Elevating Insurance Reporting to Global Standards in Nepal
Elevating Insurance Reporting to Global Standards in Nepal
-CA. Madhav Pokharel
Abstract
Nepal is transitioning to global insurance reporting standards with the implementation of NFRS 17 “Insurance Contracts”, aligned with IFRS 17, from FY 2081/82. This change aims to enhance transparency, comparability, and accountability in accounting of insurance contracts. The standard introduces measurement models, including General Measurement Model and Premium Allocation Approach. While offering long-term benefits like improved regulatory oversight and international alignment, reporting entities also face challenges such as limited actuarial expertise, high implementation costs, and low awareness. Effective coordination among regulators, insurers, and accounting professionals is essential to ensure successful adoption and strengthen Nepal’s insurance sector in line with global best practices.
Introduction
Nepal’s direction towards global financial reporting was initiated after Nepal Financial Reporting Standards (NFRS) were issued by Accounting Standards Board, Nepal (ASB) in 2013. NFRS is aligned with International Financial Reporting Standards (IFRS) issued by International Accounting Standards Board (IASB), with adaptations suitable for Nepal’s environment. Nepal’s move to adopt IFRS in form of NFRS is a result of IFAC membership obligations. Any new international financial reporting/accounting standards are implemented after evaluation and adoption by ASB, training and guidance by The Institute of Chartered Accountants of Nepal (ICAN), and enforcement by regulatory bodies, ensuring proper localization and readiness before full application. In this context Nepal’s financial reporting landscape related to insurance is undergoing a significant transformation with implementation of NFRS 17. ASB decided to implement NFRS 17 from FY 2081/82 (2024/25) in coordination with ICAN and Nepal Insurance Authority (NIA). Replacing interim standard NFRS 4, NFRS 17 introduces consistent framework that enhances transparency, comparability, and accountability across insurance industry. IFRS 17, issued by the IASB in May 2017 and effective from January 1, 2023, is a comprehensive accounting standard for insurance contracts. It replaces IFRS 4, which was an interim measure that allowed a wide variety of local practices, leading to inconsistencies in measurement and presentation of insurance liabilities.
Understanding Insurance Contract
As per the definitions provided in IFRS 17, Insurance Contract is a contract under which one party (the issuer) accepts significant insurance risk from another party (the policyholder) by agreeing to compensate the policyholder if a specified uncertain future event (the insured event) adversely affects the policyholder. Insurance contract includes reinsurance contract as well. As per this standard, insurance risk means risk other than financial risks, where financial risks are risks that arise from possible changes in one or more factors like interest rate, financial instrument price, commodity price, currency exchange rate, index of prices or rates, credit rating or credit index and others.
IFRS 17 was developed to bring consistency in accounting, reporting and disclosure of insurance contracts, improve comparability across insurers and provide users of financial statements with more reliable and relevant information on how insurance contracts impact an entity’s financial position, performance, and cash flows.
IFRS 17 includes insurance and reinsurance contracts an entity issues or holds, and certain investment contracts with discretionary features. It excludes warranties, employee benefit plans, business combination contingencies, leases, policyholder-held contracts, financial guarantees, and credit card and other similar contracts.
Combination of insurance contracts and Separating components from an insurance contract
As per IFRS 17, if a set of insurance contracts with the same or related counterparty has a single commercial effect, they may need to be reported together to reflect their substance. To group or aggregate the insurance contract, firstly an insurance contract should be assigned to specific portfolio, i.e., contracts with similar risks which are managed together. Then, the portfolio is divided into at least the groups of contracts that are onerous at inception or contracts that have no significant possibility of becoming onerous at the inception or other contracts which are profitable. Finally, same portfolio is divided by annual cohort/group. It means each group of contracts must only include contracts issued within the same 12-month time period.
However, an insurance contract may include components that fall under other standards, with criteria to determine if each non-insurance component is distinct from the host contract. The non-insurance contract components can be embedded derivative, investment component which should be separated and accounted for under IFRS 9, Financial Instruments, if related criteria are met and distinct goods or services for which IFRS 15, Revenue from Contract with Customers is applied after separating the component from insurance contract.
