IFRS17 complexities in MENA
By Amir Sadiq
Insurance companies operating in MENA’s more mature regulatory environments show greater readiness for IFRS17 which will come into effect for reporting periods beginning on or after 1 January 2023, according to analysis from AM Best.
There is a less consistent picture among the region’s small carriers and in markets with less oversight, said the global credit ratings agency in its latest commentary.
The transition to IFRS17 is also expected to be complex, given the significant data and IT system requirements and changes to financial statement presentation, as well as the simultaneous adoption of IFRS9, the new accounting standard for classifying and measuring financial instruments.
Different regulatory environments
AM Best noted that the MENA region includes countries whose insurance markets and insurance regulatory bodies are at various stages of development and maturity, with more mature regulatory environments demonstrating greater readiness for IFRS17.
“Preparedness largely reflects the implementation of regulatory IFRS17 roadmaps in these jurisdictions, with insurers required to comply with preparation and implementation milestones. This has been the case notably in Saudi Arabia, where the Saudi Central Bank has been particularly proactive,” said AM Best.
“On the other hand, in markets where there has been less regulatory oversight and engagement on IFRS17, AM Best has observed a less consistent picture in the level of preparedness among market participants. In these markets, the level of preparedness is largely market-driven with larger, more sophisticated, insurers leading the way.”
Data quality issues
One of the main challenges AM Best expects the region to face in its adoption of IFRS17 involves the quality and availability of data, which have been longstanding concerns in the market, given that the new regime requires greater depth and quality of data than current accounting standards under IFRS4.
It said that the availability of reinsurance data is also likely to pose a challenge as a significant proportion of large commercial risks are ceded to reinsurers by regional market participants and monitored by management on a net basis.
Reliance on third parties a risk
The ratings agency also highlighted a potential IFRS17-related risk for the region – its reliance on third parties, including external consultants and actuarial firms, to drive IFRS17 development and implementation projects.
The reliance on external resources is to be expected in the region, said AM Best, as regulations in several MENA insurance markets often mandate the use of third parties for certain critical functions including reserving and pricing oversight.
This, however, risks concentrating knowledge outside the operations of insurers and could create a potential disconnect between internal management engagement and external consultant experience on the subject, it said.
Still a net-positive
Even though the transition to IFRS17 brings with it challenges and risks, AM Best said it does not expect this to have a direct impact on ratings as the agency mainly looks at the underlying economics of insurers, which are normally unaffected by the accounting regime they report under.
The adoption of IFRS17 is also viewed as a positive step towards a more economic and uniform presentation of financial statements in the region.
During a GAIF webinar earlier this year, Central Bank of Jordan expert Rifaat Hammad said that IFRS17 has been well received by regulatory authorities because its principles are consistent with supervisory requirements. Among those main principles is paying more attention to risk management, transparency as well as offering the ability to measure the solvency margin and companies’ ability to meet their obligations.
He added that implementing IFRS17 is not only a challenge for insurance companies, but also represents a challenge to regulators to update the legislative frameworks to comply with the requirements of the new standard.