Malaysian insurers will have to significantly alter and invest in their processes and systems as a result of the new accounting standards that are likely to take effect in 2021, the chief financial officer of Axa Affin Life Insurance Malaysia has said.

“Much of the current financial processes will need to be changed; significant process re-engineering and investments will need to be made between now and 2021 to ensure [insurers] are MFRS17-compliant,” Kelvin Wong Wei Win told AsianInvestor.

MFRS17 refers to Malaysian Financial Reporting Standard 17, which mirrors the better known International Financial Reporting Standard 17 issued by the International Accounting Standards Board (IASB) that applies to 125 jurisdictions, impacting more than 500 insurance companies globally. It was expected to come into effect in 2021, but the IASB is now considering deferring implementation by one year given the scale of changes that the new rules will bring to insurer operations and reporting.

Wong noted that insurers are in the process of assessing and implementing the necessary changes to their systems and processes, as required by the new accounting standard. 

The broad consensus is that insurers may well have to invest in new IT systems and processes and will likely need more specialist staff as actuarial models become more complex with the adoption of the new standard, according to a recent Aminvest research report.

MFRS17 will be a big change for insurers, particularly in terms of how they make provisions and recognise profits, Wong said (see box).

“With MFRS17, profits will be recognised more uniformly with the provision of insurance services," he said. "Under current standards, it is possible for some portion of the profit to be front-loaded or back-loaded, depending on the products. What will happen in future is that [profits] will be more aligned with the services that insurance contracts provide.”

Malaysia's central bank, Bank Negara Malaysia, also expects MFRS17/IFRS17 to be a catalyst for insurers to review, if not overhaul, business processes across their organisations.

In a speech in May, BNM deputy governor Jessica Chew Cheng Lian said IFRS17 would require insurance companies to capture broader and more granular information for financial reporting and change the way performance is measured.

It could also offer increased opportunities for institutions to differentiate themselves from the competition, given a more integrated view of performance, she noted.

MFRS17 will come on top of another set of new accounting rules that were introduced under MFRS9 this year. IFRS 9 focuses on the asset side of the balance sheet, while IFRS 17 is for the liability side.

MFRS9 replaces International Accounting Standard 39, which has been criticised for being too complex and inconsistent with the way companies manage their businesses and risks; in particular, it defers the recognition of credit losses on loans and receivables until too late in the credit cycle.

The impact of MFRS9 on insurers in Malaysia has been minimal to date, media reports have said, since many firms have been allowed to defer implementation to coincide with MFRS17 when it comes into effect.

"Because of the changes ... under MFRS17, companies are trying to adopt both standards at the same time so that the impact doesn’t occur on a staggered basis,” added Wong.

“Anyone reading the financial statements will then understand the full impact of the regulations,” he added.

Insurance firms elsewhere in Asia and globally are preparing for the impact of IFRS 9 and 17 on investment portfolios, with some, such as China's Ping An, becomg early adopters of IFRS 9. 

Some key changes under IFRS/MFRS 17 
  • Premium income will no longer appear on the profit and loss statements of insurers. Gross written premiums will not be stated as part of revenue and will be replaced by profits from contracts, which will gradually be amortised or released and recognised on the P&L via contractual service margins* 
  • Insurance contracts that are similar in risk will have to be grouped together 
  • Insurance service expenses will become more transparent with actual and expected expenses reported
  • Financial risk will be presented separately from insurance service results. The volatility of financial risk will be captured either under the P&L or the statement of other comprehensive income

*Gross written premiums refer to the total premium underwritten by an insurer or reinsurer during a specified period, before deduction of reinsurance premium. Contractual service margins refer to unearned profits that have to be recognised systematically over the insurance coverage period. It can also be viewed as the present value of future profits.

Source:Aminvest