FINANCIAL REPORTING IN INSURANCE INDUSRTY
Lessons From The Future
A presentation at the Chartered Insurers Professional forum held at Abeokuta
on 11 – 13 September, 2014
By
GEORGE ONEKHENA
DEPUTY COMMISSIONER FINANCE AND ADMINISTRATION
(NAICOM)
OPENING SHOT
Confronting Reality: Doing what matters to get things right
But the established methodologies for defining the purpose of a business and
planning its future have drifted steadily away from realism. Many people
in business today are boxed in by dysfunctional practices and habits that
more often than not obscure reality, rather than expose it. Many have
succeeded anyway in the past. Fewer will in the future, because….the
business environment is becoming far less forgiving of mistakes”
……Larry Bossidy and Ram Charan (2004) in “Confronting Reality: Doing
what matters to get things right”
THOUGHT FOR FOOD
Where
will you be
11 September, 2084?
OUTLINE
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Introduction
Clarification of Terms
Current Reporting Context : Framework, Practices and Evaluations
Emerging issues and related strategies
Recommendation
Conclusion
INTRODUCTION
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I thank CIIN for a recognition implicit in the opportunity to present this paper
Theme of this year’s forum is well chosen; in the era of rapid, unrelenting and
pitiless change that we live in today, we need knowledge of the trends and how to
manage them otherwise failure is evitable ..
The insurance industry has gone through a lots changes in the last 7 years; more will
come because we need to address impact of inevitable changes on our lives and
business.
History is replete negative stories of people and societies that resisted change. We
cannot afford not to be on good side of History.
CLARIFICATION OF TERMS
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Financial reporting
Financial statements
Financial reporting supply chain
Insurance industry
CLARIFICATION OF TERMS
Financial reporting
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Financial reporting can simply be described as the art of presenting of data on an
entity’s financial position, performance and changes in financial position for an
accounting period.
The output of financial reporting process are general purpose financial statements
which are distinguished by their target audience of existing and potential
investors, lenders and other creditors;
General purpose financial statements are different from Statutory financial
reporting targeted at Regulators
This presentation will focus on general purpose financial statements as impacted
by regulatory requirements
CLARIFICATION OF TERMS
Financial Statements
Financial Statements
• Financial statements includes
– a statement of financial position as at the end of the period;
– a statement of comprehensive income for the period;
– a statement of changes in equity for the period;
– a statement of cash flows for the period;
– notes, comprising a summary of significant accounting policies and other
explanatory information;
• An entity may use titles for the statements other than those used in this Standard.
Financial reporting framework
Financial Reporting Framework is a set of criteria used to determine recognition,
measurement, presentation, and disclosure of all material items appearing in the
financial statements.
CLARIFICATION OF TERMS
Financial Reporting Supply Chain
The financial reporting supply chain refers to the people and processes involved in the
preparation, approval, audit, analysis and use of financial reports.
CLARIFICATION OF TERMS
Insurance Industry
All participants in the insurance value chain and Includes
• Intermediaries
• Insurance companies
• Reinsurers
• Facilitators:
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Loss Adjusters
Engineers
Values
Accountants
Actuaries
Arbitrators
CURRENT FINANCIAL REPORTING CONTEXT
Insurance Financial Reporting Framework
Legal
• CAMA
• NAICOM Act
• Insurance Act
• Pension Reform Act
• Investments and
Securities Act
• Financial Reporting
Council of Nigeria Act 2
Accounting /Auditing
Standards/
References
• IFRS
• SAS
• Nigerian Auditing
Standard
Nigerian Stock
Exchange
Requirement
Business Models of
Insurance
institution
CURRENT FINANCIAL REPORTING CONTEXT
Financial Reporting Framework
FRC Act 2011
Several innovation and demanding provisions, enforcement yet to commence. Please
note:
• Superiority of FRC Act on financial reporting issues
• Submission of annual reports and financial statements to FRC.
• Management assessment of internal controls with independent attestation
• Real time disclosures on material changes in financial conditions or operations
• Forfeiture of certain bonuses where the company is required to prepare an
accounting restatement
• Submit all qualified reports
• Auditors to report separately on corporate governance.
