IFRS 4 Insurance Contracts : an analysis of the business issues on the local insurance market

Abstract

Purpose – This study investigates the potential impact of the proposed IFRS 4 Phase II on the local insurance industry. The study focuses on four business issues being: the volatility of results, the changes to performance reporting, the acquisition costs and the impact on relations with stakeholders and capital management. Design – In order to achieve the determined objective, an exploratory qualitative study employing semi-structured in-depth interviews was carried out. A sample of 10 local insurance principals was selected to obtain views with respect to the implications of implementing the proposals. Findings – The findings exhibits that the transition to Phase II will have a significant impact on how insurance companies will manage volatility, and how the impact on the reported results based on the new format of financial statements will be explained. The study establishes that the new insurance contracts proposals will affect many aspects of insurers’ operations. However, local insurers do not expect the proposed treatment of acquisition costs to have a major impact. Furthermore, the proposals are not expected to impact the raising of capital. Conclusions – Based on the qualitative results, it can therefore be concluded that the proposed insurance standard might have an impact on the local insurance industry. However, given that the proposals will be re-exposed, the actual impact on the insurance industry is still to be seen. Value – The findings of the study are of relevance to the Regulator and insurance companies as they provide information regarding the potential implications of the new insurance contract proposals which will allow them to plan ahead to lessen the impact. Contrary to previous literature, this is the first study to investigate the business issues of Phase II for the industry.