Financial Reporting in Life Insurance Sector:
Framework, Challenges, and Way Forward
Ala Uddin FCA
CFO, American Life Insurance Company (MetLife)
8 February 2021
Confidential – for internal use only
Agenda for Discussion
1. Regulatory Framework
2. Current Practice Vs. IFRS Requirements
3. Challenges
4. Way Forward
5. Future with IFRS 17
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Regulatory Framework
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Current Regulatory Framework
Insurance and Other Regulations
Bangladesh Insurance Sector is currently governed by the following regulatory framework:
‒ The Insurance Act, 1938 and the corresponding Insurance Rules, 1958
‒ The Insurance Act, 2010 (however, no corresponding Insurance Rules or Regulations for all areas)
‒ The Financial Reporting Act, 2015
‒ The Companies Act, 1994
‒ The Securities and Exchange Rules, 1987
‒ IFRS (International Financial Reporting Standards)
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Current Regulatory Framework cont.
Alignment of Regulatory Framework
• Alignment of the
1 Insurance Act, 2010
(Section 32) in alignment
with the FRA 2015
• BSEC Notification
2 dated 20 June 2018,
para 1: Preparation of
Financial Statements
• Amendment of the
3 Companies Act,
1994
• Notification from
4 FRC on March 2020
re Section 40 of
FRA
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Amendment of the Insurance Act, 2010
Following two new sub-sections (4) and (5) inserted in the Insurance Act, 2010
"(4) The responsibility of an insurer as a "public interest entity" defined in section 2(8) of the FRA, 2015 shall
be to present to the authority necessary documents including the auditor’s report prepared in accordance
with the financial reporting standards and auditing standards made pursuant to provisions of section 40 of
the said Act."
(5) The said authority shall not accept any annual report, unless the same is presented along with the report of an
enlisted auditor.";
FRA Section 40, Standards setting, etc.–(1) The Council, with a view to rendering professional accounting
services for public interest entities, shall set and issue–
(a) financial reporting standards keeping consistency with the International Accounting Standards issued by the
IASB; and
(b) auditing standards keeping consistency with the International Standards on Auditing and Assurance and
Ethical Pronouncements issued by the International Auditing and Assurance Standards Board.
Subsequent circular of FRC on March 2020 required to prepare financials based on IFRS for all the Public
Interest Entities (PIE). 5
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19Amendment of Companies Act, 1994
Following two new sub-section (2A) and (2B) shall be inserted in section 185, namely:
(2A) The responsibility of a company established as a "public interest entity" defined in section 2(8) of the
FRA, 2015 shall be to present necessary documents including the enlisted auditor's report prepared in
accordance with the financial reporting standards and auditing standards made pursuant to provisions
of section 40 of the said Act.
(2B) The Registrar of Joint Stock Companies shall not accept annual report presented by such a company,
unless the same is presented along with the report of the enlisted auditor."
Following new sub-section (1A) shall be inserted after sub-section (1) of section 190, namely:
"(1A) The financial statements of a company established as a public interest entity defined in section 2(8) of the
Financial Reporting Act, 2015 shall not be furnished, unless in case of preparing the said financial statements,
the standards made by the Financial Reporting Council pursuant to section 40 of the same Act are followed.";
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BSEC Guidelines
BSEC notification dated 20 June 2018, para 1: Preparation of Financial Statements :
The financial statements (annual or interim) of the company shall be prepared in
accordance with the Securities and Exchange Rules, 1987 as well as the provisions
of International Accounting Standards (IAS) or International Financial Reporting
Standards (IFRS) as applicable in Bangladesh or as per requirements under the
Financial Reporting Act, 2015 as the case may be, unless otherwise specified in the
referred Rules and other rules related to the issue or issuer of securities.
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Current Practice Vs. IFRS Requirements
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Current Practice Vs. IFRS Requirements
Broad Financial Reporting Differences
IFRS Current Practice
The following reports are prepared under
the current regulatory framework:
IFRS would require the following
financial statements to be reported:
1. Balance Sheet
2. Revenue Account
1. Balance Sheet
3. Cash Flow Statement
2. Statement of Profit or Loss
3. Statement of Comprehensive Income
And
4. Statement of Changes in Equity (SCE)
5. Statement of Cash Flows
4. A separate Actuarial Valuation Report
5. A separate Financial Condition Report
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Current Practice Vs. IFRS Requirements cont.
Balance Sheet Differences
IFRS Current Practice
In the Asset side, there is no visible
difference with respect to the items Asset: Asset:
presented. 1. Policy loan 1. Policy loan
2. Investment 2. Investment
In the liability side, IFRS would expect two 3. Accrued investment income 3. Accrued investment income
distinct liabilities: “Actuarial Reserve 4. Cash & cash equivalents 4. Cash & cash equivalents
Liability” & “Participating Policyholders’ 5. Other assets 5. Other assets
Dividend or Bonus Liability”.
