The insurance sector is set for a game-changing development with the IRDAI asking the top 15 companies, across life and non-life, to adopt the new IND-AS accounting framework from April 1, 2024 (FY25), sources told businessline.

This is the first such partial roll-out of accounting standards for the insurance industry in many decades, and the move is aimed at bringing Indian accounting practices closer to global standards. This is expected to help stakeholders understand insurers’ risk exposure, profitability, and financial position accurately.

Designed in coordination with IFRS-17, the revised standard under IND-AS 117 will mandate insurers to explicitly declare unbiased estimates of future cash flows, discount rates reflecting the contracts’ cash flows, and adjustments for non-financial risk. Further, revenue will no longer be equal to written premiums but to the change in contract liability.

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15 companies

The insurance regulator has identified 15 companies that have foreign equity partners and/or strategic collaborations for the purpose. The reason here is that these entities may have estimates of the financials as per parallel IFRS-17 for their consolidated balance sheets, which need to be presented on their foreign partner’s home turf. According to sources, some of the companies identified for the pilot phase include ICICI Prudential Life, ICICI Lombard General, TATA AIG General, Niva Bupa Health, HDFC Life, and HDFC Ergo General, among others.

Interestingly, the State-run insurance companies, including the behemoth Life Insurance Corporation of India, have been excluded from the adoption of the new accounting rules for now.

Over 140 countries have adopted IFRS 17, effective January 2023.

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Regulatory pilot

The regulatory pilot, undertaken with the aim of completing the transition for these 15 players by the end of FY24 (March 31, 2024), has been undertaken to understand the impact on, and allow more time to smaller insurers for adopting the accounting standard. This is because their solvency is more likely to be impacted, leading to higher capital requirements, industry sources said, adding that implementation for PSU insurers is also expected to take some time.

“The idea is also to sync with the timeline for the transition to the risk-based capital framework so as to ensure any hit on capital is one-time and the transitions can be smoother,” an industry executive said.

IRDAI has proposed moving the insurance industry towards a risk-based capital regime from the current factor-based solvency regime, for which it began a pilot in July 2023. The transition is expected to hurt insurance companies with a higher share of relatively riskier products such as ULIPs (unit-linked insurance plans).

A risk-based capital approach will also bring the industry closer to the new IND-AS, which requires highlighting insurance firms’ outcomes separately from their finance expenditure and income and integrating existing future cash flow with the estimated profit ratio over the contract tenure.

The government is expected to roll out IND-AS 117 following recommendations received from the National Financial Reporting Authority (NFRA) based on the proposals by the ICAI (Institute of Chartered Accountants of India). The new accounting standard will replace Ind AS 104, Insurance Contracts.