United Arab Emirates: IFRS 17 & UAE Regulatory Landscape

Insurance Financial Reporting Standards (IFRS) 17 represents a new and unprecedented international reporting and disclosure regime for the insurance industry 1. IFRS 17 takes effect in January 2021 2. There have been many publications and a wealth of information on the reporting and disclosure standards in IFRS 17 offering guidance to the insurance industry, many of which have naturally addressed accountancy and financial governance concerns 3. However, consideration should be also given to the regulatory and compliance implications both for regulators and regulated entities. This update considers several regulatory factors with the implementation of IFRS 17 and what insurers should be planning prior to 2021 within the United Arab Emirates legal framework 4.

BACKGROUND

IFRS 4 provided lack of consistency with accounting for insurance contracts resulting in uncertain outcomes for outside investors and regulators 5. To resolve this issue IFRS 17 now requires insurers to report obligations and risks in respect of their insurance contracts on the entity's balance sheet as fulfillment cash flows and contractual service margins 6.

UAE FINANCIAL REGULATIONS & IFRS 17

Board of Directors Decision Number (25) and Number (26) of 2014 (the "Regulations") Pertinent to Financial Regulations for Insurance Companies and Takaful Insurance Companies regulates the prudential and solvency aspect of UAE insurance companies 7. The Regulations introduced a "Minimum Guarantee Fund", "Solvency Margins, "Solvency Capital Requirements as well as certain disclosure obligations of financial and data governance in line with the spirit of policyholder protection 8. Reflected, to a large extent on the European Union Solvency II 9, the Regulations play a significant change for the UAE insurance market in terms of risk management and policyholder protection. The Regulations provide a solid prudential platform for risk management and risk mitigation where UAE insurance companies established new internal governance structures with Investment Committees and an Audit Committees placed at board level responsibility. The Regulations have established a uniform regulatory structure to maintain capital adequacy and risk management standards for insurance operations in the UAE.

IFRS 17 will bring new and challenging obligations to the UAE insurance market in terms of further open and transparent financial reporting set against the existing legal obligations under Section (6) and (7) of the Regulations 10. By way of illustration, Article (4) – Auditing of Accounting Books paragraph 3 & 4. provides:

"3. The External Auditor shall review actuarial reports that represent immediate or future risks facing the Company, and the Authority shall be provided with copies of these reports in a timely manner.

4. The Actuary shall, in the presence of immediate or future risks facing the Company that would hinder the Company from fulfilling its short term and long-term liabilities, submit a report on a timely basis directly to the Company's Board of Directors. The Board of Directors shall examine the report and recommend corrective actions, and forward all related information to the Authority, including the Board of Director's recommendations related to the report." 11.

IFRS 17, if implemented in the UAE would require the new application of financial disclosures and financial governance pursuant to how insurance contracts should be disclosed on the balance sheet as fulfilment cash flows and contractual service margins, a fundamental departure from the existing practice. Addendum (1) – Principles of Organizing Accounting Books and Records of Each of the Companies, Agents and Brokers and Determining Data to be maintained in these Books and Records 12 provides a degree of flexibility for the UAE Insurance Authority (the "Regulator") to request external auditors to carry out additional duties when working with the insurance companies in terms of disclosure and presentation requirements. This for example includes submission of additional information related to audited accounts. In the same context, it may be possible for the IFRS 17 standards and obligations to be procured through these legal requirements without necessarily promulgating new laws and resolutions.

Furthermore, Addendum (2) – Principles of Organizing Accounting Books and Records of Each of the Companies, Agents and Brokers and Determining Data to be maintained in these Books and Records 13 would imply, from a word construction perspective a positive legal obligation on the insurance companies/external auditors to in fact apply the financial disclosures and governance provisions of IFRS 17 pursuant to paragraph (3). By way of example, "b) Reports risk management issues and internal control deficiencies identified directly to the Audit Committee, or equivalent group-level governance structure for Foreign Companies, and provides recommendations for improving the Company's operations, in terms of both efficient and effective performance; c) Evaluating the risk exposures relating to the achievement of the Company's objectives; d) Evaluating the reliability and integrity of information and the means used to identify, measure, classify and report such information; e) Evaluating the information security and probabilities of exposure to its related risks; f) Evaluates regulatory compliance program with consultation from legal counsel;" 14.

On further review of Section (7) of the Regulations and Addendums (1) and (2) of Section (7) 15, it would appear these provisions require insurance companies to report and disclose their accounts in a prescriptive manner meeting minimum requirements as imposed by the Regulator. For example, Article (1) – Preparation of Financial Statements expressly provides:

"1. The Company shall prepare its financial statements in accordance with the International Financial Reporting Standards and the Authority accounting policies and forms stipulated herein, and shall provide the Authority with a detailed financial report in accordance with the applicable requirements of the Authority." 16.