• Auditors to notify any material irregularity
• Notification of conflict of interest to CEO of reporting entity and FRC
CURRENT FINANCIAL REPORTING CONTEXT
Financial Reporting Framework
Insurance Act
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Obstruction of Public officers.( S87)
Offence by insurers in relation to investments.(S 88)
Misrepresentation by public officers ( S 89)
Offence by body corporate ( S 90)
Powers as to production of books, etc.( s 91)
CURRENT FINANCIAL REPORTING CONTEXT
Financial Reporting Practice
Insurance Companies
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Transited to IFRS in 2012, with outstanding issues
Weakness in Accounting systems
Attitude to timelines and quality of financial reporting need improvement
Insurance Brokers
• Transited to IFRS in 2013, training and evaluation still on
• NCRIB made commendable effort with the shared service concept
• Brokers in need of Accountants who will sign Financial Statements
• Challenges of competence deficits will need to be addressed
Loss Adjuster
• Will transit to IFRS for SMEs in 2014.
• This should not be a major problem
CURRENT FINANCIAL REPORTING CONTEXT
Evaluation of Financial Reporting Practice
IMF/ World Bank FSAP report
“Poor accounting and auditing practices results in supervisors spending too much
time in verifying the accuracy of financial data. Supervisors spend more time verifying
data than analyzing them. This not only hinders effective supervision, but also timely
disclosure of information to policyholders and the market in general. NAICOM should
collaborate with the FRC to improve the reliability of the audited financial
statements, so that supervisors are able to focus more on both quantitative analysis
and qualitative aspects of supervision. To promote proper governance, NAICOM
should take insurers and directors to task for submitting inaccurate information”
CURRENT FINANCIAL REPORTING CONTEXT
Evaluation of Financial Reporting Practice
GIZ Report on regulation and Nigerian Market
“There is lack of transparency in commissions paid and low reliability of financial
data. In addition, the financial statements are not very transparent. Underlying
reasons are not entirely clear (e.g. low quality of audit, reporting standards not being
followed, etc.),but these characteristics might be impacting competition and
perpetuating inaction in the market.”
CURRENT FINANCIAL REPORTING CONTEXT
Evaluation of Financial Reporting Practice
Standards & Poor Assessment of Insurance Industry
“Institutional framework (Weak--6) .We base our view of Nigeria's institutional
framework as weak (6) on our assessment of two factors--regulatory framework and
track record, and governance and transparency--as weak. Improvements in these
factors have come only slowly and both started from a low base. Regulatory oversight
will improve as the regulator puts risk-based supervision into operation and
implements the policies outlined above. However, we still have concerns about the
speed and comprehensiveness of implementation and the availability of technically
skilled staff. We base our view of the weak governance and transparency in the
sector on the poor quality and timeliness of accounting and disclosure. That said, we
expect implementing International Financial Reporting Standards to cause this to
improve gradually.”
CURRENT FINANCIAL REPORTING CONTEXT
Living in an age of Discontinuous Change
A characterization of Change by Gary Hamel
“...What confronts every company, large or small, today and in the years ahead, is not
merely the challenge of harnessing the power of “e” but of learning to thrive in a
world where change is discontinuous, unrelenting and pitiless. What distinguishes
the future from the past is not “e” –not electronic commerce, but “t”-profound
and inescapable environmental turbulence. Many industrial-age paragons-from AT
&T to Motorola to Coca-Cola to British Telecom to DaimlerChrysler to Merrill
Lynch- are right now struggling to adapt to a world where change jumps and spins,
tumbles and careens”
....... Gary Hamel ,Leading the Revolution ( 2002)
EMERGING ISSUES & STRATEGIES
Parade of Issues
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Change in NAICOM approval methodology
Extracting Accountability for Financial report
Embedding IFRS
IFRS 4 phase II- Insurance Contracts
Extensible Business Reporting Language (XBRL)
Upgrade of Solvency Margin Regime
Harmonization of accounting practices
Implementation and enforcement of FRC Act 2011
Concerns about Information Overload
EMERGING ISSUES & STRATEGIES
Change in NAICOM approval methodology
Issues
• NAICOM change approval Methodology
– Limited Validation, more Analysis
• Management to be assessed by quality and timelines of financial reports
• NAICOM to pay more attention to Financial Analysis using the CARAMELS
framework: C- Capital , A- Asset Quality, R- Reinsurance , A- Actuarial , MManagement, E- Earnings ,L- Liquidity and S- subsidiaries
Strategies
• Improve internal control over financial reporting
• Companies to do internal CARAMELS analysis
EMERGING ISSUES & STRATEGIES
Extracting Accountability for Financial report
Issues
• Board to be held accountable and required to ensure deficiencies are
corrected.
