FINANCIAL REPORTING IN INSURANCE INDUSRTY Lessons From The Future A presentation at the Chartered Insurers Professional forum held at Abeokuta on 11 –

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 ONEKHENADEPUTY 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

• Introduction• Clarification of Terms• Current Reporting Context : Framework, Practices and Evaluations• Emerging issues and related strategies• Recommendation• Conclusion

INTRODUCTION

• 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

• Financial reporting • Financial statements• Financial reporting supply chain• Insurance industry

CLARIFICATION OF TERMSFinancial reporting

• 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 TERMSFinancial 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 frameworkFinancial 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 TERMSFinancial 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 TERMSInsurance Industry

All participants in the insurance value chain and Includes•Intermediaries•Insurance companies•Reinsurers•Facilitators:

– Loss Adjusters– Engineers– Values– Accountants– Actuaries– Arbitrators

CURRENT FINANCIAL REPORTING CONTEXTInsurance Financial Reporting Framework

CURRENT FINANCIAL REPORTING CONTEXTFinancial Reporting Framework

FRC Act 2011Several 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 CONTEXTFinancial Reporting Framework

Insurance Act

•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 CONTEXTFinancial Reporting Practice

Insurance Companies•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 CONTEXTEvaluation 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”


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.”


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 CONTEXTLiving 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 & STRATEGIESParade of Issues

1. Change in NAICOM approval methodology2. Extracting Accountability for Financial report3. Embedding IFRS4. IFRS 4 phase II- Insurance Contracts5. Extensible Business Reporting Language (XBRL)6. Upgrade of Solvency Margin Regime7. Harmonization of accounting practices8. Implementation and enforcement of FRC Act 20119. Concerns about Information Overload

EMERGING ISSUES & STRATEGIESChange 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 , M- Management, E- Earnings ,L- Liquidity and S- subsidiaries

Strategies•Improve internal control over financial reporting•Companies to do internal CARAMELS analysis

EMERGING ISSUES & STRATEGIESExtracting 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 & STRATEGIESEmbedding 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 & STRATEGIESNew Standards with prospective application

The standard - IFRS 9•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” modelIssues•Need exploit time available to prepare for changeStrategies•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 & STRATEGIESIFRS 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 risksStrategies•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 & STRATEGIESStandards in process

Rigorous, open , usually webcast process

IASB Due Process

EMERGING ISSUES & STRATEGIESExtensible Business Reporting Language- XBRL

Issues

•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 & STRATEGIESUpgrading Solvency Regime

Issues•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. •NAICOM is transit to Risk based supervision and the industry will be involved in all effort leading to the change•Solvency regime has implications for measurements, presentation and disclosure practices of insurance companies.•Standards and guidelines on this can be found in Insurance Core Principles (ICPS) issued by IAIS. ( See Appendix 1)•Solvency II model is an example of a risk based solvency regime. Strategy•Learn implications and keep up to date on progress in transit to Risk based supervision• Be involved as much as possible

RECOMMENDATION

• 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

RECOMMENDATIONLife Action Map

Determinants of where issues fall for each of us include natural endowment, gift, knowledge, orientation, resource controlled...

Determinants of where issues fall for each of us include natural endowment, gift, knowledge, orientation, resource controlled...

298/3/2014

CONCLUSION

• 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

Solvency - Valuation of Liabilities & Value at Risk Methodology 32 November 2009

Jason Park


Common Solvency Structure and Standards

Preconditions

Regulatory requirements

Supervisory assessment

LEVEL 1

LEVEL 2

LEVEL 3 Supervisory assessment and intervention

Basic conditions for the effective functioning of

the insurance supervisory authority

the insurance sector and insurance supervision

Financial Governance Market conduct

Common Solvency Structure and Standards

Framework for Insurance Supervision


Regulatory Financial requirements

• 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)

• 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



• 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.


Jason Park

35



Solvency Control Levels and Regulatory Capital Requirements

Minimum Capital Requirement

(MCR)

TechnicalProvisions(TP) and

Other liabilities

Capital Resources

(CR)

Required Capital

Risk Margin (RM)

Current Estimate

(CE)

RegulatoryCapital

Requirements

Insurer’s FinancialPosition

Prescribed Capital

Requirement (PCR)

Other liabilitie

s(OL)

Other liabilities

(OL)


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


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


Jason Park


Supervisory assessment and intervention

• Prescribed capital requirement (PCR) level

• Supervisory intervention not required

Capital Adequacy Ratio

= Capital Available

Capital Required

190%

160%

100%

130%

• Submission of business plan to improve capital buffers

• Increased on-site supervision

• Additional stress and scenario testing

• Limit shareholder dividends

• Restrict new business acquisition

• Delay approval of new products

• Minimum capital requirement (MCR) level

• Winding-up of operation

Progressive intervention levels to ensure timely corrective measures – an example

FINANCIAL REPORTING IN INSURANCE INDUSRTY Lessons From The Future A presentation at the Chartered Insurers Professional forum held at Abeokuta on 11 –

Documents

FINANCIAL REPORTING IN INSURANCE INDUSRTY Lessons From The Future A presentation at the Chartered Insurers Professional forum held at Abeokuta on 11 –