System readiness gaps: Insurers likely to seek forbearance for 1 year

Irdai had mandated insurers to transition to Ind AS effective April 1

Most insurance companies in India are likely to apply for a one-year forbearance provision in their transition to Indian Accounting Standards (Ind AS) due to a lag in system readiness.

 

Even as they have all worked on proforma submission over the past two years, it has been focused on semi-manual systems and fully automated systems are still not in place.

 

Earlier in the week, the Insurance Regulatory and Development Authority of India (Irdai) had issued final regulations for the transition to Ind AS, effective April 1.

 

Ind AS is aimed at aligning India’s accounting framework with International Financial Reporting Standards (IFRS).

 

Under the norms, the regulator has allowed one-year forbearance for insurers that are unable to prepare and present financial statements in compliance with the new standards.

 

At present, Indian insurers follow the framework for Indian Generally Accepted Accounting Principles (IGAAP). Insurers seeking forbearance have to submit their requests on or before April 30.

 

Even as the industry prepared the proforma of IFRS for two years, the only challenge has been the use of quasi- or semi-automated systems, while they need a full-fledged automated system, which is expected to take time, said Hasmukh Raval, Partner, Deloitte Touche Tohmatsu India LLP. 

 

“Companies are clear in terms of position and progress is there, but when it comes to generating from a full-fledged automated system, including the automated data application programming interface, it will take time. And that is where we believe people might ask for forbearance. The preparation of the proforma involved assumptions and making certain simplifications, which has to be revisited now in addition to getting granular, accurate, and complete data from the system. That is where the challenge lies.”

 

In contrast, actual IFRS requires granular data, automation, and precise calculations. Building and integrating such systems into existing ecosystems is inherently time-consuming.

 

The challenge in insurers’ adopting IFRS is not conceptual but technological. IFRS represents a global accounting framework focused on comparability, requiring a complete shift in accounting methodology. This change impacts how premium flows and gains are recognised, necessitating new software systems and formats aligned with the new accounting approach.

 

Seeking forbearance is an option for many insurers unless their systems are already ready. Companies, if ready, must either execute immediately or fast-track system implementation while seeking an extension in the interim.

 

“From a knowledge standpoint, non-life and health insurers are well prepared in understanding its impact on financial metrics, solvency, and reporting. However, the key gap lies in system readiness. While a few standalone health insurers and select non-life insurers may have systems in place, most insurers still depend on developing or upgrading systems, which could take up to 12 months,” said a senior official at an insurance company.

 

In addition, the size of the portfolio, legacy data, and the diversity of products will affect timelines. Larger companies may take longer due to its complexity.

 

“Most companies started their journey over the past two years though progress has been slow because it was not the most critical priority earlier. Now that timelines are announced, companies have accelerated their efforts. Few large companies had started early. So no large company is starting from scratch now but full readiness may still be a question,” said Debashish Banerjee, partner and insurance-sector leader, Deloitte India

 

The transition to the Ind AS framework will require additional investment in technology and should be treated as a priority for chief executive officers. This was expected for the last two to three years, so it should not come as a surprise. There is also a broader industry expectation that IFRS implementation aligns with risk-based capital because IFRS calculations depend on similar inputs. 

Challenges ahead

• Fully automated systems for proforma submissions are still not underway
• Few standalone health insurers have systems in place for quicker execution
• Large companies have been working for over 2 years on draft invoices
• Experts suggest developing or upgrading existing systems will take time
• IFRS reporting requires automation and precise calculations