Source: ET
Context:
The Insurance Regulatory and Development Authority of India (IRDAI) has issued a consultation paper proposing that insurance companies transition from Indian Generally Accepted Accounting Principles (IGAAP) to Indian Accounting Standards (Ind AS).
The reform aims to align the financial reporting framework of Indian insurers with global standards under International Financial Reporting Standards (IFRS).
Current Accounting System for Insurers
At present, Indian insurers follow accounting rules based on:
- Insurance Act, 1938
- IRDAI regulations
- IGAAP framework
However, most listed companies and large NBFCs in India have already migrated to Ind AS, making the insurance sector one of the last major financial segments yet to transition.
Objectives of the Ind AS Transition
IRDAI believes adopting Ind AS will:
1. Improve Transparency
Standardised reporting improves clarity in financial disclosures.
2. Increase Global Comparability
Financial statements will become comparable with international insurers.
3. Attract Foreign Investment
Global investors are more comfortable with IFRS-based reporting frameworks.
4. Improve Access to Global Capital Markets
Better reporting standards may help insurers raise capital internationally.
Transition Plan Proposed by IRDAI
Parallel Reporting in the First Year
During the first year of implementation:
- Insurers will submit Ind AS financial statements for statutory reporting.
- They will also submit IGAAP statements as special regulatory filings.
This dual reporting system will ensure a smoother transition.
Additional Audit Requirement
In the first year:
- Financial statements must undergo independent validation by an IRDAI-empanelled auditor.
- This will be in addition to the statutory audit.
Key Accounting Changes
Entity-Level Financial Statements
Under Ind AS, financial reporting will include:
- Balance Sheet
- Profit and Loss Account
- Statement of Changes in Equity
- Cash Flow Statement
These will be prepared at the entity level, consistent with global accounting practices.
Policyholder vs Shareholder Funds
Under the Insurance Act, insurers must keep policyholder and shareholder funds separate.
IRDAI’s proposed compromise:
- Primary financial statements prepared at entity level.
- Separate revenue accounts and schedules maintained for policyholder funds.
This maintains transparency while aligning with international standards.
Ind AS 117 for Insurance Contracts
The transition includes adoption of Ind AS 117, the accounting standard for insurance contracts aligned with IFRS 17.
Key Feature: Annual Cohorting
Insurance contracts must be grouped by year of issue to:
- Track profitability accurately
- Prevent cross-subsidisation between policyholder generations
Insurers requested exemption due to operational challenges, but IRDAI rejected this request.
Gradual Retrospective Implementation
To ease implementation, IRDAI proposed a phased retrospective approach:
- FY27: 10-year retrospective data
- FY28: 15-year retrospective data
- FY29: 20-year retrospective data
This allows insurers time to adjust systems and data structures.
Rules for Participating Life Insurance Policies
For participating life insurance business:
- Surplus distribution will continue under Section 49 of the Insurance Act.
- Shareholder participation remains capped at 10%.
This ensures policyholders continue receiving the majority of profits.
Implications of the Reform
If implemented, the transition to Ind AS will change how stakeholders evaluate insurance companies.
Affected stakeholders
- Investors
- Analysts
- Rating agencies
- Policyholders
