It was a professional call on my friend, a CA, ICWA, CS and MBA, all combined who informed me of the latest developments in implementation of Ind AS in insurance sector. I collected the required reference.

You may ask me why one should learn about the latest development in insurance?

History reminds me of learning the economic development from The Economic Times when I was a Management Trainee, struggling to learn the basic tenets of banking in 1970s. Most of the employees in any nationalized bank in those days were matric at the most, while the youngsters were mostly graduate or having higher qualification. Most of the bosses, promoted on seniority basis, were hardly empowered to guide us on the intricacies of banking than the routine matters. It was my dream in those days to educate the youngsters with the latest information on any field. My earlier article has already appeared on banking regarding “Convergence to IFRS (Ind AS) – Indian banking scene “in Tax Guru. This is in continuation to that article and hence it omits detailed discussion on many Standards of Ind AS which share common characteristics with insurance. The basic character of Ind AS does not change.

Now, the Indian insurance scene with the latest developments.

The Ministry of Corporate Affairs (MCA) has already notified the Companies (Indian Accounting Standards) Rules, 2015 on February 16, 2015. A reference is also invited to their press release dated January 18, 2016 for implementation of IFRS converged Indian Accounting Standards (Ind AS) for banks———and insurers. In relation to above development, IRDA vide its directive dated March 1, 2016 gave a detailed instruction to insurers in India to follow Ind AS for financial statements for accounting periods beginning from April 1, 2018 onwards, with comparatives for the periods ending March 31, 2018. Comparatives naturally implied the comparative figures for the preceding period.

Insurers are supposed to adopt (Ind AS) as per above timelines though they would have been sending proforma (Ind AS) financial standards to IRDA from the quarter ended December 31, 2016 onwards. Though the insurers were to inform the public about the developments in their annual statements, the writer could not find any meaningful information from the insurers in their recent financial statements.

This article is heavily based on IRDA directives as well as Ind AS standards 101, 104, 109, 110 and 115. Whatever standards are applicable otherwise, would also be essentially followed by insurers.

IRDA has already advised the insurers to form a Steering Committee under the leadership of an Executive Director, or equivalent, with members from cross-functional areas of insurers to immediately initiate the implementation process. Though it was not possible to get the required confirmation ‘from the latest Balance sheet of the insurers, it is presumed that the following critical areas/strategic points would have been incorporated in the action plans of insurers:

  • Ind AS Technical Requirements: Diagnostic analysis of differences between the current accounting framework and Ind AS, significant accounting policy decisions impacting financials, drafting accounting policies, preparation of disclosures, documentation, preparation of proforma Ind AS Financial Statements, timing the changeover to Ind AS, and dry -run of accounting systems and end-to-end reporting process before the actual conversion.
  • Systems and processes: Evaluate system changes-assessment of processes requiring changes, issues having significant impact on information systems (including IT systems), and develop/strengthen data capture system, wherever required.
  • Business impact: Profit planning and budgeting, taxation, capital planning, and impact on solvency.
  • People: Setting up adequate and fully dedicated internal staff for implementation. Adequate usage of fully qualified CAs, Company Secretaries, Cost Accountants along with experienced insurers with vast experience have been associated by the leading insurers to undertake the massive implementation process which involves huge tasks on a time bound program. Fully charged training programs at various levels of human resources would need to be evolved to make the systems work after implementation.
  • Effective implementation would involve significant input from all units of the insurer including IT, Human resource, treasury, underwriting, product development, distribution, reserving, marketing and customer service. Without good preparation based on practical usages, the volatility of results may reach unexpected levels and the execution may lose focus.
  • All stake holders need to be taken into confidence by involvement of Directors by the way of Audit Committee who would shoulder responsibilities along with the top management if any variation from plans perceived, invite corrections. Yes, seeing is not believing but by proper legal and timely input of progress in implementing the process of integration of Ind As standards with the existing accounting GAAP

Convergence implementation

How will the insurer make its present GAAP Based accounting into Ind AS, IFRS converged?

Ind AS Standard 101 titled “First time adoption of International Financial Reporting Standards” sets the tone and it clearly explains that the insurers will follow Ind AS for financial statements for accounting periods beginning April 1, 2018 with comparatives for the period ending March 31, 2018, revealing comparatives as figures for the preceding accounting period.

This clearly means that it is the starting point for accounting in accordance with Ind AS and the accounting policies used will be Ind AS only.

Ind AS 104 titled “Insurance Contract” deals extensively with insurers for conversion to Ind AS.

The following paras have been taken from http://mca.gov.in/Ministry/pdf/INDAS104.pdf

along with necessary explanations for easy understanding, wherever required.

Discussion on Indian Accounting Standard (Ind AS) 104

Objective

The objective of this Indian Accounting Standard (Ind AS) is to specify the financial reporting for insurance contracts by any entity that issues such contracts (described in this Ind AS as an insurer). In particular, this Ind AS requires:

(a) limited improvements to accounting by insurers for insurance contracts.

