BIHL readies for IFRS 17
It may seem a tad too early, but the Botswana Insurance Holdings Limited (BIHL) group is almost ready for the adoption of a new international reporting standard that will indeed apply across the entire insurance industry in the world. The Group’s Chief Finance Officer, Kudakwashe Mukushi, explains what this means to KITSO DICKSON of The Business Weekly & Review
Q: IFRS 17, the International Financial Reporting Standard, was issued by the International Accounting Standards Board in May 2017. It is due to replace IFRS 4 on accounting for insurance contracts, effective for annual reporting periods beginning on or after 1 January 2023. From an industry perspective, what does it seek to achieve?
A: IFRS 17 is intended to deliver better alignment, transparency and consistency across the insurance industry’s financial reports. As an international standard, it creates the ability to make businesses more comparable through complex fundamental changes to accounting, liability measurement and profitability recognition for insurance contracts. IFRS 17 introduces an approach that tackles some challenges in accounting, for insurance, contracts currently applied inconsistently when a company applies IFRS 4. Through IFRS 17, insurers will:
- Provide updated information about the obligations, risks and performance of insurance contracts;
- Have increased transparency in financial information reported, which will give investors and analysts more confidence in understanding the insurance industry; and
- Have consistent accounting for all insurance contracts supported by a current measurement model.
Q: How is BIHL preparing for this?
A: This is a key development and one we comply with, not simply because of compliance needs but because it is best practice to help ensure that we are current with industry standards and needs. The BIHL Group has initiated a project to prepare its systems and processes to be complaint with the IFRS 17 reporting standard as set out by the International Accounting Standards Board (IASB). This project covers the following broad aspects:
- Accounting systems and financial reporting,
- Actuarial and IFRS 17 calculation modeling,
- Process redesign, and
- Internal and external stakeholder engagement and change management
The IFRS 17 Project is managed in accordance with existing governance structures culminating in reporting into the BIHL Audit & Risk Committee and Board. It is an area we have the utmost dedication to.
Q: May you kindly share with us where you are in the process of this transition?
A: The Group is making effective progress towards achieving the requirements of the new standard and is on track to complete the development and testing of IFRS 17 reporting systems by the end of 2021. These systems will enable the Group to perform dual IFRS 4 and IFRS 17 reporting, which in turn will allow the Group to evaluate changes in reported financial performance resulting from changes in measurement and timing of recognition of insurance transactions as required by the new standard.
Q: With earlier application permitted, when do you plan to have a full parallel run between IFRS 17 and IFRS 4?
A: Due to the complex and evolving nature of the requirements of the Standard, the Group has elected not to adopt the standard earlier than its mandatory effective date. Instead, the Group will use the time available to provide maximum assurance of the robustness and accuracy of new calculation and reporting systems and development of requisite staff skills and experience. This is not a process to be rushed, and we are ensuring due attention and commitment so we effectively transition.
Q: How will the board of directors be prepared?
A: The BIHL Group is training board members, management and relevant staff on the changes that IFRS 17 is bringing to the reporting environment. It is important that all are aware, informed and abreast of the requirements, the standard and the expectation. The training is conducted via e-learning and virtual platforms with physical interactions having been discontinued due to the COVID-19 pandemic.
Q: Does BIHL have the strategy for acquiring the right skills?
A: The Group is confident that the training and development initiatives underway, together with the ongoing support from our parent entity, Sanlam, will ensure that the needed skills and competencies will be available going forward.
Q: How are systems and/or data being aligned?
A: The Group is participating together with other entities in the Sanlam Pan Africa cluster in the development of a centralised modelling and calculation engine to perform the complex calculations for liability measurement and profitability recognition that the Standard requires. This application, which will be fed by data from various policy administration systems, performs the necessary actuarial modelling and cashflow calculations and generates IFRS 17 transactions to be fed back into the accounting system.
All of these processes will be electronically integrated from end to end and the system is designed to be fully auditable and enable traceability from final result back to underlying transaction data. Due alignment is core here and we are committed to the fullest extent to ensuring that all are appropriately on track and aligned.
The IFRS 17 project team is also performing data reviews to ensure that the policy-related data which underlies all insurance reporting sits accurately on the Group’s various policy administration systems. As part of data quality assurance, new data validation check reports have also been designed, and these will be strictly made use of as standard protocol.
Q: What are the challenges being experienced in the process of adoption?
A: Although the Standard aims to simplify and harmonise insurance reporting, the underlying calculations and processes to achieve this are complex and highly technical. Additionally, the Standard will significantly change the presentation of financial statements and increase the detail of disclosed information. The Group has ongoing activities to improve the level of knowledge and understanding across the Group and develop competencies in our Finance and Actuarial functions.
These activities have had to be implemented and managed against the backdrop of challenges brought on by COVID 19-related lockdowns and other disruptions and ongoing maintenance of COVID-19 safety protocols.
Q: From a budget perspective, please share with us the cost implications of the process of adoption.
A: A project of this magnitude requires a substantial investment of time, effort and resources. Related costs include system modifications, project management costs and other consultancy costs.
Q: How do you see IFRS 17 adding value to the organisation?
A: The onset of the new Standard has provided an opportunity for the Group to update its business systems to ensure that as far as possible and more fully take advantage of the benefits of the process automation and reduction of manual efforts for low value transaction processing activities.
Our teams are developing new skills and capabilities through the understanding of IFRS 17 concepts and the interpretation of financial information in the new format. The development of the IFRS 17 calculation functionality has created an opportunity to review and enhance data quality. In adopting the Standard, the BIHL Group will maintain its reputation for adhering to best governance practices.
Q: Is there any volatility or downside expected with IFRS 17?
A: The Group is currently not in a position to comment on the possible volatility resulting from the implementation.
Q: From financials perspective, what will the application of IFRS 17 mean for the Group’s financial statements?
A: The long run reported performance of the group is not likely to be significantly affected by the new Standard.
Q: Please share with us any other information regarding this topic?
A: The BIHL Group has dedicated teams which have indepth skills and talent across the Accounting, Actuarial, IT and Operations functions working together to achieve critical milestones leading up to the adoption date of January 2023. We have also begun engaging with various internal and external stakeholders on our progress and what they can expect.