Insurance liabilities - IFRS Vs regulatory requirements

In 2016, the Insurance Regulatory Agency (IRA) changed the methodology for calculating insurance
liabilities for life companies from the Net Premium Valuation (NPV) methodology to the more advanced
Gross Premium Valuation (GPV).

The issue

With the recent changes in regulatory requirements and with the impending implementation of IFRS 17,
instances of differences between IFRS and regulatory requirements are likely to increase. This is
especially the case where IRA requires certain prescribed rates to be used in computation of liabilities.
The example given below illustrates one such instance where an entity may believe that the most
appropriate interest margin rate for its business is different from that specified by the regulator, with very
significant impact on the level of reserves required.

Would IRA consider an arrangement similar to the one agreed between CBK and ICPAK where differences
in liabilities computed under IFRS and IRA guidelines are included in reserves; with movements going
directly through equity? I would propose discussions with IRA on this matter.

Interest rate risk margin

The biggest area of contention at the moment is in respect of the interest rate risk margin.

The IRA has specified certain rates to be used in the GPV computation. For example, it requires that a
risk margin is applied to the interest rate used to discount future liabilities. This essentially is an
adjustment to the best estimate liability to come up with a resultant prudent regulatory liability. The risk
margin is applied as a shock/stress on the base assumption.

The base interest rate is based on the return on the assets (investment return) backing the insurance
liabilities. This rate is then applied as a discount rate, to discount expected future liability cash flows to
the present time. The risk margin effectively reduces the discount rate used to compute the liability. All
else being equal, a decrease in discount rate would result in a higher present value of liabilities and vice
versa.

For investment return, the gazette risk margin is 20% decrease.

This applies as follows:

Assume the best estimate assumption on investment return is say 14% and this results in a liability value
of X = best estimate liability.

Risk margin = (1-0.2)*14% = 11.2%

This would result in a liability value of Y which would be greater than X.

X is a best estimate, therefore realistic value while Y is a prudent estimate. The difference between X and
Y could be substantial.

IFRS 4 requires an entity to carry out a liability adequacy test in which it confirms whether its recognized
liabilities are adequate using current estimates of future cash flows under its insurance contracts. An
entity may consider that the risk margin required, based on its policy portfolio, is different from that
prescribed by the regulator.
Differing reporting requirements

The regulator’s reporting requirements are focused on protecting solvency and are therefore prudent.
IFRS aims to give a true and fair view and therefore requires that estimates be realistic. These conflicting
reporting requirements are challenges insurers in the market are increasingly having to deal with,
especially in light of the recent changes in insurance regulation and IFRS 17.

In some jurisdictions, solvency reporting requirements are significantly different from IFRS driving
insures to prepare multiple sets of accounts to separately and adequately meet the differing reporting
requirements.

Our IRA has confirmed that they will not accept cases where the filed regulatory returns differ from the
published financial statements. Further, the regulator believes that their reporting requirements are in
line with IFRS and do not see the need for a company to produce more than one set of accounts.

Way forward

I would propose a discussion between ICPAK and IRA to explore possibilities of introducing a mechanism
similar to that used for banks to ensure financial statements comply with both IFRS and regulator
requirements.