NFRS 17 in Insurance Companies: Hasty Implementation or Practical Foresight?
The Nepal Insurance Authority's directive mandating NFRS 17 from the first quarter of the current fiscal year 2083/84 has heightened anxiety among insurers. Insurers are pressing for an extension, citing inadequate preparation, lack of skilled manpower, and technical infrastructure, while the Authority insists on implementation. Although theoretically positive, this sudden move without solid preparation risks turning Nepal's insurance sector into a 'laboratory' once again.
Kathmandu । As the deadline for implementing NFRS 17, issued by the Accounting Standards Board for the insurance sector, approaches, the anxiety of chief executive officers of insurers has increased. With growing anxiety, they have been repeatedly pleading formally and informally with the regulatory Nepal Insurance Authority through the Life Insurers' Association of Nepal for a solution.
Despite seeing the insurers' anxiety, the Insurance Authority, displaying a regulatory stance, is trying to present itself somewhat sternly. The Authority is emphasizing implementation, stating that the deadline for NFRS 17 was set in consultation with insurers. Conversely, insurers are pressuring for an extension, citing inadequate preparation, lack of skilled manpower, and lack of technical infrastructure.
If the Authority does not relent, most insurers will have to pay hefty fines for late submission of balance sheets. On the other hand, employees, investors, and even chief executives awaiting incentives, who are keen to complete the general meeting on time and reap bonuses, will have their patience tested.
The directive on NFRS 17 issued by the Authority mandates compulsory implementation from the first quarterly report of the current fiscal year 2083/84. Additionally, insurers have been instructed to prepare the balance sheet and financial statements of the previous fiscal year 2082/83 on the same basis.
In principle, NFRS is an extremely positive and revolutionary step for risk-based capital strategy, transparency, and sustainable financial valuation. However, without solid preparation, skilled manpower, and infrastructure, this sudden move risks turning Nepal's insurance sector into a 'laboratory' once again.
1. Nepal's Current Insurance Market and Practical Challenges
A policy prepared without considering the current structure and practices of Nepal's insurance market could bring serious imbalance. Its main practical aspects are as follows:
- Pressure of Advance Payment and Limited Payment Insurance: In Nepal, money-back (advance payment), single premium, and limited payment policies are more popular. In such policies, outflows in the name of agent commission and incentives are high. When preparing reports under NFRS 17, the insurance plan contract is highly likely to incur losses. This reduces profits and requires keeping large amounts in provisioning. This could lead to a situation where both investors and the industry cannot distribute dividends.
- Lack of Separation of Assets, Funds, and Expenses: Except for MetLife or a few companies, most insurers in Nepal do not have the practice of separate tracking or asset share calculation for which product has how much fund or investment related. Similarly, there is no clear picture of which expense is how much attributable and which is one-time. In the absence of practice, adjusting statements based on estimates may not reveal the true financial position.
- Ambiguous Dividend Policy: The recently issued NFRS 17 directive has a provision to distribute only the lower of the profits. Instead of giving insurers time for provisioning by looking at both NFRS and the previous regulatory framework reports comparatively for 2–3 years, it is not practical to say distribute the lower one from today.
2. A Step Against Consumers, Investors, and Its Own Principles
The Insurance Authority, adopting IAS principles, has brought a policy of fair treatment to customers and addressing the legitimate expectations of the insured. When approving insurance plans, it does not approve without mandatorily addressing both elements. However, in a broader sense, stakeholders include not only the insured but also shareholders. Imposing a forced decision ignoring investors expecting returns and the overall industry's practical capacity goes against the spirit of cooperation. Since the banking or insurance sector is directly connected to the general public, administrative and managerial prudence is necessary here.
3. International Practice and Scarcity of Manpower
Even powerful and large nations like neighboring India are taking sufficient time to implement NFRS 17 and observing the practices of other countries. There, risk-based capital provisions have not yet been implemented. However, in Nepal, which lacks both manpower and resources, there is intense pressure for immediate implementation. In Nepal, the lack of experienced actuaries, skilled manpower, and technical infrastructure has made successful implementation of NFRS 17 challenging.