THE year 2022 promises to be an interesting yet challenging one for the insurance industry arising from the post-IFRS 17 implementations.
MFRS 17, issued by the Malaysian Accounting Standards Board, is equivalent to the IFRS 17 Insurance Contracts as issued and amended by the International Accounting Standards Board. The aim of MFRS 17 is to increase consistency, comparability, and transparency in financial reporting across the insurance industry. However, the implications on the insurer’s financials and operations will vary from company to company, making the transition to MFRS 17 and management post-implementation more challenging.
The adoption of MFRS 17 is expected to have significant impact on the fundamentals of the insurance business and its financial management. It is thus critical for insurers to review their strategies to ensure they adapt post–MFRS 17.
Product redesign and repricing
Insurers will have to fundamentally examine the design and pricing of insurance products with the implementation of the new standard. They also need to take into consideration, additional factors arising from MFRS 17 adoption, during the product pricing process including measurement models, contract boundary, mutualisation, contract grouping, onerous contract, and amortisation factor.
There will also be greater focus on the financial aspects of the product design including options and guarantees of the policies and any potential cross subsides between polices.
For example, insurers will have to be more mindful in pricing or offering products that leads to contracts being recognised as onerous at inception. Losses for such contracts will be recognised upfront in profit or loss and impact the overall performance outcome.
Asset Liability Management (ALM) reoptimisation
Both MFRS 17 for insurance contracts and MFRS 9 for financial instruments will impact presentation of financial statements and economic results. Insurers need to evaluate their ALM strategies and implications on the presented financials under these new standards. This would include approach for grouping of assets to back insurance contracts liabilities as well as understanding potential mismatches arising from fair valuation of assets, but not the liabilities.
There are several key factors that should be considered to enhance the management of asset and liability. These include assessment of the strategic asset allocation and the mixed asset defined by MFRS 9, liability interest rate sensitivity affected by the type of measurement models, and the ability to offset accounting gains and losses.
Tax implications
While MFRS 17 will fundamentally change the financial reporting presentation for insurance and takaful companies, it is unclear how the government and the Inland Revenue Board will address this change in the tax legislation. The application of MFRS 17 and MFRS 9 will give rise to a once-off transitional impact on opening retained earnings or OCI and changing the timing of profits emergence, resulting in cash tax and/or deferred tax consequences.
Financial reporting, tax reporting and the regulatory framework are all part of the same regulatory ecosystem for the industry. It is imperative that all three elements are in harmony as the industry makes the transition.
Redesigning key performance and risk indicators
Most performance metrics such as profit, return on equity and return on asset will be affected under the new standard. Individual performance assessments linked to these metrics will have to be re-evaluated and monitored. This will require significant changes to key business processes such as strategic planning and budgeting, management reporting and performance monitoring. Consequently, remuneration plans may also need to be adjusted to ensure alignment with performance metrics.
This article was contributed by Deloitte financial services industry partner Cheng Yen Chu, insurance partner Lim Siang Thnia, finance transformation leader Ho Sai Weng, and insurance senior manager Kuek Yeong Chian.
Source: The Sun Daily
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