IFRS 17 & UAE Regulatory LandScape
Insurance Financial Reporting Standards (IFRS) 17 represent a new and unprecedented international reporting and disclosure regime for the insurance industry 1. IFRS 17 takes effect in January 2021 2. There have been many publications and a wealth of information on the reporting and disclosure standards in IFRS 17 offering guidance to the insurance industry, many of which have naturally addressed accountancy and financial governance concerns 3. However, consideration should be also given to the regulatory and compliance implications both for regulators and regulated entities. This update considers several regulatory factors with the implementation of IFRS 17 and what insurers should be planning prior to 2021 within the United Arab Emirates legal framework 4.
IFRS 4 provided a lack of consistency with accounting for insurance contracts resulting in uncertain outcomes for outside investors and regulators 5. To resolve this issue IFRS 17 now requires insurers to report obligations and risks in respect of their insurance contracts on the entity's balance sheet as fulfilment cash flows and contractual service margins 6.
UAE FINANCIAL REGULATIONS & IFRS 17
Board of Directors Decision Number (25) and Number (26) of 2014 (the "Regulations") Pertinent to Financial Regulations for Insurance Companies and Takaful Insurance Companies regulates the prudential and solvency aspect of UAE insurance companies 7. The Regulations introduced a "Minimum Guarantee Fund", "Solvency Margins", "Solvency Capital Requirements" as well as certain disclosure obligations of financial and data governance in line with the spirit of policyholder protection 8. Reflected, to a large extent on the European Union Solvency II 9, the Regulations play a significant change for the UAE insurance market in terms of risk management and policyholder protection. The Regulations provide a solid prudential platform for risk management and risk mitigation where UAE insurance companies established new internal governance structures with Investment Committees and Audit Committees placed at board-level responsibility. The Regulations have established a uniform regulatory structure to maintain capital adequacy and risk management standards for insurance operations in the UAE.
IFRS 17 will bring new and challenging obligations to the UAE insurance market in terms of further open and transparent financial reporting set against the existing legal obligations under Section (6) and (7) of the Regulations 10. By way of illustration, Article (4) – Auditing of Accounting Books paragraph 3 & 4. provides:
3. The External Auditor shall review actuarial reports that represent immediate or future risks facing the Company, and the Authority shall be provided with copies of these reports in a timely manner.
4. The Actuary shall, in the presence of immediate or future risks facing the Company that would hinder the Company from fulfilling its short term and long-term liabilities, submit a report on a timely basis directly to the Company's Board of Directors. The Board of Directors shall examine the report and recommend corrective actions, and forward all related information to the Authority, including the Board of Director's recommendations related to the report." 11.
IFRS 17, if implemented in the UAE would require the new application of financial disclosures and financial governance pursuant to how insurance contracts should be disclosed on the balance sheet as fulfilment cash flows and contractual service margins, a fundamental departure from the existing practice. Addendum (1) – Principles of Organizing Accounting Books and Records of Each of the Companies, Agents, and Brokers and Determining Data to be maintained in these Books and Records 12 provides a degree of flexibility for the UAE Insurance Authority (the "Regulator") to request external auditors to carry out additional duties when working with the insurance companies in terms of disclosure and presentation requirements. This, for example, includes the submission of additional information related to audited accounts. In the same context, it may be possible for the IFRS 17 standards and obligations to be procured through these legal requirements without necessarily promulgating new laws and resolutions.
Furthermore, Addendum (2) – Principles of Organizing Accounting Books and Records of Each of the Companies, Agents, and Brokers and Determining Data to be maintained in these Books and Records 13 would imply, from a word construction perspective a positive legal obligation on the insurance companies/external auditors to in fact apply the financial disclosures and governance provisions of IFRS 17 pursuant to paragraph (3). By way of example, "b) Reports risk management issues and internal control deficiencies identified directly to the Audit Committee, or equivalent group-level governance structure for Foreign Companies, and provides recommendations for improving the Company's operations, in terms of both efficient and effective performance; c) Evaluating the risk exposures relating to the achievement of the Company's objectives; d) Evaluating the reliability and integrity of information and the means used to identify, measure, classify and report such information; e) Evaluating the information security and probabilities of exposure to its related risks; f) Evaluates regulatory compliance program with consultation from legal counsel;" 14.
On further review of Section (7) of the Regulations and Addendums (1) and (2) of Section (7) 15, it would appear these provisions require insurance companies to report and disclose their accounts in a prescriptive manner meeting minimum requirements as imposed by the Regulator. For example, Article (1) – Preparation of Financial Statements expressly provides:
"1. The Company shall prepare its financial statements in accordance with the International Financial Reporting Standards and the Authority accounting policies and forms stipulated herein, and shall provide the Authority with a detailed financial report in accordance with the applicable requirements of the Authority." 16.
