FINANCIAL REPORTING IN INSURANCE INDUSRTY Lessons From The Future

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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)

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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

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THOUGHT FOR FOOD

• Where
• will you be
• 11 September, 2084?

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OUTLINE

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

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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.

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CLARIFICATION OF TERMS

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

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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

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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.

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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.

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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

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CURRENT FINANCIAL REPORTING CONTEXTInsurance
Financial Reporting Framework
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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

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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)

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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

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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

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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.

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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.

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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)

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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

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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

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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

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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?)

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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

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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

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

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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

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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 

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

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• APPENDIX 1

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EMERGING ISSUES STRATEGIESUpgrading Solvency
RegimeCommon Solvency Structure and Standards
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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

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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.

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EMERGING ISSUES STRATEGIESUpgrading Solvency
RegimeRegulatory Financial requirements

• Solvency Control Levels and Regulatory Capital
  Requirements

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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

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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

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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