• Shareholders will not bear cost of penalties.
• Auditor to be backlisted for acts of omission and commission
Strategies
• Learn the legal implications of delays in or failure to render financial reports –
Read NAICOM Act 1997 and Insurance Act 2003
• All parties in the reporting supply chain should be alive to their responsibility
• Periodic financial statements should be analyzed to detect errors
• Make staff accountable for errors
EMERGING ISSUES & STRATEGIES
Embedding IFRS
Issues
• Financial reporting practices to be IFRS compliant
• Significant improvement in IFRS competence required
• Embedding of Risk Management
• Deficiencies in current IT applications in Financial reporting
Strategies
• Conduct honest assessment of state of IFRS reporting practices
• Improve internal control of financial reporting
• Improve learning and development
• Upgrade of change IT application( Industry shared services concept?)
EMERGING ISSUES & STRATEGIES
New Standards with prospective application
The standard - IFRS 9
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FRS 9 (2014) was issued as a complete standard to replace IAS 39 on financial
instrument.
• Effective with effect from 1 January 2018 , early adoption permitted
• New classification for financial instruments
• Basis of impairment now “expected-Loss” in place of “incurred loss” model
Issues
• Need exploit time available to prepare for change
Strategies
• Companies to determine impact of IFRS 9 and ensure need full done
• Accountant should study IFRS 9 and ensure financial report for 2018 reflects
proper treatment of items.
• Remember comparatives for 2017 will be required
EMERGING ISSUES & STRATEGIES
IFRS 4 phase II- Insurance Contracts
Major Issues
• The proposed standard, if adopted will replace IFRS 4: Insurance Contracts
phase 1,
• Possible effective date 1 January 2018
• Will establish a single consistent recognition, measurement, presentation and
disclosure model
• New approaches to financial position and income statement presentation
– Basis of Valuation of liabilities the change especially with use of present
value techniques
– Unbundling contracts into insurance and investment components
• Increased need to assess enterprise risks
Strategies
• Study and monitor developments in the standard setting process
• Note possible impact and incorporate same in strategic planning, even if on
scenario basis
• As Industry, consider involvement in standard setting process
EMERGING ISSUES & STRATEGIES
Standards in process
IASB Due Process
Setting
Agenda
Planning
Discussion
Paper
Exposure
Draft
Rigorous, open , usually webcast process
IFRS
Reviews
EMERGING ISSUES & STRATEGIES
Extensible Business Reporting Language- XBRL
Issues
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XBRL (eXtensible Business Reporting Language) is a digital 'language' that was
developed to provide a common, electronic format for business and financial
reporting.
Mark-up tags are used to make business information computer-readable and
consumable.
It offers cost savings, greater efficiency and improved accuracy and reliability
to all those involved in supplying or using business information
Will come into regulatory reporting in the future
Capability exist in current software
Strategies
• Understand XBRL
• Make conscious decision on when to apply
• Expect Regulators Position on it
EMERGING ISSUES & STRATEGIES
Upgrading Solvency Regime
Issues
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IMF FSAP Evaluation: The solvency regime, valuation and the reserve
requirements need to be upgraded to capture the nature of risk inherent in
each insurer.
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NAICOM is transit to Risk based supervision and the industry will be involved in
all effort leading to the change
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Solvency regime has implications for measurements, presentation and
disclosure practices of insurance companies.
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Standards and guidelines on this can be found in Insurance Core Principles
(ICPS) issued by IAIS. ( See Appendix 1)
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Solvency II model is an example of a risk based solvency regime.
Strategy
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Learn implications and keep up to date on progress in transit to Risk based
supervision
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Be involved as much as possible
RECOMMENDATION
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All those with role in the financial reporting change should be awake to the reality
that the field is going to be continuously subject to changes both from the
standard setting Boards, Regulators and service providers especially in the area of
information technology
They should therefore keep abreast of development with attention to details that
may be required
Establish a framework for dealing with changes in a proactive determined way
– Establish accountability for identifying and monitoring change in Financial
Reporting
– Ensure emerging changes receive appropriate attention at relevant levels
– Take actions considered necessary
– Monitor Results
RECOMMENDATION
Life Action Map
Determinants of where issues fall
for each of us include natural endowment, gift,
knowledge, orientation, resource controlled...
