By Michael F. Rellosa
The Philippine Insurance Industry is gearing up for the January 2025 start of the IFRS17, an international financial reporting standard for insurance contracts locally known as PFRS17. However, in a survey conducted by PIRA, its trade association, 39 out of its 55 member companies have responded, saying only 16 out of the 39 companies are ready with a process to be able to provide the quantitative impact assessment that IFRS17 calls for, with the remaining 23 in various stages of being ready. It must be noted that IFRS17 has significant implications for the general insurance industry.
Here are some of the pros and cons:
Pros
1. Increased transparency. IFRS 17 enhances transparency and comparability in financial statements. It requires insurers to provide more detailed information about their insurance contracts, which can improve the understanding of their financial position for stakeholders.
2. Improved consistency. The standard aims to unify accounting practices across different jurisdictions. This consistency can simplify the assessment of insurers' financial health and performance, especially for multinational companies.
3. Enhanced risk management insights. By requiring insurers to disclose more detailed information about the timing and amount of future cash flows, IFRS 17 encourages better risk management practices and helps insurers manage their liabilities more effectively.
4. Better performance measurement. The standard allows for a more accurate reflection of profit over time, aligning revenue recognition with the insurance coverage period. This helps stakeholders evaluate an insurer's performance on a more consistent basis.
5. Focus on future cash flows. IFRS 17 emphasizes the importance of future cash flows, which can lead to improved forecasting and planning capabilities for insurers.
Cons
1. Implementation costs. The transition to IFRS 17 involves significant costs related to system upgrades, staff training and potential consulting fees. For smaller insurers, these costs can be particularly burdensome.
2. Complexity of implementation. The standard is complex and may require considerable effort to interpret and implement correctly. This could lead to inconsistencies in application, particularly among smaller firms or those with less robust infrastructure.
3. Increased regulatory scrutiny. The detailed disclosures required by IFRS 17 could expose insurers to increased regulatory scrutiny and potential reputational risks.
4. Volatility in financial statements. The new measurement models might introduce volatility in reported profits due to changes in assumptions or market conditions, which can be challenging for investors and analysts.
5. Operational challenges. Insurers may face operational challenges as they adjust their accounting, risk management, and actuarial processes to comply with the new standard. This can also put additional strain on resources during the transition period.
As if this was not enough, the industry is still expected to report its financials under multiple frameworks, such as margin of solvency and risk-based capital (RBC) frameworks. In the not-too-distant future, we would have to factor in the own risk and solvency assessment (ORSA) and environmental, social and governance (ESG) criteria. There is no doubt that these can provide a comprehensive view of an insurer's financial health, but there are several downsides and challenges associated with this approach:
1. Complexity and confusion. Multiple frameworks can lead to complex reporting processes that may confuse stakeholders, including regulators, investors and policyholders. Each framework has its own metrics, requirements, and calculations, which can make it difficult to provide a clear and consistent narrative about the insurer's financial position.
2. Increased costs. Maintaining compliance and preparing reports under multiple frameworks can lead to increased administrative costs. Insurers may need to invest in additional resources, including specialized staff, software and external consultants, which can strain operational budgets.
3. Regulatory overlap. There may be regulatory overlaps and conflicts between the various frameworks. For example, different frameworks might have conflicting capital requirements or solvency assessments that could create confusion for both the insurer and regulatory authorities.
4. Focus dilution. Insurers might divert attention and resources away from core business operations to focus on meeting the varying demands of multiple reporting frameworks. This could potentially hinder strategic decision-making and operational efficiency.
5. Inconsistency in risk assessment. Different frameworks may assess risks in varying ways, leading to inconsistencies in how an insurer's risk profile is portrayed. This can result in stakeholders misinterpreting the insurer's overall risk exposure and financial stability.
6. Data management challenges. Reporting under multiple frameworks requires robust data collection, management and analysis systems. Insurers may face challenges in gathering and maintaining the large quantities of data needed for consistent reporting across different regimes.
7. Market perception risks. If stakeholders perceive the insurer as engaged in overly complex or opaque reporting practices, it could affect their confidence and trust. Transparency is essential in the insurance industry, and any perception of obfuscation can harm reputational capital.
8. Evolving standards. Frameworks like ESG are still evolving, and their requirements can change over time. Insurers who are heavily invested in reporting under these frameworks may need to quickly adapt to new standards, which can add additional pressure and uncertainty.
In summary, while reporting under multiple frameworks can offer a robust perspective of an insurer's financial standing and risk profile, it can also bring about complexities, increased costs, regulatory challenges, and potential impacts on stakeholder confidence. As such, insurers and, more importantly, the Insurance Commission need to carefully evaluate the benefits against these downsides when determining the reporting practices.
The adoption of IFRS 17 presents both opportunities and challenges for the general insurance industry. While it promotes transparency and better performance measurement, insurers must navigate the complexities and costs associated with its implementation, especially in the Philippine setting, where new requirements are starting to be looked into and may be implemented sooner rather than later. In this regard, a well-planned transition strategy will be crucial for leveraging the benefits while mitigating the drawbacks of these significant changes.
Source: manilatimes.net
Comments