Listed insurers have realised a one-off Sh1.2 billion gain from adopting a new global accounting standard, the International Financial Reporting Standard (IFRS) 17.
The IFRS details how companies must maintain their records and report their expenses and income.
The insurers; Britam, CIC, Jubilee, Kenya Re, Liberty Kenya, and Sanlam made the disclosures on the initial impact of the rules change at the end of last year where the gains have been booked under shareholder equity.
Britam posted the highest gain from the transition to the new accounting rule at Sh1 billion. In contrast, CIC and Liberty saw their shareholder equity dropping by Sh607.6 million and Sh254.9 million, signalling increased liabilities from the new accounting rules.
IFRS 17 has required insurance firms to use the most updated estimates and assumptions in measuring insurance contracts, reflecting the timing of cash flows into the businesses and any uncertainties relating to the policies.
David Limo, the chief actuary at Britam, says the one-off gain has come from the release of provisions held under the previous accounting rules.
Previously under IFRS 4 rules, insurance firms measured insurance contracts on an estimate that included the setting aside of prudential margins, especially on the long-term business.
“There was a one-off lift in shareholder equity on initial adoption for insurers who held prudent reserves under IFRS 4 compared to IFRS 17. General insurers also had a one-off lift in shareholder equity on initial adoption due to the discounting of long-tail claims reserves,” Mr Limo said.
IFRS 17 has also prompted changes in revenue recognition for long-term business where insurers now have to factor in expected claims and expenses, including commissions in addition to highlighting gross written premiums.
Insurers have also been required to establish a contractual service margin on contracts, which is held as a reserve of unearned future profits and released into the profit and loss account over the policy's life.
The main changes in measuring insurance contracts on the short-term business include the allowance of time value for money on long-tail claims reserves and the establishment of risk adjustment for non-financial assumptions.
The adoption of the IFRS rules is expected to enhance transparent reporting about insurers' financial positions and risks. The switch is expected to lead to a stable performance of underwriters while the rules will provide a standard unit of comparing the financial performance of various firms.
“We expect more stable profit performance under IFRS 17 since the standard requires a systematic release of the contractual service margin. However, performance will always be affected by actual versus initially projected experience, and this will be more visible under IFRS 17,” Mr Limo added.
The listed insurance firms realised a profit of Sh14.6 billion in the year ended December 31, 2023, compared to net earnings of Sh11 billion previously. They booked Sh14 billion as the insurance service result in the period compared to Sh12.1 billion previously.
Local insurance firms have struggled to switch to the new accounting standard due to difficulties including logistical issues and inadequate actuarial departments.
A recent study by consultancy firm Deloitte covering Kenya and other East African countries shows that many companies with limited budgets are facing challenges in the implementation of the new reporting standards.
