By Michael Rellosa | The Manila Times | May 24, 2021
AT this juncture, the Philippine nonlife insurance industry must be deep in thought and action preparing for the implementation of IFRS17 by Jan. 1, 2025. IFRS stands for international financial reporting standards and No. 17 refers to the latest global standard for all insurance contracts replacing all other earlier standards currently in place. The main objective of IFRS17 is to standardize insurance accounting across all jurisdictions with the end in view of improving comparability; thereby increasing transparency. This will also provide users of accounts with the needed information to understand an insurer’s financial position, performance and risk exposure; valuable information for regulators, investors and the insuring public, among others. IFRS17 does this by dictating which insurance contract items should be on the balance sheet as well as the profit and loss statements of an insurer and how these are to be measured and presented in the financial reports.
In a Zoom meeting with the Insurance Commission last May 21, 2021, the Philippine Insurers and Reinsurers Association (PIRA) together with its consultant on IFRS17, PWC-Isla Lipana, presented the initial findings of the industry impact assessment after embarking on a year-long study to help PIRA members assess where they are and whether they are prepared for the big shift and what remains to be done to adequately prepare the industry and its members for compliance. In a few words, the industry can either sink or swim and the role of the commission is crucial to the outcome.
The deadline is looming and the myriad issues confronting the industry is further exacerbated by the ongoing pandemic. The industry will therefore have to steel itself, bite the bullet and forge ahead despite the obstacles in their midst, such as the pressure brought about by the incessant round of minimum net worth increases, high taxation, perennially low interest rates, the Philippines being one of the most risk- prone countries in the world, just to name a few. The industry also faces difficult decisions such as whether they are better off under a tariff regime for three main classes of business – fire, motor and surety – or to go free market. The decision has far-reaching implications for all stakeholders.
This is a mean feat given the adoption of IFRS17 will mean gargantuan changes for the traditional insurance workforce, as well as the shareholders of insurance companies. There are numerous issues that need to be resolved and, as stated earlier, the assistance of the Insurance Commission is key. Among the tasks of the industry are:
1. Guidance and practical examples of/on the application of materiality, premium allocation approach eligibility tests, the determination of onerous contracts, methods and templates for revenue recognition, approaches and methodology of risk adjustment, discount rates, the alignment of the FRF with Financial Reporting.
2. Clarity on the actual start of IFRS17 i.e., shall it be applicable to the December 2021 financial statements or only prudential reporting will be required, or will it be applicable from the first quarter reporting.
3. The need to align prudential reporting requirements with that of IFRS17. Will the industry be required to submit several reports, one for the IC, one for the SEC, one for the BIR and one using the IFRS? How are these different reports to be aligned? How will companies be ranked going forward? Will gross premiums written (GPW), net earned premiums and other current metrics have any bearing in the future? This also has a bearing on the key performance indicators of an insurance company and the need to change this as well.
4. Numerous accounting issues such as transaction-based taxes, allowances for impairment, uncollectable premiums, the proper treatment of receivables from intermediaries, the proper allocation approach to be used for revenue recognition, to name a few.
Bear in mind the 57 non-life insurers are differently abled according to affiliation (local or global), size in terms of GPW, market presence, product offerings and others, experience, expertise and all the other metrics currently in use, vis-à-vis the complexity and cost of such a shift, then you begin to get the picture of where the industry is relative to its preparedness for the big shift to IFRS17.
The good thing is both regulators and the industry are communicating well and seem to be on the same page. Hopefully, they see their way together to turning a burden into an opportunity.