Insurers stare at losses as deadline looms for IFRS 17 transition

By Monica MUEMA

Kenyan insurance firms are set to spend hundreds of millions of shillings to implement the IFRS 17 insurance accounting standard into their operations as the deadline for compliance draws near.

While the real cost of implementation by over 40 firms with local operations is less clear, sector’s lobbyist – the Association of Kenya Insurers (AKI) says insurers should be ready to spend ‘big’ in order to meet the IFRS 17 transition requirement that comes into effect on 1 January 2023.

“We now have the report and I can tell you this is not going to be a cheap exercise…most of them now have dedicated teams like actuarial departments to help in the study and implementation of the mandatory requirement,” offered AKI’s CEO Tom Gichuhi in phone interview last Thursday on the level of preparedness by policy providers ahead of the deadline.

The implementation of the International Financial Reporting Standard (IFRS 17) was delayed by one year due to the Covid-19 pandemic.

But the new conditions for reporting rules for underwriters will now see firms set aside substantive budgets towards the exercise – with most companies deficient in actuarial departments, likely to outsource or hire specialists in that field.

The total number of actuaries in Kenya is now estimated at about 68, signaling an ever-increasing demand inspired by new opportunities in various sectors such healthcare, banking and other financial institutions, adding that this is an emerging development away from the previous concentration of demand in the insurance sector.

AKI had in late April hired a consultant to carry out a survey on the level of preparedness of Kenyan insurers to comply with the requirements of the International Financial Reporting Standards (IFRS 17).

The consultant — Kenbright Actuarial and Financial Services, a subsidiary of Kenbright Holdings Ltd returned a 60 percent level of readiness in its market analysis– meaning the market was on-course  to meet the compliance level.

“We got the report last week and the level of preparedness between Kenyan insurance firms is between 50 percent and 60 percent, which is very impressive,” noted Gichuhi.

IFRS 17 will replace IFRS 4 as the financial reporting standard for insurance companies and will be implemented for reporting periods starting on or after 1 January 2023. Any legislative changes impacting tax would need to be finalized prior to that date.

Deloitte’s Insurance Outlook 2022 highlights post-pandemic challenges study, anticipates that, for some, the transition to IFRS 17 will give rise to significant additional day one IFRS profits. Such profit increases will result in increased tax payable on transition which may place certain insurers under severe liquidity strain.

As a result, an insurer will be required to share the performance of underlying contracts with the policyholders, such as in life insurance or investment policies like unit trust investments.

Similar adjustments are ongoing for the banking sector with Kenyan banks on course with the implementation of the IFRS 9 in 2019 that requires them to set aside greater financial provisions for expected credit losses.

IFRS 9 replaced the International Accounting Standard 39, which saw commercial banks provide for projected loan losses rather than those already incurred.

The resultant impact saw lenders reduce their profitability and erode their capital base – which is also expected in the insurance industry.

Kenya’s Central bank granted banks a five-year transition period, beginning January 2018, to fully comply with IFRS 9 in the computation of regulatory capital.