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Insurers dragging their feet over new accounting standard: PwC

Singapore

TIME is running out for insurers here and abroad who have been slow to prepare for the reforms that are on the cards to improve transparency and comparability of profit reporting.

The new accounting standard, International Finance Reporting Standard or IFRS 17, may only take effect from Jan 1, 2021, but PwC Singapore said insurers have little time and much to do to update existing systems and prepare their staff for the inevitable reforms. IFRS 7 is to be issued sometime in May this year by the global accounting rule maker, International Accounting Standards Board (IASB),

Chen Voon Hoe, accounting and reporting advisory leader at PwC Singapore noted that insurers here have been slow to move as they are "still in denial" and some are hopeful that the changes will be delayed.

The problem with this is that the bigger players need at least three to four years to get ready for the changes, while it is easily a two-year exercise for smaller insurers to review contracts, quantify the impact, make accounting decisions, before they decide on tweaks to current systems, he explained.

Given that insurers' products are "bespoke", there is no off-the-shelf solution available in the market that can facilitate the transformation to IFRS 17, he said, adding that insurers can work with partners and vendors to develop such solutions tailored to their needs.

In the works for more than a decade, IFRS 17 aims to provide some form of consistency as to how all insurers classify and measure insurance contracts - something that is now lacking.

The new standard is also expected to give clarity on where changes in an insurer's profit in a certain year are coming from, Mr Chen said.

IFRS 17 will require current valuation of all insurance liabilities, not just life, but also non-life. The intention is to increase comparability between insurers themselves, as well as between insurance and other parts of the financial industry such as banks and asset management.

But insurers, worried about the greater volatility in their profit and loss statements and greater scrutiny on some of their products, have been resistant to the changes.

PwC Singapore's insurance industry leader Woo Shea Leen told The Business Times that insurers are concerned about the granularity required under IFRS 17, particularly for participating funds, which they have argued, goes against the concept of risk pooling.

The problem is compounded as insurers' existing systems "will not be able to cope with the changes", Mr Chen said, adding that this is because their accounting, actuarial and underwriting systems are not equipped to generate data with the level of granularity required.

Another obstacle, said Ang Sock Sun, regulatory advisory services partner at PwC Singapore, is the issue of restrospective adjustments.

"Life policies can be incepted 20, 30 years ago and IFRS 17 will require insurers to go back to 20, 30 years ago to assess the implications arising from the standard. The key question will be - is the data available? How do they get around it in terms of retrospective adjustments?" she said.

The new standard, which is already proving to be a massive challenge for the industry, is also expected to be an expensive affair.

For a global insurer, total implementation cost of IFRS 17 including accounting, actuarial modelling and finance transformation, is estimated to range from "at least hundreds of millions", PwC said.

In Singapore, insurers' tax assessments are carried out based largely on their regulatory returns and these are similar to that in their financial statements. But these elements will change under IFRS 17.

Ms Woo pointed out that regulators here will continue to work on the revised risk-based capital framework or RBC 2 independent of IFRS 17. "Now IRAS (Inland Revenue Authority of Singapore) is using both to assess tax. Going forward, if the divergence continues, how will it assess tax?"

Despite the overwhelming issues, the new standard is expected to create jobs in the industry, PwC said.

This, as resources such as finance transformation talent, accounting technicals and actuaries who can run required models, will be in demand, even as the training of staff on the new standard is an uphill task.