How prepared are emerging market insurers for IFRS 17?

As insurance companies prepare for the most significant change in global accounting standards in nearly two decades, how well prepared are operators in emerging markets for the transition?

On 1 January, 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 to improve comparability and increase transparency by applying a uniform approach. It is hoped that this will help those in the industry to better understand the financial position, performance and risk exposure of individual insurers.

The forthcoming standard will be the first time that a single IFRS accounting model will be applied to all types of insurance contracts; it also seeks to align insurance accounting as much as possible with general IFRS accounting in other industries.

Since lack of transparency and consistency in financial reporting was seen as a major factor discouraging global investors, the implementation of the new standards is expected to facilitate increased capital and funding 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 having fully adopted 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 companies to change their reporting practices.

In addition to changes in 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 comply.

These requirements present challenges for emerging markets as insurers seek to balance the financial costs and human resource demands with the benefits of adoption.

As the IFRS 17 implementation date approaches, the level of preparedness among insurers varies by region, country and company.

Indeed, in a May report assessing the readiness of MENA countries, US credit rating agency AM Best noted that, although few companies in the region were fully prepared for the transition, the region's more mature financial markets had demonstrated a higher level of readiness, particularly with respect to the largest market-leading insurers.

Saudi Arabia has been particularly proactive on this front, with industry authorities requiring insurers to meet a number of readiness and implementation milestones. For example, in December 2018, the Saudi Arabian Monetary Authority, now known as the Central Bank of Saudi Arabia, launched a four-phase plan for the insurance sector to transition to IFRS 17.

In countries with less regulatory oversight and commitment to IFRS 17, AM Best notes that the level of preparation 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 observed in Latin America. Indeed, many insurers across the continent have started to implement IFRS 17, even though Brazil, Colombia, Mexico and Peru are not signatories.

In some cases, insurance companies in the region operate internationally, in markets where compliance with IFRS 17 is required. In other cases, insurers have or are subsidiaries of foreign insurance companies, in which case they have been compliant with IFRS for several years.

The Asia-Pacific region, meanwhile, is home to some of the world's most prepared countries, led by South Korea, but also including Australia, China, New Zealand and Singapore, which are expected to implement IFRS 17 early next year. 

Meanwhile, in another example highlighting the relative readiness of countries with mature financial services sectors, Malaysia is on track to meet the 2023 implementation deadline.

Despite this progress, several other countries are expected to experience delays and difficulties in implementing IFRS 17.

For example, Thailand has delayed its start date to 1 January 2024, while Indonesia and the Philippines have pushed back their implementation dates to 2025 to give the insurance industry more time to prepare.