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KPMG Sri Lanka Partner Suren Rajakarier
By Darshana Abayasingha
International Financial Reporting Standard (IFRS) 17 issued by the International Accounting Standards board comes into effect from January 2021, whereby insurance contract liabilities will be calculated as the present value of future insurance cash flows with a provision for risk. The new standard also offers provisions for specific types of contracts, including short-duration contracts, but has also presented a number of challenges to insurers globally.
Speaking to the Daily FT, ACCA President and KPMG Sri Lanka Partner Suren Rajakarier said that globally many companies have already commenced the process of transition to comply with the new standard as the timeframe given is somewhat inadequate to cope with the challenges. In this context, Sri Lankan insurers are slightly behind schedule, but in the event a deferral is given on an international basis, we could work along those timelines, he said.
“IFRS 17 is going to present significant challenges for all insurance companies, because up to now it was mainly accounting related challenges, but with this new standard, it becomes integrated where accounting personnel and IT personnel will be equally impacted in trying to implement or comply. One of the biggest global issues in terms of IFRS 17 is that insurance systems are required to capture more data and that is not in place. Globally, a significant percentage of CEOs have identified the lack of appropriate IT systems as the biggest challenge. In the local context, that’s going to play a big part too. One particular aspect of the standard is that it presents many business benefits; it is not just about compliance. If companies put down processes in place in IFRS 17, it provides strategic inputs on how they can redesign the business or products to make it more profitable, plus, reduce loss-making sectors. Therefore, in addition to the IT and accounting challenges the standard presents, Boards have to think about it from a strategy perspective, as to how they can take advantage of this whole requirement.”
Whilst most Sri Lankan insurers are far from ready to adopt IFRS 17, it was revealed that most have commenced the initial phase of assessment to identify appropriate consultants who could help them with the transition and implementation. It was revealed that many companies are ‘still grappling’ with the complexities of the new standard, and the limitation of resources at institutional and country level to meet them. These include accounting knowledge, technology and actuaries. The industry, together with the Insurance Association and the Institute of Chartered Accountants of Sri Lanka, are working together to comply with the standard and set the necessary changes, but are yet to set a target date for implementation.
With so many challenges before organisations, we asked Rajakarier if we are pushing the boundaries of regulation beyond practical expectations.
“There is a school of thought that deregulation and self-monitoring is better, others opine that regulation and monitoring or compliance is better. In the Sri Lankan context, with the business conducted by insurance companies being not so complex, the implementation challenges should be less. If you apply the standard to non-complex transactions, then it should be much easier. There is always the question whether you can apply a Rolls Royce standard to third world countries. But more than 100 countries are adopting IFRS 17, and all 100 countries are not large countries. Regulation along with monitoring is a good thing. Regulation per se without monitoring is useless, similar to the traffic laws of Sri Lanka. You can have a lot of laws and regulations which are not monitored and are therefore of no use. So, regulation along with good monitoring will improve business confidence, organisational performance, transparency and governance, and these are attractive to international investors. For a country like Sri Lanka, it’s always good to comply and show that we are at a better standing at compliance rather than not. A country like India and China can dictate terms. Somebody has to think if Sri Lanka can dictate terms. It’s a trade-off; it’s a difficult trade-off but compliance might be an easier one to Sri Lanka.”
The discount rate listed in IFRA 17 is market-based, allowing little room for manipulation and thereby improving consistency of results amongst companies. The new standard will also improve governance amongst insurance companies, and also provide impetus to embrace new and innovative digital products due to the greater focus on IT. Most local institutions employ legacy IT systems, which will now need to be enhanced with the advent of IFRS 17, which would enable companies to look at offering more personalised products to grow insurance penetration in Sri Lanka. The rate of penetration for insurance in Sri Lanka is amongst the lowest in the region at just 1.24%. This was also listed in the Insurance Sector Report issued by KPMG Sri Lanka recently.
“Though we have 28 companies, they have not done enough to penetrate into various sectors. One of the aspects is the distribution channel, which is where digitalisation comes into play. They can improve distribution and improve customer experience, and also try sell personalised insurance products. You get a lot of agents in the country who have not received adequate training. They are only interested in coming and selling a life policy and getting the first year’s instalment and then walk away. If the policy doesn’t persist over a longer period, the company incurs a loss and also the insuree loses confidence in insurance. There is enough scope for growing non-life business and life business. In life business, people have to look at the benefits of insurance rather than looking it as a fixed deposit or an investment product. On the general side, people have to be made aware of the benefits of insurance, and you could employ technology to do that. In the heath sector, one or two companies have started monitoring or assisting individuals to try make them more health conscious and sell insurance. With wearable technology, you link up with those to persuade customers to look at insurance in a more positive way to improve their health as well rather than simply considering it as a payback mechanism,” Rajakarier averred.
There is still very little focus on the ageing population of the country, he lamented, pointing out that by 2040, over 25% of the population will be over 60. With a significant part of the younger population looking to migrate, there will be a large ageing population in the country, but very little effort present other than pension products to convince the ageing population to buy insurance. The number of products is deeply inadequate, he said. These were some of the areas that have been highlighted in KPMG’s Insurance Sector report, which he said provides an independent analysis of the sector underscoring a number of trends and challenges.
“How you sell your products is something the industry really needs to look into. Do we have adequate digital platforms to address youngsters? They may seek shorter schemes and different payment plans; do we have products to cater to that? Young customers think differently. So, if you cater to that type of customer, you have to redesign products based on their needs. Global companies use predictive analysis to come up with trends which are appealing to different people and market products relating to them. You have to really understand their needs.
Will an insurance company give a two-week insurance via a phone? People don’t like filling forms. The tools available in the global market allow that from health to motor to travel; it is all on smart devices. With artificial intelligence, they are able to assess it within hours and claims are paid within ten minutes. Over here, if you make a claim, it takes a very long time, and therefore, it is not really appealing. It is really all about how you choose to penetrate the market,” Rajakarier said, pointing to Sri Lanka’s unexploited insurance potential.
