Ind AS 117 Insurance Contracts – What it means to Indian insurers
Background:
International Accounting Standards Board (IASB) issued International Financial Reporting Standard (IFRS) 17: Insurance Contracts in May 2017. This is a significant change for insurers across the globe, and the new standard is expected to significantly enhance comparability and transparency in reporting by insurers. Keeping in mind the same objective of enhanced transparency in financial statements prepared by the insurers in India, The Institute of Chartered Accountants of India (ICAI) issued an Exposure Draft (ED) on Indian Accounting Standard (Ind AS) 117, Insurance Contracts, which is consistent with IFRS 17.
Presently, Ind AS 104: Insurance Contracts has been included in the set of notified Ind AS and is expected to be superseded by Ind AS 117 in due course.
Key highlights of ED Ind AS 117:
- Separate presentation of underwriting and finance results will provide added transparency about the sources of profits and quality of earnings
- Premium volumes will no longer drive the ‘top line’ as investment components and cash received are no longer considered to be revenue
- Accounting for options and guarantees will be more consistent and transparent.
- Separation of underwriting results and investment results in the financial statement will provide a clearer picture of the profit drivers.
- Written premiums and net margin calculations based on current revenue and cost accounting practices will be replaced by complex contract service margin (CSM) calculations based on actuarial models, risk adjustments and analysis of movements, giving possibly new insights in key performance drivers not previously disclosed. This may also have an impact on the way products are currently being priced.
- Given that implementation of Risk Based Capital regime may be considered in India, it becomes even more important for the regulator and the industry to find synergies and sort out the implementation challenges well in advance. This can help reduce complexity and cost of future reporting.
- Given the new measurement models and grouping requirement, significant system, data warehouses and valuation methodology changes will be needed to support the measurement of the insurance liabilities going forward
- The human talent required to operationalise Ind AS 117’s requirements and translate theory into practice may be significant. Accordingly, companies may have to significantly scale up their team to navigate through these challenges.
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