(b) disclosure that identifies and explains the amounts in an insurer’s financial statements arising from insurance contracts and helps users of those financial statements understand the amount, timing and uncertainty of future cash flows from insurance contracts.

This Ind AS is applied to a) insurance contracts b) financial instruments that it issues with a discretionary participation feature. An entity is not allowed to apply this Ind AS to the following:

  • Product warranties issued directly by manufacturer, dealer or retailer
  • Employers’ assets and liabilities under employee benefit plans
  • Financial guarantee contracts
  • Contingent consideration payable or receivable in a business combination
  • Direct insurance contracts that the entity holds where the entity is the policyholder.

Since a reinsurance contract is a type of insurance contract, all references in this Ind AS to insurance contracts are equally applicable to reinsurance contracts.

Embedded derivatives

Ind AS 109 requires an entity to separate embedded derivatives from their host contract, measure them at fair value and include changes in their fair value in profit or loss.

Unbundling of deposit components

The word unbundle means account for the components of a contract as if they were separate contracts.

Some insurance contracts contain both an insurance component and a deposit component. In some cases, an insurer is required or permitted to unbundle those components:

(a) unbundling is required if both the following conditions are met:

(i) the insurer can measure the deposit component (including any embedded surrender options) separately (i.e. without considering the insurance component).

(ii) the insurer’s accounting policies do not otherwise require it to recognize all obligations and rights arising from the deposit component

(b) unbundling is permitted, but not required, if the insurer can measure the deposit component separately as in (a)(i) but its accounting policies require it to recognize all obligations and rights arising from the deposit component, regardless of the basis used to measure those rights and obligations.

(c) unbundling is prohibited if an insurer cannot measure the deposit component separately as in (a)(I).

To unbundle a contract, an insurer shall:

  • Apply this Ind AS to the insurance component.
  • Apply Ind AS 109 to the deposit component.

Liability adequacy test

An insurer shall assess at the end of each reporting period whether its recognized insurance liabilities are adequate, using current estimates of future cash flows under its insurance contracts. If that assessment shows that the carrying amount of its insurance liabilities is inadequate in the light of the estimated future cash flows, the entire deficiency shall be recognized in profit or loss.

If an insurer applies a liability adequacy test that meets specified minimum requirements, this Ind AS imposes no further requirements. The minimum requirements are the following:

  • The test considers current estimates of all contractual cash flows, and of related cash flows such as claims handling costs, as well as cash flows resulting from embedded options and guarantees.
  • If the test shows that the liability is inadequate, the entire deficiency is recognized in profit or loss.

The purpose of giving directive quotes from Ind AS 104 is to help an employee who may handle the actual operations of any private/public insurer to fully understand the implications of the new instructions as contained in Ind AS.

The writer of the article is of the firm view that not many in insurance industry would have read the present GAAP guidelines under which the present accounting of insurance industry withstands. However, those who have qualified in insurance examinations, can easily understand the actual implications of Ind AS. With the best insurance companies from all over the world participating with the emerging India, employees are no longer just union employees fighting for some small gains from the government. The shares of insurance companies will be offered to common public making them more attractive and the services more professional. Hence, the need to understand the latest developments in insurance.

Impairment of reinsurance assets

If a cedant’s reinsurance asset is impaired, the cedant shall reduce its carrying amount accordingly and recognize that impairment loss in profit or loss. A reinsurance asset is impaired if, and only if:

(a) there is objective evidence, as a result of an event that occurred after initial recognition of the reinsurance asset, that the cedant may not receive all amounts due to it under the terms of the contract; and

(b) that event has a reliably measurable impact on the amounts that the cedant will receive from the reinsurer.

(Cedant means the policy holder under the reinsurance contract)

Changes in accounting policies

An insurer may change its accounting policies for insurance contracts if, and only if, the change makes the financial statements more relevant to the economic decision-making needs of users and no less reliable, or more reliable and no less relevant to those needs. An insurer shall judge relevance and reliability by the criteria in Ind AS 8.

Current market interest rates

An insurer is permitted, but not required, to change its accounting policies so that it remeasures designated insurance liabilities to reflect current market interest rates and recognizes changes in those liabilities in profit or loss. At that time, it may also introduce accounting policies that require other current estimates and assumptions for the designated liabilities. The election in this paragraph permits an insurer to change its accounting policies for designated liabilities, without applying those policies consistently to all similar liabilities as Ind AS 8 would otherwise require. If an insurer designates liabilities for this election, it shall continue to apply current market interest rates (and, if applicable, the other current estimates and assumptions) consistently in all periods to all these liabilities until they are extinguished.

