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FINANCIAL REPORTING IN INSURANCE INDUSRTY Lessons From The Future

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Title: FINANCIAL REPORTING IN INSURANCE INDUSRTY Lessons From The Future


1
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)

2
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

3
THOUGHT FOR FOOD
  • Where
  • will you be
  • 11 September, 2084?

4
OUTLINE
  • Introduction
  • Clarification of Terms
  • Current Reporting Context Framework, Practices
    and Evaluations
  • Emerging issues and related strategies
  • Recommendation
  • Conclusion

5
INTRODUCTION
  • I thank CIIN for a recognition implicit in the
    opportunity to present this paper
  • Theme of this years 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.

6
CLARIFICATION OF TERMS
  • Financial reporting
  • Financial statements
  • Financial reporting supply chain
  • Insurance industry

7
CLARIFICATION OF TERMSFinancial reporting
  • Financial reporting can simply be described as
    the art of presenting of data on an entitys
    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

8
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 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.

9
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.

10
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

11
CURRENT FINANCIAL REPORTING CONTEXTInsurance
Financial Reporting Framework
12
CURRENT FINANCIAL REPORTING CONTEXTFinancial
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

13
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)

14
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

15
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

16
CURRENT FINANCIAL REPORTING CONTEXTEvaluation 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.

17
CURRENT FINANCIAL REPORTING CONTEXTEvaluation 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.

18
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)

19
EMERGING ISSUES STRATEGIESParade of Issues
  • 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

20
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

21
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

22
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?)

23
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 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

24
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 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

25
EMERGING ISSUES STRATEGIESStandards in
process
IASB Due Process
Rigorous, open , usually webcast process
26
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

27
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

28
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 

29
RECOMMENDATIONLife Action Map
Determinants of where issues fall for each of us
include natural endowment, gift, knowledge,
orientation, resource controlled...
30
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

31
  • APPENDIX 1

32
EMERGING ISSUES STRATEGIESUpgrading Solvency
RegimeCommon Solvency Structure and Standards
33
EMERGING ISSUES STRATEGIESUpgrading Solvency
RegimeRegulatory 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

34
EMERGING ISSUES STRATEGIESUpgrading Solvency
RegimeRegulatory Financial requirements
  • 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.

35
EMERGING ISSUES STRATEGIESUpgrading Solvency
RegimeRegulatory Financial requirements
  • Solvency Control Levels and Regulatory Capital
    Requirements

35
36
EMERGING ISSUES STRATEGIESUpgrading Solvency
RegimeGovernance 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

37
EMERGING ISSUES STRATEGIESUpgrading Solvency
RegimeMarket 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

38
EMERGING ISSUES STRATEGIESUpgrading Solvency
RegimeSupervisory assessment and intervention
Progressive intervention levels to ensure timely
corrective measures an example
  • Prescribed capital requirement (PCR) level
  • Supervisory intervention not required

190
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
  • Minimum capital requirement (MCR) level
  • Winding-up of operation
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