The adoption of IFRS 17 (Insurance Contracts) and its interaction with IFRS 9 (Financial Instruments) marks one of the most significant changes to financial reporting for the insurance industry in decades, and Kenyan insurers are navigating this complex regulatory landscape.
What is IFRS 17 and IFRS 9?
- IFRS 17 (Insurance Contracts): This new global standard, mandatory for Kenyan insurers and reinsurers since January 1, 2023, fundamentally changes how insurance contracts are measured, recognized, presented, and disclosed. It replaces the old IFRS 4 and aims to provide greater consistency, transparency, and comparability globally.
- Key Impact: It measures insurance liabilities using current estimates of future cash flows and recognizes profit over the period that services are provided, through the Contractual Service Margin (CSM). It separates the “insurance service result” (underwriting performance) from the “financial result” (investing performance).
- IFRS 9 (Financial Instruments): This standard dictates the classification, measurement, and impairment of financial assets and liabilities. It was already effective for non-insurers, but insurance companies typically adopted it concurrently with IFRS 17.
- Key Impact: It introduced a new model for classifying financial assets and the forward-looking Expected Credit Loss (ECL) impairment model, which affects how insurers provision for potential losses on their investment portfolios.
The Critical Interaction: IFRS 9 and IFRS 17
The main challenge and complexity for insurers arise from the simultaneous implementation of these two standards, as they govern opposite sides of the balance sheet:
- IFRS 17 governs the measurement of insurance liabilities.
- IFRS 9 governs the measurement of financial assets (investments held by the insurer to back those liabilities).
The core interaction challenge lies in reducing accounting mismatches—situations where an economic event (like a change in interest rates) affects the value of assets and liabilities differently under the new accounting rules, causing artificial volatility in the Profit or Loss (P&L) statement.
Key Areas of Interaction:
Measurement of Assets and Liabilities:
- IFRS 17 requires discounting insurance liabilities using current market-consistent interest rates.
- If the assets backing these liabilities are measured at Amortized Cost under IFRS 9, changes in interest rates will immediately impact the liability side through IFRS 17, but not the asset side, leading to P&L volatility.
- To mitigate this, insurers may choose to measure assets at Fair Value Through Other Comprehensive Income (FVOCI) or Fair Value Through Profit or Loss (FVPL) under IFRS 9, to align the impact of interest rate changes on both sides of the balance sheet.
Optionality in Presentation:
- Both standards offer options to manage accounting mismatches.
- IFRS 17 allows entities to disaggregate the change in the insurance liability due to financial risk (Insurance Finance Income/Expense) between P&L and Other Comprehensive Income (OCI). This choice must be aligned with the IFRS 9 classification of the corresponding assets to ensure the financial results are clearly presented and do not mislead users.
IFRS 17 Adoption in Kenya
The Insurance Regulatory Authority (IRA) and the Institute of Certified Public Accountants of Kenya (ICPAK) have been instrumental in guiding the transition.
- Mandatory Date: Kenyan insurers adopted IFRS 17 on January 1, 2023, following a granted transition period.
- Implementation Challenges: The adoption required significant overhauls of actuarial and finance systems, substantial data management improvements, and extensive training for teams to handle the complex measurement models (General Measurement Model, Premium Allocation Approach, and Variable Fee Approach).
Conclusion
The dual implementation of IFRS 9 and IFRS 17 fundamentally reshapes financial reporting for Kenyan insurance companies. While presenting significant technical and operational challenges, it promises to enhance the quality and comparability of financial statements, giving investors and regulators a clearer view of an insurer’s true profitability, risk exposure, and future obligations.
If your insurance company is navigating IFRS 9 requirements—or facing challenges with ECL modelling, data gaps, or system integration—FineIT is here to help.
FineIT is a leading provider of IFRS 9 ECL software and risk modelling services in Kenya, helping insurers, banks, and SACCOs achieve regulatory compliance with accuracy, speed, and confidence.
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