Liabilities: Fund and Liabilities:
Instead, Balance Sheet shows “Life Fund” 1. Actuarial reserves 1. Capital
which is the major building block for the 2. Participating policyholders’ dividend/ 2. Retained profit
alignment of our practice with IFRS. bonus liability 3. Life fund
3. Claims liabilities 4. Claims liabilities
Also, any separate equity section is not 4. Tax provision 5. Tax provision
reported within the balance sheet. 5. Payables and other liabilities 6. Payables and other liabilities
6. Revaluation reserves 7. Revaluation reserves
A simplified illustration is shown here:
Equites:
1. Capital
2. Retained profit 10
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Current Practice Vs. IFRS Requirements cont.
Revenue Account / Profit & Loss Account Differences
IFRS Current Practice
IFRS would expect the current year surplus
Premium
(profit/ loss) to be determined from the Beginning life fund
(+) Investment income
current year profit/ loss statement. (-) Transfer of previous year’s surplus
(-) Benefit costs (e.g., claims, surrender,
(profit/ loss) to the Shareholders
maturities)
The revenue account only shows the
(-) Change in actuarial reserve liability
non-actuarial revenue items and life fund (+) Premium
(-) Change in participating policyholders’
movement. (+) Investment income
dividend/ bonus liability
(-) Benefit costs (e.g., claims, surrender,
(-) Commission & other direct expenses
The revenue account does not reflect maturities)
(-) Fixed and other management costs
current year surplus (profit/ loss). It only (-) Commission & other direct expenses
(-) Tax provision_________________
shows the previous year’s surplus through a (-) Fixed and other management costs
deduction from the beginning life fund (-) Tax provision_________________
= Current year surplus (profit/ loss)
balance.
Ending life fund
A simplified illustration is shown here:
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Current Practice Vs. IFRS Requirements cont.
Revenue Recognition Basis
i) Investment contract: IFRS Current Practice
IFRS requires to recognize deposits from
investment contract as deposit in the
balance sheet as investment contract
liability, where the current practice to Total premium collected in the period Total premium collected in the period
recognize as premiums in the revenue (+) Premium receivable within the period (+) Due premium within the period
account. (-) Premium received in advance for future
periods (Risk unexpired)
II) Unearned revenue: ______________________________ ______________________________
IFRS requires to recognize unearned
premium which relate to periods of risk after = Premium revenue to be recognized in the = Premium revenue to be recognized in the
the balance sheet date on the basis of current period current period
estimated risk profile of the business written,
whereas the revenue account shows
revenue on a collected basis (including
premiums that have been due for a
certain period). So, any premium received
in advance is also recognized as premium
income in the Revenue Account.
A simplified illustration is shown here:
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Current Practice Vs. IFRS Requirements cont.
Where does the surplus (profit/ loss) come from?
IFRS Current Practice
Nothing to be done under IFRS as surplus Ending life fund (from the revenue account)
Surplus (profit/ loss) determination is (profit/ loss) determination process is (-) Actuarial reserve liability___________
automatically done through the profit & loss automatic (e.g., done through the profit &
account under IFRS. loss account). = Current year surplus
(-) Adjustments for participating
But a separate Actuarial Valuation Report policyholders’ dividend/ bonus liability____
is prepared to determine the current year
surplus (profit/ loss) where the actuarial = Current year surplus to be transferred
reserves and the policyholders’ dividend/ to Shareholder in the next year
bonus liability are deducted/ adjusted for.
A simplified illustration is shown here:
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Current Practice Vs. IFRS Requirements cont.
Other Differences
1. IFRS requires a separate Statement of Changes in Equity where items like capital, retained earnings are
reported. However, we observed different practices in many cases.
2. IFRS does have provisions to distinguish between separate policyholder funds like participating, non-
participating etc. Existing insurance regulatory framework has not spelt out clearly about segregation of
Participating and Non-participating fund.
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Current Practice Vs. IFRS Requirements cont.
Bottom Line
Current
IFRS
Practice
All financial Financial
statements 1. Financial statements 1. Financial
Actuarial
including Performance including Performance
Valuation
Balance Sheet, 2. Financial Balance Sheet 2. Solvency
Report
Profit & Loss Position and Revenue Position
Account etc. Account
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Challenges
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Challenges
Multiple Acts in Place
1. We have main Insurance Acts - the Insurance Act, 2010. However, in many cases references are required
from the old act 1938.
2. The Insurance Rules, 1958 complement the Insurance Act, 1938. However, there is no complete set of
Insurance Rules/ Regulations that complement the entire Insurance Act, 2010.
3. So, we need to consider both the Acts as the latest Insurance Act, 2010 is not fully complemented by any
Rules/ Regulations yet.
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Challenges cont.
Absence of Takaful Guidelines for Reporting
1. We have to maintain 3 specific funds under the Takaful business – Operator fund, Participants’ Investment
Fund, and Participants’ Risk fund and need clear direction from regulators as current regulatory framework
on Takaful is not comprehensive.
