New reporting standard raises capital costs for insurers in Kenya

Tuesday April 19 2022

Preparations for IFRS 17 have been completed by 37 percent of global insurers. PHOTO | FILE


Kenyan insurance firms will face high costs to meet the conditions for reporting rules as the global standardisation policy for underwriters comes into effect on January 1, 2023. The implementation of the accounting standards was delayed by one year due to the Covid-19 pandemic.

The requirements include that insurers double their capital and shift all non-quoted investments into a holding company.

The Association of Kenya Insurers (AKI), the industry’s lobby, has hired a consultant to carry out a survey on the level of preparedness of Kenyan insurers to comply with the requirements of the International Financial Reporting Standards (IFRS 17).

New standards

The consultant — Kenbright Actuarial and Financial Services, a subsidiary of Kenbright Holdings Ltd — is expected to release the findings of the survey soon.

“It is not going to take very long,” Tom Gichuhi, AKI’s chief executive told The EastAfrican last week.


“Kenbright won the tender. It is an actuarial firm. We expect the report probably in a month or two months. The reason why we are carrying out this survey is because companies are at different levels of compliance.

“We want to find out who is at what level so that we know what kind of interventions to make, for instance, organising training programmes and ensuring that the staff of these companies understand the requirements of IFRS 17 and how to comply with them,” he said.

Insurance Contracts IFRS 17 was issued by the International Accounting Standards Board in May 2017 as replacement for IRFS 4 Insurance Contracts.

The reporting standards require an updated measurement model where estimates are re-assessed in each reporting period.

The new rules will affect the financial statements and key performance indicators of all firms that issue insurance contracts or investment contracts with flexible participation features.

For these, the insurer must share the performance of underlying contracts with the policyholders, such as in life insurance or investment policies like unit trust investments.

“We are all going to go through a nightmare because it is a difficult thing for us to handle,” said Nizar Juma, the group chairman of Jubilee Holdings Ltd.

“We need money because we are moving from a 100 percent capital adequacy ratio requirement to 200 percent, which means we are almost doubling our capital.

“The second thing is that our shares in our non-quoted investments like Bujagali and Seacom are now going to be bought by Jubilee Holdings from the life company or medical or general insurance company,” he added.

Preparations for IFRS 17 have been completed by 37 percent of global insurers, according to consultancy firm Deloitte.

The IFRS 17 will ensure that insurance firms provide relevant information that represents the contracts they have entered into with the policyholders.

“This information gives a basis for users of financial statements to assess the effect that insurance contracts have on the entity’s financial position, financial performance and cash flow,” said Deloitte.

Banking industry

Kenyan banks have already started implementing the IFRS 9 in 2019 that requires them to set aside greater financial provisions for expected credit losses.

Under the IFRS 9, which replaced the International Accounting Standard 39, banks are expected to provide for projected loan losses rather than those already incurred, thereby reducing their profitability and eroding their capital base. The implementation of IFRS 9 had an adverse impact on capital adequacy due to increased allocations for future losses and banks had to explore new ways of injecting capital.

The Central Bank of Kenya granted banks a five-year transition period, beginning January 2018, to fully comply with IFRS 9 in the computation of regulatory capital.

Meanwhile, insurers are concerned that the standards may add a new challenge to a sector that has struggled to penetrate the country.

Insurance penetration in Kenya, which is the ratio of gross direct insurance premiums to GDP, declined to 2.17 percent in 2020 from 2.34 percent in 2019. The global average insurance penetration is at 7.4 percent.

In 2020, Kenyan insurers posted a combined net profit of Ksh6.39 billion ($55.56 million), a 57.7 percent decline from Ksh15.12 billion ($131.47 million) in 2019, according to the AKI report (2020).

Over a five-year period (2016-2020), the industry’s net profit declined to Ksh6.38 billion ($55.47 million) in 2020 from Ksh12.83 billion ($111.56 million).

The total paid up capital — that is the amount of money an insurer receives for share sales — rose to Ksh58.81 billion ($511.39 million) from Ksh42.54 billion ($369.91 million) in the same period.

Same period

Long term insurance business grew by 4.8 percent to Ksh102.08 billion ($887.65 million) in 2020 from Ksh97.4 billion ($846.95 million) in 2019, and general insurance business grew marginally by 0.4 percent to Ksh132.7 billion ($1.15 billion) from Ksh132.1 billion ($1.14 billion) in the same period.

General insurance business which made underwriting losses of Ksh1.85 billion ($16.08 million) in 2020 still dominates the industry, accounting for 56.5 percent of total premium.