The use of the words "in accordance with the International Financial Reporting Standards" construes that IFRS 17 and its application is of relevance to the UAE insurance market and must be adhered to in the strictest sense. To that end, insurers must consider the wider implications in terms of internal compliance and external regulatory obligations.
Regulatory issues arise from the application of IFRS 17 in terms of the financial reporting and financial governance obligations extending and shifting to new legal requirements on the insurance company's board of directors, internal compliance and to a smaller extent external auditors and accountants. By way of illustration, IFRS will change the culture of how insurance entities will present and disclose information, which could provide useful data to competitors to assess the bottom line of profits. Insurers will need to protect their assets, including financial information which can in certain circumstances amount to propriety information. Insurers will, therefore, need to consider how to protect their information while also meeting the requirements of IFRS 17. In addition, the insurer will need to review and consider their own insurance coverage requirements 17 in light of IFRS 17 to mitigate any potential risk to the business. There may also be an opportunity for the insurance industry to develop a new risk coverage for IFRS 17 in the future.
Compliance policies and procedures will need urgent consideration to sit with and compliment new financial governance processes and procedures. Compliance will need to work closely with finance departments to align protocols to meet the IFRS 17 standards while maintaining risk management and policyholder protection under the Regulations. This will not be an easy task and may result in increased operational costs.
We would recommend that insurance companies start to engage in audit reviews now in terms of the implementation of IFRS 17 in the context of internal compliance and risk structures despite the implementation date of 2021. It is often a good start to implement internal reviews and seek external support thereafter to avoid any future risk or unnecessary exposure. This may include external actuary, legal and account support where needed.
In summary, IFRS and the Regulations will provide a transparent and solid regulatory platform to give both policyholders and investors, confidence in the UAE insurance market but perhaps at a greater cost to the insurance industry in the short term.
1 IFRS 17 Insurance Contracts – IFRS' Standards Project Summary May 2017 – International Accounting Standards Board – On 18 May 2017 the International Accounting Standards Board issued IFRS 17
2 International Accounting Standards Board
3 The International Financial Reporting Standards Foundation Impacts of IFRS 17, insurance contracts accounting standard Considerations for data, systems and processes EY 2018
4 The author makes observations about possible impacts on the UAE regulatory system and legal framework under IFRS 17 and such comments in this update should not be construed as or taken, as advice of any sort including legal advice. No reliance should be placed on such comments by the readers and this update is for general guidance only.
5 IFRS' Standards Project Summary May 2017 page 2 – International Accounting Standards Board
6 The fulfilment cash flows – the current estimates of amounts that the insurer expects to collect from premiums and payout for claims, benefits and expenses, including an adjustment for the timing and risk of those cash flows; and the contractual service margin – the expected profit for providing future insurance coverage (i.e. unearned profit) – IFRS' Standards Project Summary May 2017 page 3
7 The Financial Regulations were published on 29 January 2015 https://ia.gov.ae/en/Documents/Financial%20Regulations%20for%20Insurance%20Companies.pdf
8 Section 2 – Regulations Pertinent to the Solvency Margin and Minimum Guarantee Fund – Board of Directors Decision Number (25) and Number (26) of 2014
9 Section 1- Regulations Pertinent to the Basis of Investing the Rights of the Policyholders – Board of Directors Decision Number (25) and Number (26) of 2014
10 Section (6) Regulations Pertinent to the Principles of Organizing Accounting Books and Records of Each of the Companies, Agents and Brokers and Determining Data to be maintained in these Books and Records and Section (7) Regulations Pertinent to Accounting policies to be adopted and the necessary forms needed to prepare and present reports and financial statements
11 Section (6) – Regulations Pertinent to the Principles of Organizing Accounting Books and Records of Each of the Companies, Agents, and Brokers and Determining Data to be maintained in these Books and Records
12 Board of Directors Decision Number (25) and Number (26) of 2014
13 Board of Directors Decision Number (25) and Number (26) of 2014
14 Addendum (2) – Principles of Organizing Accounting Books and Records of Each of the Companies, Agents and Brokers and Determining Data to be maintained in these Books and Records Board of Directors Decision Number (25) and Number (26) of 2014
15 Regulations Pertinent to Accounting policies to be adopted and the necessary forms needed to prepare and present reports and financial statements
16 Board of Directors Decision Number (25) and Number (26) of 2014 – Regulations Pertinent to Accounting policies to be adopted and the necessary forms needed to prepare and present reports and financial statement
17 This might include E & O, D & O third liability insurance coverage
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.