Action
Influence
Surrender
Unknown, No
Action but
Watch and Pray
8/3/2014
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CONCLUSION
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There various issues emerging in the financial reporting framework
IFRS and regulatory requirements will continue to drive changes in financial
reporting
Individual and organizations have critical roles to play
There is need for appropriate strategies to be chosen and deployed
Thanks for you attention
APPENDIX 1
EMERGING ISSUES & STRATEGIES
Upgrading Solvency Regime
Common Solvency Structure and Standards
LEVEL 3
LEVEL 2
LEVEL 1
Supervisory
assessment
Supervisory assessment and intervention
Regulatory
requirements
Preconditions
Framework
Solvency - Valuation of
Liabilities & Value at Risk
Methodology
Common Solvency
Structure and Standards
Financial
Governance
Market conduct
the insurance supervisory authority
Basic conditions for the
effective functioning of the insurance sector and insurance
supervision
for Insurance Supervision
32
November 2009
Jason Park
EMERGING ISSUES & STRATEGIES
Upgrading Solvency Regime
Regulatory Financial requirements
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Total balance sheet approach
– Recognise interdependence between assets, liabilities, regulatory capital
requirements and capital resources
– Ensure that determination of available and required capital is based on
consistent assumptions for the recognition and valuation of assets and
liabilities for solvency purposes ( Economic Valuation)
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Determination of prescribed levels of RCRs
– MCRs and PCRs
– relationships between different levels
Establishment of a range of solvency control levels
– with appropriate supervisory interventions
Allowance of a range of approaches
– standardised approaches and more advanced approaches, such as internal
models
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EMERGING ISSUES & STRATEGIES
Upgrading Solvency Regime
Regulatory Financial requirements
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14.2.6 Regulatory capital requirements are determined using a consistent
treatment of the valuation of assets and liabilities. Consistency in the valuation of
assets and liabilities for solvency purposes does not necessarily mean that a single
valuation basis is used for all assets and liabilities. The balance sheet, when taken
together with capital requirements, should result in an appropriate recognition of
risks.
EMERGING ISSUES & STRATEGIES
Upgrading Solvency Regime
Regulatory Financial requirements
Solvency Control Levels and Regulatory Capital Requirements
Prescribed Capital
Requirement (PCR)
Capital
Resources
(CR)
Required
Capital
Minimum Capital
Requirement (MCR)
Risk Margin
(RM)
Current
Estimate
(CE)
Technical
Provisions
(TP) and
Other
liabilities
Other
Other
liabilities
liabilities
(OL)
(OL)
Insurer’s
Financial
Position
Solvency - Valuation of
Liabilities & Value at Risk
Methodology
Regulatory
Capital
Requirements
35
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November 2009
Jason Park
EMERGING ISSUES & STRATEGIES
Upgrading Solvency Regime
Governance Requirements
refers to governance processes and controls in areas such as
• the Board, directors, senior management and other organisational aspects,
• fit and proper testing of directors and management;
• administrative, organization and internal controls, including risk management;
• compliance with legislative requirements;
• shareholder relationships; and the governance risks posed by group structures
EMERGING ISSUES & STRATEGIES
Upgrading Solvency Regime
Market Conduct Requirements
this includes areas such as
• dealing with customers in the selling and handling of insurance policies,
• the integrity of conduct by an insurer as an institutional investor.
• disclosure of relevant information both to the market and to policyholders
EMERGING ISSUES & STRATEGIES
Upgrading Solvency Regime
Supervisory assessment and intervention
Progressive intervention levels to ensure timely corrective
measures – an example
190%
• Prescribed capital requirement (PCR) level
• Supervisory intervention not required
160%
• Submission of business plan to improve capital buffers
• Increased on-site supervision
• Additional stress and scenario testing
Capital Adequacy Ratio
= Capital Available
Capital Required
130%
• Limit shareholder dividends
• Restrict new business acquisition
• Delay approval of new products
100%
Solvency - Valuation of
Liabilities & Value at Risk
Methodology
• Minimum capital requirement (MCR) level
• Winding-up of operation
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November 2009
Jason Park