The use of the words "in accordance with the International Financial Reporting Standards" construes that IFRS 17 and its application is of relevance to the UAE insurance market and must be adhered to in the strictest sense. To that end, insurers must consider the wider implications in terms of internal compliance and external regulatory obligations.

Regulatory issues arise from the application of IFRS 17 in terms of the financial reporting and financial governance obligations extending and shifting to new legal requirement on the insurance company's board of directors, internal compliance and to a smaller extent external auditors and accountants. By way of illustration, IFRS will change the culture of how insurance entities will present and disclose information, which could provide useful data to competitors to assess the bottom line of profits. Insurers will need to protect their assets, including financial information which can in certain circumstances amount to propriety information. Insurers will therefore need to consider how to protect their information while also meeting the requirements of IFRS 17. In addition, insurer will need to review and consider their own insurance coverage requirements 17 in light of IFRS 17 to mitigate any potential risk to the business. There may also be an opportunity for the insurance industry to develop a new risk coverage for IFRS 17 in the future.

Compliance policies and procedures will need urgent consideration to sit with and compliment new financial governance processes and procedures. Compliance will need to work closely with finance departments to align protocols to meet the IFRS 17 standards while maintaining risk management and policyholder protection under the Regulations. This will not be an easy task and may result in increased operational costs.

We would recommend that insurance companies start to engage in audit reviews now in terms of the implementation of IFRS 17 in the context of internal compliance and risk structures despite the implementation date of 2021. It is often a good start to implement internal reviews and seek external support thereafter to avoid any future risk or unnecessary exposure. This may include external actuary, legal and account support where needed.

In summary, IFRS and the Regulations will provide a transparent and solid regulatory platform to give both policyholders and investors, confidence in the UAE insurance market but perhaps at a greater cost to the insurance industry in the short term.

Footnotes

1. IFRS 17 Insurance Contracts – IFRS' Standards Project Summary May 2017 – International Accounting Standards Board – On 18 May 2017 the International Accounting Standards Board issued IFRS 17

2. International Accounting Standards Board

3. The International Financial Reporting Standards Foundation Impacts of IFRS 17, insurance contracts accounting standard Considerations for data, systems and processes EY 2018

4. The author makes observations about possible impacts on the UAE regulatory system and legal framework under IFRS 17 and such comments in this update should not be construed as or taken, as advice of any sort including legal advice. No reliance should be placed on such comments by the readers and this update is for general guidance only.

5. IFRS' Standards Project Summary May 2017 page 2 – International Accounting Standards Board

6. The fulfilment cash flows – the current estimates of amounts that the insurer expects to collect from premiums and pay out for claims, benefits and expenses, including an adjustment for the timing and risk of those cash flows; and the contractual service margin – the expected profit for providing future insurance coverage (i.e. unearned profit) – IFRS' Standards Project Summary May 2017 page 3

7. The Financial Regulations were published on 29 January 2015 https://ia.gov.ae/en/Documents/Financial%20Regulations%20for%20Insurance%20Companies.pdf

8. Section 2 – Regulations Pertinent to the Solvency Margin and Minimum Guarantee Fund – Board of Directors Decision Number (25) and Number (26) of 2014

9. Section 1- Regulations Pertinent to the Basis of Investing the Rights of the Policyholders – Board of Directors Decision Number (25) and Number (26) of 2014

10. Section (6) Regulations Pertinent to the Principles of Organizing Accounting Books and Records of Each of the Companies, Agents and Brokers and Determining Data to be maintained in these

Books and Records and Section (7) Regulations Pertinent to Accounting policies to be adopted and the necessary forms needed to prepare and present reports and financial statements

11. Section (6) – Regulations Pertinent to the Principles of Organizing Accounting Books and Records of Each of the Companies, Agents and Brokers and Determining Data to be maintained in these Books and Records

12. Board of Directors Decision Number (25) and Number (26) of 2014

13. Addendum (2) – Principles of Organizing Accounting Books and Records of Each of the Companies, Agents and Brokers and Determining Data to be maintained in these Books and Records Board of Directors Decision Number (25) and Number (26) of 2014

14. Regulations Pertinent to Accounting policies to be adopted and the necessary forms needed to prepare and present reports and financial statements

15. Board of Directors Decision Number (25) and Number (26) of 2014 – Regulations Pertinent to Accounting policies to be adopted and the necessary forms needed to prepare and present reports and financial statements

16. This might include E & O, D & O third liability insurance coverage

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions