In 2020, the world took a pause to understand the impact of COVID-19 but as time passes by, a new form of normalcy has returned, highlighting the challenges that have remained since before the pandemic. One such challenge is the implementation of IFRS 17, scheduled to become effective from the 1st January 2023 in Malaysia. Even though there are still more than 20 months to go, the Takaful industry has to start preparations now as the implementation is challenging and entails several key decisions.
The Malaysian Takaful Association (MTA) recently organized a sharing session for the senior management of its member companies. During the session, EY shed light on the new accounting standard’s impact.
Most importantly, IFRS 17 will not change the fundamentals of Takaful. Profits of Takaful companies will remain the same, albeit profit recognition will change across different time periods. EY emphasized it should not drive how Takaful operators run their business, and the impact of IFRS 17 on business decisions will need to be monitored.
Transparency will increase as profit components will have to be shown upfront. For investment-linked products, profit recognition will be smoothened over a period of time and by doing this, it will help ease the strain current accounting standards (IFRS 4) have on a new business.
In contrast, for mortgage-backed business, lower profit will be shown in the first year which could negatively affect a company’s overall profit, especially during the IFRS 17 transition period.
The IFRS 17 implementation will significantly impact Takaful companies’ key performance indicators against both top line and bottom line benchmarks. It will also increase the business transparency.
EY stressed that IFRS 17 is a principles-based standard and it is not meant to provide full guidance. Therefore, Takaful companies will need to determine how to develop their own accounting papers and positions.
To help the Takaful industry prepare for the change, the MTA is organizing quarterly forums for its member companies. It has already also issued several guidance notes on topics such as the columnar presentation of financial statements and the Multiple Funds Model. Other topics to be discussed include the treatment of Qard and unallocated surplus, which will be shared later.
One other challenge with the new accounting standard is that capital requirements by the local regulators such as Bank Negara Malaysia are currently not based on IFRS 17. As a result, Takaful companies will need to maintain two books.
At the end of the session, EY compared the IFRS 17 implementation to climbing a mountain — one has to arrive at several ‘camps’ (eg impact analysis, solution design, dry run, transition) before reaching the summit.
The Takaful industry has already ascended several peaks in its history and has high hopes in overcoming the IFRS 17 challenge.
Marcel Omar Papp is the head of Swiss Re Retakaful. He can be contacted at [email protected].