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New financial reporting standard for insurance companies: not all companies will survive

The users of financial information were surprised by the change in the format of statistics on the insurance market at the end of February 2023. The amendments affected the life insurance market, in particular. The statistics shrank to six areas instead of the usual eight. Information on Employer's Liability Annuities (ELA) and Other Annuities (OA) is now "hidden" in general annuity insurance statistics. Although these areas are not key for life insurance companies (LICs), their statistics made it possible to see the life insurance market in full, writes Forbes Kazakhstan.
New financial reporting standard for insurance companies: not all companies will survive

The changes are related to the fact that as of January of this year, the insurance market has switched to IFRS 17 in its corporate reporting. The transition led to the adjustment of regulatory reporting and, according to insurers’ comments, would “plow across” the financial statements of organizations. If IFRS 4, which was in force until 2023, was more general and had a number of limitations, IFRS 17 moved reporting towards obtaining better information on insurance contracts. The old standard, in particular, did not allow comparison of insurance companies from different countries and insurance industries (general insurance and life insurance). This fact interfered not only with investors in making financial decisions but with insurers as well, working in the field of international reinsurance.

IFRS 17 was adopted to improve transparency and reliability, comments Azamat Yerdessov, the Chairman of the Board of LIC Freedom Life. The standard “sets uniform requirements for the presentation of financial statements, including the calculation of insurance reserves and the recognition of return.” Previously, various methods were used in insurance contract accounting, which “hindered the comparison of financial results and complicated the analysis of their activities”. According to Yerdessov, one of the key changes under IFRS 17 is the division of insurance liabilities into components such as marginality, net present value of cash flows, taking into account the value of money in the financial market, and risk adjustment to cover unexpected losses. The previous standard did not allow looking into the constituent parts of the contract and its valuation. In addition, IFRS 17 requires entities to disclose more detailed information about liabilities associated with insurance contracts, including information about risks and uncertainties. “This allows investors and other stakeholders to better assess the risks associated with investing in insurance companies, - said Yerdessov. - Thus, the adoption of IFRS 17 will provide the insurance services and investment market with more accurate and transparent data, which will increase market credibility.”

He also expects that the new reporting standard will “certainly lead to a review of the current strategies and business models of insurance companies.” The latter will have to “take measures to optimize their activities in order to meet new requirements and increase their competitiveness.” Yerdessov believes that these measures may include changing product lines and pricing policy, improving risk management and raising the efficiency of operations.

However, the “17th standard” brings a lot of inconvenience to insurance companies and requires special competencies and costs to attract them. Freedom Insurance notes that IFRS 17 will determine whether investment or insurance activities are the driver of an insurance company's profit, as well as highlight the most profitable products. Insurance organizations, however, will not recognize profit immediately, but as the fact of the provision of services. Insurers will not be able to simply write the premiums received into profits, as before. The press service of Freedom Insurance explains that companies will have to consider the term of each contract and calculate the expected losses for years ahead based on available historical data. This requires risk assessment models using stochastic and deterministic modeling. The players’ task of building an IT system for insurance contract accounting and automating complex mathematical calculations performed by actuaries comes to the fore, since IFRS 17 is based on its own actuarial models when assessing insurance liabilities. Another innovation is related to the principles of recognition and valuation of insurance contracts; they will be divided by products and currencies. For each of them, it will be necessary to aggregate and form groups depending on the beginning of the contract.

Building valuation models using stochastic modeling will undoubtedly increase the workload on insurance industry specialists, Nomad Life's press service told Forbes Kazakhstan. Besides, IFRS 17 has complex transitional requirements for companies applying this standard for the first time: it obliges the use of retrospective accounting models and methods, that is, all calculations must be made according to the new standard from the date the company commences operations. “We believe that the most important task for all insurance organizations this year will be the improvement of the IT system that allows such payments to be made,” they noted in Nomad Life.

They believe in Freedom Insurance that a separate, “probably additional, workload awaits insurers who have experienced mergers in the past, because they will have to raise the documentation of all their companies and make the appropriate analysis and evaluation of all contracts.” The company predicts that the implementation of IFRS 17 will affect the profit, which will be distributed over time; besides, estimated liabilities of insurers will grow. “It is already clear that some companies will need additional capitalization from shareholders,” experts conclude.

