The level of preparedness in the Mena region for IFRS 17 varies significantly by country and by insurer, ahead of the standard’s effective date of January 1, 2023, said global credit rating agency AM Best in a new report.

Although several countries in the Mena region continue to report under local accounting standards, IFRS is the prevailing accounting regime and the implementation of IFRS 17 is expected to affect a significant proportion of insurers operating in the region.

The transition to IFRS 17 will be accompanied by considerable data and IT system requirements, significant changes to financial statement presentation and the simultaneous adoption of IFRS 9 (the new accounting standard for classifying and measuring financial instruments), which all increase the complexity of the implementation and the importance of good preparedness.

The Mena region includes countries whose insurance markets and insurance regulatory bodies are at various stages of development and maturity. In general, AM Best views companies operating in the region’s more mature regulatory environments as demonstrating greater readiness for IFRS 17. This is particularly the case for the region’s larger, market leading, insurers.

Preparedness largely reflects the implementation of regulatory IFRS 17 roadmaps in these jurisdictions, with insurers required to comply with preparation and implementation milestones. This has been the case notably in the Kingdom of Saudi Arabia, where the Saudi Central Bank has been particularly proactive.

On the other hand, in markets where there has been less regulatory oversight and engagement on IFRS 17, 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.

Diverse levels of preparation are also seen among smaller insurers operating in the region, including some of those in the generally more progressed markets. A number of the insurance markets of the Mena region are characterised by market fragmentation, with a high number of smaller scale firms operating in them. Insurers in these markets may lack the expertise, financial capacity and systems infrastructure required for the transition, ultimately impacting their preparedness.

AM Best views few companies in the Mena region as fully prepared for the transition to IFRS 17. Many have progressed through initial gap analyses and financial impact assessments; however, the proportion that have completed IFRS 17 dry runs or parallel runs is much lower. This implies that many insurers currently lack a reliable and accurate presentation of their financials on an IFRS 17 basis. In AM Best’s opinion, having this view will be an important step in readying for the implementation of IFRS 17, informing business decisions and supporting the education of internal and external stakeholders.

Premium allocation approach expected
For many insurers operating in the Mena region, net premiums are weighted towards general insurance product lines, with annual motor and medical policies representing the majority of premium production in many markets. As such, AM Best expects that most insurers in the region will aim to apply the Premium Allocation Approach (PAA) to the majority of their portfolios. The PAA is a simpler method of measuring contracts than the General Measurement Model (GMM). It is unlikely that companies writing large volumes of long-term life insurance business or multi-year general insurance policies will be able to apply the PAA to their entire portfolio, and may have to apply the GMM to a portion.

The financial statement and administrative impact from adopting the PAA is expected to be lower than under the GMM. In theory, this should support the ease of transition to IFRS 17 for many Mena (re)insurers. The GMM requires significantly more computation, both on transition and on an ongoing basis.

Reliance on third parties
A key risk for the region related to IFRS 17 is the reliance upon third parties, including external consultants and actuarial firms, to drive IFRS 17 development and implementation projects. This presents the risk of concentrating knowledge outside of the operating insurers, and creates a potential disconnect between internal management engagement and external consultant experience on the subject.

This reliance on external resources is not unexpected in the region. AM Best notes that a feature of several Mena insurance markets is the (often regulatory mandated) use of third parties for certain critical functions, including reserving and pricing oversight. AM Best expects the region’s consultants and external actuaries to play a key role in the implementation of, and ongoing compliance with, IFRS 17. At the same time, AM Best sees an opportunity for the regional insurance market to capitalise on the momentum built up by third parties, and develop stronger in-house IFRS 17 capabilities.

Data quality a concern
Compared with current accounting standards under IFRS 4, IFRS 17 requires greater depth and quality of data. AM Best views this as a headwind for the region’s adoption of IFRS 17, as, in general, data quality and availability have been longstanding concerns in the market.

Companies applying the GMM will experience the most significant increase in data requirements. The approach of modelling fulfilment cash flows on these contracts will likely be completely new to many market participants, although companies with Solvency II-type internal models will have some relevant experience. It is also possible that certain non-life multi-year (re)insurance contracts, including any risk-attaching reinsurance that has been written or purchased, will need to be modelled under the GMM.

Availability of reinsurance data is also likely to pose a challenge. A significant proportion of large commercial risks are ceded to reinsurers by regional market participants, and monitored by management on a net basis. Data availability may also be an issue for payables and receivables, which form fulfilment cash flows, and are often net-settled. When it comes to assessing cohort profitability, the allocation of whole account reinsurance to cohorts is likely to be a challenge.

IFRS 17 and AM Best ratings
AM Best does not expect the introduction of IFRS 17 to have a direct impact on ratings, as AM Best targets the underlying economics of insurers, which is normally unaffected by the accounting regime they report under. Nevertheless, AM Best will continue to monitor the potential disruption that a lack of preparedness for this fundamental change could cause, for example, to the reporting of accurately stated figures and to the availability of timely management information. In this regard, AM Best views having robust enterprise risk management practices as central to being able to successfully manage the transition.

In a number of markets across the Mena region there remains a significant volume of work required to implement IFRS 17 as the effective date fast approaches. But despite the challenges faced by the region’s insurance markets in the implementation of IFRS 17, AM Best views the adoption of IFRS 17 as a positive step towards a more economic and uniform presentation of financial statements. – TradeArabia News Service