2. IFRS guidelines on Takaful insurance reporting needs further alignment.
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Challenges cont.
IFRS 9: Financial Instruments
1. IFRS 9 requires financial instruments to be reported under three categories – Amortized cost, Fair Value
through other Comprehensive Income, and Fair Value through Profit and Loss.
2. However, according to our regulatory framework, we do not have any statement to reflect other comprehensive
income or profit/ loss.
3. So, any investment/ financial instrument to be reported at fair value has to be reflected in Fair Value through
Balance Sheet or Revenue Account.
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Challenges cont.
Classification of Owner-Occupied Property
1. IFRS requires owner-occupied property to be reported under the Property, Plant and Equipment heading of
the balance sheet.
2. However, our regulatory framework mandates all real estate properties to be reflected within the Investments
heading of the balance sheet.
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Challenges cont.
Participating/ Non-participating Fund Separation
1. The existing regulatory framework does not outline the fund separation and reporting principles for par/
non-par (participating/ non-participating) portfolios. However, Section 26 of the Insurance Act, 2010 requires
the companies to maintain separate accounts for each class of business.
2. Currently these separate funds are managed on a commingled basis by the industry and most of the
companies report the financials on a commingled basis as well.
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Challenges cont.
Absence of Solvency Regulations and Corresponding Reporting Requirements
1. There is no solvency regulation to be followed by the insurance companies now. However, a draft regulation
has been published and is still under review.
2. So, regulatory/ economic solvency capital which is a part of the insurance companies’ financial reporting
worldwide is completely absent in the country.
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Way Forward
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Way Forward
Aligning the Regulator, ICAB, and FRC
1. Implementing full IFRS reporting framework will first need an alignment between the Insurance Regulator and
other authorities.
2. In this case, ICAB together with FRC will need to play the front-end role to do the following:
‒ To hold regular dialogue with the Insurance Regulator and to suggest possible changes in the existing
regulatory framework for full IFRS implementation.
‒ To have regular follow-up.
‒ To voice the benefits for the overall industry from a full implementation of IFRS.
‒ To reflect upon the possible benefits for the listed insurance companies as they will be able to report
financial performance to the market more frequently (e.g., quarterly).
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Future with IFRS 17
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Future with IFRS 17
Why is it different and complicated?
1. Revenue will be reported under two primary sections – insurance service result and insurance finance
result. This is way too different from the existing gross premium and gross investment income reporting.
2. Liabilities will be assessed through discounting the Fulfilment Cash Flows (FCF) which are probability-
weighted future cash flows. There will be a separate loading for Risk Adjustment (based on Value-at-risk or
other risk metrics) and a Contractual Service Margin (CSM) which is the discounted unearned margin from
insurance contracts. At each reporting period, this value of FCF’s will be trued-up for any change in
assumptions.
3. There will be explicit reporting of onerous contracts at initial recognition.
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Future with IFRS 17 cont.
Basic Requirements to Implement IFRS 17
1. Our regulatory framework allows actuarial reserving only on a Net Premium Valuation (NPV) basis which
means only the insurance cash outflows (e.g., mortality, morbidity, and maturity) benefits are explicitly reserved
for in the actuarial valuation report.
2. IFRS 17 implementation will require the consideration of all possible cash-flows (not just the insurance
benefits) and all possible risks (both financial and non-financial risks).
3. Therefore, the first step will be to integrate the annual actuarial valuation with the annual financial
statements so that there will not be any lag of reporting the current year surplus.
4. The second step will be to change the valuation methodologies gradually so that the companies can develop
the capacity for valuation of all future Fulfilment Cash Flows (FCF).
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Future with IFRS 17 cont.
Key milestones for Full Implementation India is here
Step 1 Step 2 Step 3 Step 5
Step 4
Net Premium Separation of Par/ Introduction of Gross Premium
Factor based
Valuation (NPV) Non-Par funds Deferred Valuation (GPV)
Solvency
reserving based Acquisition Cost and the removal of
Framework
on Zillmerisation (DAC) to replace DAC
and FPT methods, Zillmerisation
and One
aggregate Life
Fund
Step 7 Step 8
Step 6
Bangladesh is here Introduction of Introduction of
Risk-based Market Consistent
Capital regime Market Consistent
Valuation (MCV) Valuation (MCV)
and advanced for general purpose
Risk-based financial reporting
Capital regime (IFRS 17)
(e.g., Solvency II,
ORSA)
Singapore is here 28
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Thank You
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Appendix
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Future with
IFRS 17 cont.
Illustrations of Statement
of Profit & Loss under
IFRS 17 (source: PWC)
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Future with
IFRS 17 cont.
Illustrations of Statement
of Comprehensive
Income under IFRS 17
(Source: PWC)
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Future with
IFRS 17 cont.
Illustrations of Balance
Sheet under IFRS 17
(Source: PWC)
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