Insurers face costly transition to IFRS financial reporting

The cost of compliance with the new financial reporting standard has come with huge costs for insurance firms which may be forced to either merge or sell their businesses to third parties.

Effective date for the transition to the International Financial Reporting Standard (IFRS-17) was January 1, 2023, but insiders say the companies are financially fatigued and facing implementation challenges, especially with a shortage of actuaries.

An actuary is a business professional with advanced statistical skills who deals with the measurement and management of risk and uncertainty.

Accounting software

Speaking to the Business Hub, Sammy Muthui, Minet Kenya Insurance Brokers Ltd CEO said in addition to a shortage of actuaries, the cost of actuarial and accounting software required may be out of reach for some insurers.

Late last year, David Limo, head of the IFRS 17 Working Party at The Actuarial Society of Kenya (Task) said small insurers are struggling to retain or hire actuaries owing to higher costs, while multinationals have also been faced with the exit of their employees.

“There is a lot of movement of actuaries in the insurance world, some even going to the UK. The new standards are complex and forcing companies to rework their resourcing,” he said.

The standard also requires an insurer to have a lot of data on the insurance policies that they issue and some insurers may not have kept all the required records of their policies, according to Muthui.

He said insurance companies in Kenya may also be fatigued by the introduction of some significant new requirements and the cost of compliance involved.

“Yes, it is possible that the cost of compliance may be too great for some insurers and they may opt to merge or sell their business to another party,” added Muthui.

He said fatigue started with the introduction of risk-based capital in 2014 and the requirement for insurers to increase their capital to Sh600 million for general insurers and Sh400 million for life insurers.  “IFRS-17 was thereafter introduced which also required significant investments in human and IT resources from insurance companies,” Muthui added.

The standard is meant to bring uniformity in how insurance companies prepare their Financial Statements.

Muthui said due to the shortcomings of the IFRS 4 standard, many different local Generally Accepted Accounting Principles (GAAP) were developed.

It thus became difficult for investors and analysts to compare the financial performance of insurance companies in the US to those in the UK for example.

“Also for companies operating across various jurisdictions, it was difficult to consolidate the Financial Statements from various jurisdictions,” Muthui said.