IFRS 17 “Insurance Contract” Implementation in Kuwait
Transport & Logistics Focus
IFRS 17 which stands for International Financial Reporting Standard 17 is an accounting standard developed by the International Accounting Standards Board ("IASB") for insurance contracts which was issued in May 2017 and sets out the principles ....
Law Update: Issue 360 - Africa and Transport & Logistics
Ahmed RezeikSenior Counsel,Transport & Insurance
Passant MansourAssociate,Transport & Insurance
IFRS 17 which stands for International Financial Reporting Standard 17 is an accounting standard developed by the International Accounting Standards Board ("IASB") for insurance contracts which was issued in May 2017 and sets out the principles for recognizing, measuring, presenting, and disclosing insurance contracts in the financial statements of insurance companies. This IFRS 17 requires a company to measure insurance contracts using updated estimates and assumptions that reflect the timing of cash flows and any uncertainty relating to insurance contacts.
The main objective of IFRS 17 is to provide a consistent and comprehensive framework for reporting insurance contracts, while its aim is to improve the transparency and comparability of financial statements across different insurance companies and jurisdictions about a company’s financial position and risk.
Measurement of insurance contracts: IFRS 17 introduces a new measurement approach known as the "building block approach." This approach requires insurers to measure insurance contracts at the present value of the future cash flows expected to arise from the contract.
Contractual service margin (CSM): IFRS 17 introduces the concept of the CSM, which represents the unearned profit that insurers recognize over the coverage period of the insurance contract. The CSM is adjusted over time as new information emerges, reflecting changes in estimates and the passage of time.
Presentation and disclosure: IFRS 17 require insurers to provide enhanced disclosures about insurance contracts, including information about the nature and extent of risks arising from insurance contracts, the impact of insurance contracts on financial statements, and information about insurance revenue and expenses.
Transition requirements: IFRS 17 sets out specific requirements for transitioning from existing accounting standards to the new standard. Insurance companies are required to apply IFRS 17 retrospectively or through a modified retrospective approach, depending on the availability of data and practical considerations.
The implementation of IFRS 17 presents the below several challenges which are facing the insurance companies:
Data requirements: IFRS 17 necessitates the collection and analysis of significant amounts of data, including historical policy and claims information. Insurance companies may face challenges in aggregating and organizing the data in a format that is compliant with the standard. Ensuring data accuracy, completeness, and consistency can be time-consuming and complex.
Contractual service margin (CSM) estimation: Estimating the CSM requires making assumptions about future cash flows, discount rates, claims experience, and other factors. The complexity and subjectivity of these estimates can pose challenges for insurers. Developing robust and consistent methodologies for estimating the CSM is crucial to ensure accuracy and comparability.
System and process changes: Implementing IFRS 17 often requires significant changes to accounting systems, processes, and controls. Insurance companies may need to enhance their existing systems or invest in new technology to capture and report the required data. Integrating data from multiple sources and aligning various systems can be a complex undertaking.
Actuarial expertise: IFRS 17 requires a deeper understanding of actuarial concepts and methodologies. Insurance companies may need to strengthen their actuarial capabilities to comply with the new standard. Acquiring and retaining qualified actuaries can be a challenge, particularly in regions with a limited pool of actuarial talent.
Impact on financial statements and key performance indicators (KPIs): IFRS 17 can result in significant changes to the recognition, measurement, and presentation of insurance contracts. This can impact financial statements and key performance indicators, such as revenue, profit, and capital requirements. Understanding the implications of these changes and communicating them effectively to stakeholders is crucial.
Transition complexities: The transition to IFRS 17 may involve retrospective or modified retrospective application. Insurers must carefully evaluate the appropriate transition approach and consider the practical challenges associated with restating comparative information and adjusting opening balances. Transitioning from existing accounting standards to IFRS 17 requires careful planning and coordination.
Stakeholder communication: Implementing IFRS 17 involves effective communication with various stakeholders, including investors, regulators, and analysts. Insurance companies need to clearly articulate the impact of the standard on financial statements, business performance, and key metrics. Transparent and informative communication is essential to manage expectations and address concerns.
Therefore, it is important for insurance companies to proactively address these implementation challenges by allocating sufficient resources, engaging subject matter experts, and developing a comprehensive implementation plan. Collaboration with auditors, consultants, and industry peers can also provide valuable insights and support throughout the implementation process.
