IFRS 17 Implementation in the Zimbabwean Insurance Sector
By Stella Mupatsi and Taurai Jamu
Zimbabwean insurance companies are currently in the process of implementing International Financial Reporting Standard 17 (IFRS 17), a new accounting standard applicable to insurance contracts and investment contracts with discretionary participation features.
This standard replaces the previous IFRS4 standard, which allowed for a wide range of accounting practices with limited financial disclosures, making it difficult for investors to compare financial statements.
IFRS 17 ensures greater comparability and strengthens report quality.
The implementation of IFRS17 requires several steps, including impact assessments, designing solutions, building and testing actuarial and financial accounting processes and models, calculating opening balances, carrying out parallel runs, and deploying full IFRS17 reporting.
The standard applies to annual periods beginning on or after January 1, 2023, and requires compliance for financial statements starting on or after that date. However, implementing the standard is not without its challenges, which include a scarcity of actuarial and accounting skills and the complex technological solutions required.
Insurance companies will need to choose whether to build an IFRS17 solution internally or appoint a third-party actuarial or accounting firm.
One of the benefits of implementing IFRS 17 is that it will make it easier to compare financial statements. This will not only be beneficial for insurance companies but also for investors, who will be able to compare the financial statements of different companies.
It will be possible to compare the financial statements of an insurance company against those of a bank or manufacturing company. This will make it easier for investors to make informed investment decisions.
IFRS 17 will also improve the understanding of insurance contract performance. The new standard requires insurance companies to provide more detailed financial disclosures, which will allow investors to better understand the financial performance of the insurance contracts. This will ultimately improve competitiveness in the insurance industry.
However, implementing IFRS 17 is not without its challenges. The standard is complex and requires actuarial and accounting skills, as well as technological solutions. Zimbabwean insurance companies will need to carry out impact assessments, which involve understanding the standard, identifying the key areas affected by the standard, identifying the knowledge, skills, and technology gaps, and analyzing the effect of the standard on the financial statements and key performance indicators.
After carrying out an impact assessment, each organization will need to develop an end-to-end, cost-effective operational solution, including data systems and organizational design and processes. The next step is to build and test the actuarial modeling processes and financial accounting and financial reporting processes to meet the IFRS17 requirements to enable statutory and operational reporting.
Zimbabwean insurance companies will also need to calculate opening balances, which are the balances that will be used as the opening balances for IFRS 17. IFRS 17, like any other standard, needs to be applied retrospectively as if it has always been applied. In this regard, there was a need to calculate opening balances as of the transition date, which is at least one year earlier than the first application date, by going back to the inception of each policy.
There are three possible approaches to restating the opening balances of insurance contracts. The first approach to transition is the full retrospective approach, which requires insurers to restate their financial statements as if they had always been applying IFRS 17 from the inception of each insurance contract. It involves restating all prior periods presented in the financial statements. However, it may not always be possible for all contracts to source all the historical data and perform transition calculations using this approach. In Zimbabwe, for instance, there have been redenominations and currency changes that would have an impact on this approach.
The modified retrospective approach should be applied when it’s not possible to apply the full retrospective approach. The third option is the fair value approach, which involves measuring the value of insurance contracts at fair value. Insurance companies can use more than one single approach to perform their transition calculations as applicable across the different insurance and reinsurance contracts they have on file.
For most recent contracts, companies are likely to apply the full retrospective approach because all the data is readily available. For older contracts, the modified retrospective approach and the fair value approach can be used.
Actuaries play a critical role in the valuation of insurance liabilities for IFRS17 purposes and provide assurance to management around the assumptions, parameters, and methodologies used.
Accountants are responsible for assessing the accounting policy changes required in line with the IFRS17 standard and redesigning financial statements and disclosures.
IFRS17 valuation involves an array of processes that call for close collaboration between actuarial and financial accounting. For instance, the change in best estimate liabilities now requires disclosure in detail.
The accountants will, therefore, need input from the actuaries to understand and explain the changes when making their disclosures. Both the actuarial and accounting divisions rely on information technology to solve the technical challenges around gathering, processing, and storing the data used for IFRS17 valuations.
A crucial consideration for insurance companies is whether to build an IFRS17 solution internally or to appoint a third party, which could be an actuarial firm or an accounting firm. A self-build approach provides an opportunity to tailor the solution precisely to the insurer’s specific needs. On the other hand, a vendor solution brings a standardized end-to-end model that can then be tailored to the individual insurer.
Zimbabwean insurance companies may choose to appoint a third-party firm to assist with implementation and ensure compliance with the standard. The selection of a third-party firm should be based on several factors, including the firm’s reputation, expertise, and experience. It is also important to consider the firm’s track record of successfully implementing IFRS 17 in other countries.
Close collaboration with external auditors is necessary to ensure the accuracy and completeness of transition calculations and disclosures. External auditors will review the IFRS17 implementation and assess whether it meets the requirements of the standard. They will also provide an opinion on whether the financial statements comply with the standard.
In conclusion, implementation of IFRS17 in Zimbabwe involves several steps that include impact assessments, designing solutions, building and testing actuarial and financial accounting processes and models, calculating opening balances, carrying out parallel runs, and deploying full IFRS17 reporting.
The implementation of IFRS 17 will make it easier to compare financial statements, improve the understanding of insurance contract performance, and ultimately improve competitiveness. Close collaboration with external auditors is necessary to ensure compliance with the standard. (ICZ 2023 newsletter)