Future investment margin

An insurer need not change its accounting policies for insurance contracts to eliminate future investment margins. However, there is a rebuttable presumption that an insurer’s financial statements will become less relevant and reliable if it introduces an accounting policy that reflects future investment margins in the measurement of insurance contracts, unless those margins affect the contractual payments.

The reader can refer to discussions shown under prudence, shadow accounting, insurance contracts acquired in a business combination or portfolio transfer under Ind AS 104 for detailed coverage.

Disclosure

Explanation of recognized amounts

An insurer shall disclose information that identifies and explains amounts in its financial statements arising from insurance contracts.

Nature and extent of risks arising from insurance contracts

An insurer shall disclose information that enables users of its financial statements to evaluate the nature and extent of risks arising from insurance contracts.

Additional information

Ind AS Standard 104 also contains two appendices, namely, Appendix A and Appendix B.

Some information which helps the reader to understand the above article a little better has been culled from above appendices and has been given below:

Appendix A

Defined terms

Cedant – The policy holder under a reinsurance contract

Deposit component – A contractual component that is not accounted for as a derivative under Ind AS 109 if it were a separate instrument

Insurance risk – Risk, other than financial risk, transferred from the holder of contract to the issuer.

Insurer – The party that has an obligation under an insurance contract to compensate a policy holder if an insured event happens.

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. (See Ind AS 113.)

Insurance asset—An insurer’s net contractual rights under an insurance contract

Insurer– The party that has an obligation under an insurance contract to compensate a policyholder if an insured event occurs.

Policyholder– A party that has a right to compensation under an insurance 141 contract if an insured event occurs.

Appendix B

This is an integral part of the Ind AS.

B1 This appendix gives guidance on the definition of an insurance contract in Appendix A. It addresses the following issues: (a) The term ‘uncertain future event’ (paragraphs B2–B4);

(b) Payments in kind

(c) Insurance risk and other risks (paragraphs B8–B17);

(d) Examples of insurance contracts (paragraphs B18–B21);

(e) Significant insurance risk (paragraphs B22–B28); and

(f) Changes in the level of insurance risk (paragraphs B29 and B30). Uncertain future

Uncertain future event

Uncertainty (or risk) is the essence of an insurance contract. Accordingly, at least one of the following is uncertain at the inception of an insurance contract:

(a) whether an insured event will occur;

(b) when it will occur; or

(c) how much the insurer will need to pay if it occurs.

Payments in kind

Some insurance contracts require or permit payments to be made in kind. An example is when the insurer replaces a stolen article directly, instead of reimbursing the policyholder. Another example is when an insurer uses its own hospitals and medical staff to provide medical services covered by the contract

Distinction between insurance risk and other risks

The definition of an insurance contract refers to insurance risk, which this Ind AS defines as risk, other than financial risk, transferred from the holder of a contract to the issuer. A contract that exposes the issuer to financial risk without significant insurance risk is not an insurance contract.

Conclusion

Generally, in insurance industry, an average employee due to union or unassailable position as unchallenged industry status (being fully owned arm of the government) was not treated fairly, by not providing intellectual understanding of the accounting principles on which the insurance industry was based. With the arrival of new players from abroad as well as introduction of latest online and offline advertisements and new IT systems, the increased competition has made this industry as highly competitive. Increased M&A deals showcase the insurance industry’s attraction for increased investments and introduction of the latest technology. The writer, therefore, introduced the concept of Ind AS in insurance industry, through this article. As mentioned earlier, the full implication of total convergence to Ind AS will take place in due course. New articles can be again written to showcase the difference between GAAP and Ind AS. It is

Reference

  • http://mca.gov.in/Ministry/pdf/INDAS104.pdf
  • http://www.icai.org/post.html?post_id=7543
  • Illustrated Guide to Indian Accounting Standards (Ind Ass) by B.D.Chatterjee, by Taxmann Publications (p) Ltd.
  • https://rbidocs.rbi.org.in/rdocs/Content/PDFs/FAS93F78EF58DB84295B9E11E21A91500B8.PDF
  • (Author’s article titled “Convergence to IFRS (Ind AS)-Indian banking scene” in Tax Guru, link quoted above)

About the author: Subramanian Natarajan C.P.A. (USA), M.Sc., CAIIBtook voluntary retirement in 2000 from Punjab National Bank after handling various facets of banking like deposit mobilization, foreign exchange, auditing and borrower accounts. After living in USA for 12 years during which period he worked in international auditing firms specializing in international tax, auditing, IFRS, he continues his practice in New Delhi, India. He can be reached at subcpa@gmail.com. Tel: 7503562701, 9015613229. He currently lives in Delhi. His name appears as tax consultant in web site of American embassy, New Delhi. The author invites employees/executives of insurers to contribute their views/observations on this article for enrichment of all of us.

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Location: NEW DELHI, New Delhi, IN
Member Since: 09 May 2017 | Total Posts: 16
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