The Insurance Regulatory Unit (“IRU”) which are the regulator of the insurance and the reinsurance companies in Kuwait did not require any specific form for submitting the financial reports, the Kuwait Insurance Law no.125 for the year of 2019 and its executive regulation (“New Insurance Law”) was only aiming to cover the requirements of the financial report. However, the IRU has recently issued the circular no. 2/2023 on 9.3.2023 which enforced the implementation of the IFRS17 as of January 2023 but on several stages, where the IRU required business entities to adopt IFRS 17 when they are preparing their financial report such as the International Account Standards Board (“IASB”) issued the IFRS 17” Insurance Contract” as of 1st of January 2023 to be implemented on three stages.
As a start of implementing the IFRS 17 in Kuwait, the IRU issued a circular no.12 for the year of 2022 requesting the insurance companies and reinsurance companies (“Company/ies”) such as, Takaful Insurance Companies and Takaful Reinsurance Companies, Insurance and Reinsurance Pools; Foreign Insurance Affiliates; and Insurance Professionals to submit a consulting audit certificate including all the information needed to implement IFRS 17 which shall be issued by one of the below auditing companies:
Deloitte Auditors.
PricewaterhouseCoopers.
Ernst & Young.
KPMG.
Baker Tilly.
Bearing in mind that the companies are responsible for providing the IRU with a certificate which proves that one of the consulting offices which have above-mentioned in the IRU circular has reviewed and approved the information mentioned in the first and second stage. However, if the company preferred different consulting office rather than those which mentioned in the circular, then they have to request for an approval from the IRU within 15 working days.
Adding to the above that the companies shall provide the IRU with the analysis report signed and approved by the auditing companies (“Auditors”) and the same should be approved from the board of directors along with the executive management of the company.
As mentioned above, the IRU has issued its circular no. 2 for the year of 2023 on 9.3.2023 which explaining the transitional trails and how the IFRS 17 will be applied in Kuwait where the IRU divided the experimental stages into three stages:
Stage One: Provide the analysis report as mentioned in circular 12 for the year of 2022 where this stage is supposed to be completed.
Stage Two: Set up a plan for implementing such analysis report with taking into consideration the minimum requirements of the administrative side along with the IT requirements.
Bearing in mind that according to above mentioned circular, this stage should be completed on 31 July 2023.
Stage Three: which is divided into two parts:
Part one: the IRU should receive the financial report which covered the first quarter on 14 August 2023.
Part two: The IRU should receive the financial report which covered the third quarter on 14 November 2023.
You will notice from the above, Kuwait is actually started to implement the International Financial Report Standard 17, where they finalized the first stage and looking forward to processing the remaining stages, stage two on 31 July 2023, stage three on 14 August 2023 and 14 December 2023.
In our opinion, we noticed that the IRU is insisting on all entities which are subject to its regulation to start applying for such new standard, and in order to smoothly shifting to this standard, they applied the procedures on several stages to grant the companies the sufficient time to comply with the above-mentioned circulars to avoid penalties imposed by IRU.
Having said that, we cannot deny that there are several challenges which are expected to face the companies when they are applying for the IFRS 17 such as:
Higher cost of acquiring actuarial- driven software license for measuring insurance contracts and synchronization with accounting software.
Scarcity of COFs who have the know-how of the accounting application of IFRS 17.
Scarcity and higher cost of employment of actuaries.
Given the complexity and significance of the changes introduced by IFRS 17, it is advisable for all insurance companies to seek guidance from accounting and consulting firms who are expertise in IFRS implementation. These firms can assist in assessing the impact of IFRS 17 on their financial statements, determining the required system and process changes, and developing an implementation plan tailored to their specific circumstances.
Finally, we are happy to see that it is the first time to have a single IFRS accounting model applies to all types of insurance contracts. In addition, it 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 is seen as a major deterrent by global investors, implementation of the new standard is expected to facilitate an increase in capital and finance in the insurance industry.
We would like to welcome all the insurance / reinsurance companies not to hesitate to seek for any advice regarding the same.
For further information,please contact Ahmed Rezeik or Passant Mansour
Published in August 2023
