that the hunt for such talent will come from the non-financial sector as well. What was unsaid was that the pandemic has the potential to strain insurance companies, even as claims rise. And that it will not be unreasonable to expect an extension in the deadline for the implementation of IFRS 17. It has another dimension, as well — the quality of the information that insurers put out will have a bearing on the capital which investors will provide as comparisons among players become more transparent.
The history of IFRS17 is as follows. The International Accounting Standards Board (IASB) had in March 2004 issued IFRS-4 Insurance Contracts as an interim standard. This was to be in place until IASB completed its project on insurance contracts and allowed insurance companies to have varied norms for insurance contracts in line with their national accounting protocols, albeit subject to relatively limited improvements and specified disclosures. In May 2017, IASB came out with IFRS 17, which replaced IFRS 4. In June last year, amendments were made to IFRS 17 to help insurance companies transit without unduly disrupting its implementation.
“What we are talking about is a common business language. Take for example data. It is not merely a question of how data is being reconciled but is being generated too,” noted Gupta.
It will lead to a “better appreciation of market risks. As to how you value the profitable and non-profitable business, and then make a subjective decision,” opined Gupta. He added that Max Life had taken on the cost to get its staffers IFRS certified. “And they (personnel) were not only from the finance department.” This is a clear signal that insurance companies will have to invest to upgrade the skill-sets of people they employ in the days ahead.
Insurance companies can no longer be structured in silos. “It (IFRS 17) will also call for a closer working of the people who run the liabilities and asset business,” observed Mukhopadhyay. “This will also call for investments in the business from a resources standpoint, and help better synergies and deliverables. While it may not lead to changes in the product design, in the short-run, what firms push may need a relook,” he added. That is because insurers are not able to hedge their risks in matching assets; they will have to weigh the option of taking exposure to derivatives and the returns they promise to policyholders.
In effect, the challenge is to manage both internal changes to the grind of running the business. And like in other parts of the financial system, it will hasten the need to hire from more diverse fields. And those with the right résumés will be a hit with head-hunters. “I believe that insurance companies will do well to ensure that they set up their pillars right. You can’t put up a skyscraper if the foundation is weak. So get your priorities right,” said Teng.
The run for cover will leave a lot more short of breath.