According to Oleg Khanin, the Board Chairman of LIC Kommesk-Omir, IFRS 17 is in general a larger process than just a change in accounting, and it will require a “considerable work to implement standards in terms of developing methodology, new technologies, modernizing processes and controls” from insurance companies.

The year beginning is calm

Against the background of introduction of the new reporting standard, the January statistics on the life insurance market in the section of retirement annuities (RA) turned out to be very entertaining. The volume of premiums on RA grew by 59.5% in annual terms in January 2023. The result was a rapidly high annual increase, as premiums fell by 61% in January 2022. And the calculations of premiums using the “month-to-month” formula showed their drop in December 2022 by 37.7%. In general, the portfolio of total LIC premiums in January in annual terms increased by 149.4%, to 33 billion tenge, with a monthly increase over last December at the level of 5.7%.

Khanin connects the growth dynamics of premiums more with active insurance than with the beginning of the transition to IFRS 17. “If we compare the periods by months, the fall in RA in January 2022 is influenced by factors of a difficult geopolitical and macroeconomic situation, changes in the exchange rate of the tenge against the dollar and ruble, stock market volatility,” the interlocutor notes. He explains the downturn by the introduction of amendments to the legislation on the possibility of early withdrawal of pension savings from the UAPF by citizens for the purchase of housing or medical treatment a year earlier. Besides, as of November 2022, the insured has the opportunity to partially return money from the LIC to UAPF, namely the insurance premium exceeding the minimum cost of the retirement annuity contract. In general, Khanin concludes, economic shocks have affected the performance of 2022, and consumer behavior has changed during the period of uncertainty regarding the purchase of long-term insurance products. As for the dynamic start in January 2023, according to the interlocutor, this was facilitated, among other things, by the promotion of accumulative life insurance products with guaranteed profitability and shorter validity periods on the market, for example, risk life insurance products, which cover risks of death of the insured person, loss of ability to work as a result of an accident.

Additional market capacity is traditionally provided by bank insurance, when life and health insurance of the borrower is one of the conditions for a mortgage agreement conclusion. According to Nomad Life experts, term types of insurance - life and disability insurance for loan borrowers, which covers the risk of a person's disability due to an accident, as well as the occurrence of an insured event for any reason, are considered the priority types of insurance for consumers at the moment. This type of insurance is developing due to the fact that “banks provide softer conditions to borrowers with a life insurance policy.” The second direction with a customer demand is endowment life insurance, “since the client is interested in getting more lucrative conditions for investing their money compared to bank deposits.”

As for RA, their January growth can be associated, among other things, with the emergence of a joint (marriage) annuity. As Khanin explains, the product allows, in case of insufficient amount of pension savings of one of the spouses, to combine the total savings to conclude a RA agreement and redistribute income in favor of the woman, “as their amount of pension contributions is often lower than that of men, and life expectancy is higher.”

Potential results of the year

Due to the adjustment of the financial reporting standard, it is quite difficult to estimate the profit forecast for 2023. As for sales, according to Khanin, the premiums from RA and life insurance can grow by 15-20%. “A product on joint retirement annuities as well as another new product - endowment life insurance within the SESS will be developed this year,” the source is confident. The latter enables parents to save money for the education of their children through the LIC. By the time of admission to the university, the LIC makes an insurance benefit, that covers the cost of child's education. The insured (parent) receives the state bonus in the amount of 5-7%. And in the event of the death of a parent or the loss of his ability to work due to disability of group I or II, the LIC will pay for the child’s education, regardless of the amount of savings. Second-tier banks already participate in the SESS program: savings are made through deposits, however, Khanin notes, banks, unlike LICs, “do not have an instrument of parental insurance coverage.”

Nomad Life experts also highly appreciate the impact of the participation of LICs in the SESS program. Bank insurance has led to the fact that most LICs have STB as their main partner, but “there will be surely changes in the near future due to the active accession inclusion of LICs to the SESS program.” LICs are starting to build their own sales system, work with organizations of preschool and school education. “Thus, we expect that agent networks and direct sales channels will develop,” they note in the company.


Photos are from open sources.

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