As per IFRS 17, insurance contracts with similar risks that are managed together are grouped into same portfolio, usually within one product line. Contracts in different product lines have different risks and belong to separate portfolios.
Recognition
As per IFRS 17, a group of insurance contracts is recognized at the earliest of the following:
- commencement of coverage period;
- due date of policyholder’s payment;
- in case of group of onerous contracts, when the group becomes onerous.
Measurement
- General Measurement Model (GMM)
Initial Measurement
At initial recognition under General Measurement Model, insurance contract liability is measured as sum of fulfilment cash flows which include expected inflows, outflows, discounting, and risk adjustment and contractual service margin, which includes unearned profit to be recognized over the coverage period.
Insurance contract liability = Fulfilment Cash Flows + Contractual Service Margin
Subsequent Measurement
Subsequently, carrying amount of a group of insurance contracts is measured as sum of liability for remaining coverage, which includes fulfilment cash flows for future services and remaining contractual service margin to be recognized as profit in future periods and liability for incurred claims, which includes fulfilment cashflows related to past service allocated to the group at that date.
Insurance Contract Liability = Liability for Remaining Coverage + Liability for Incurred Claims
Illustrative Example
Hamro Insurance Company has issued 100 insurance contracts with coverage period of 5 years, starting at issuance date. Insurance premium is NPR 25,000 per contract for whole coverage period. Annual future cash outflows are estimated to be NPR 5,000 per contract. Estimated risk adjustment for non-financial risk upon initial recognition is NPR 200,000. Discount rate is 10%.
Initial Measurement
Insurance contracts are initially measured at the sum of:
- Fulfilment Cash Flows which include:
- Estimates of future cash inflows i.e., premium of NPR 2,500,000 (100 contracts×25,000)
- Estimates of future cash outflows i.e., insurance claims payments and other costs of NPR 500,000 (100×5,000) p.a.
- Above cashflows are to be discounted using 10% (provided).
- Risk adjustment for non-financial risk is NPR 200,000 (provided).
- Contractual service margin
The calculation is shown below:
|
Year |
Cash inflow |
Cash outflow |
Net cashflow |
Discount factor @ 10% |
PV of cashflows |
|
- |
2,500,000 |
- |
2,500,000 |
1 |
2,500,000 |
|
1 |
- |
(500,000) |
(500,000) |
0.909 |
(454,545) |
|
2 |
- |
(500,000) |
(500,000) |
0.826 |
(413,223) |
|
3 |
- |
(500,000) |
(500,000) |
0.751 |
(375,657) |
|
4 |
- |
(500,000) |
(500,000) |
0.683 |
(341,507) |
|
5 |
- |
(500,000) |
(500,000) |
0.621 |
(310,461) |
|
Total |
2,500,000 |
(2,500,000) |
- |
604,607 |
|
|
Less risk adjustment |
(200,000) |
||||
|
Contractual service margin |
(404,607) |
||||
Summary of Initial Recognition
|
Component |
Amount in NPR |
|
Present value of outflows |
1,895,400 |
|
Risk adjustment (RA) |
200,000 |
|
Fulfilment Cash Flows (FCF) (A) |
2,095,400 |
|
Premium received |
2,500,000 |
|
Contractual Service Margin (CSM) (B) |
404,600 |
|
Insurance contract liability on initial recognition (A+B) |
2,500,000 |
Insurance contract liability on initial recognition is premium received of NPR 2,500,000. Contractual Service Margin of NPR 404,600 is unearned profit, which will be recognized over coverage period.
Subsequent Measurement (Year 1)
Assuming cashflows and CSM are released evenly over 5 years.
- Release of Risk Adjustment=200,000/5=NPR 40,000
- CSM Amortization=404,600/5=NPR 80,920
- Interest Accrual of Fulfilment Cash Flows (FCF) and Contractual Service Margin (CSM)
Fulfilment Cashflows (FCF)
FCF opening = 2,095,400
Interest = 2,095,400 × 10% = 209,540
New FCF before changes = 2,095,400 + 209,540 = 2,304,940
Less actual cash outflow = 500,000
Less Risk Adjustment release = 40,000
Closing FCF = 2,304,940 – 500,000 – 40,000 = 1,764,940
Contractual Service Margin (CSM)
CSM opening = NPR 404,600
Interest = 404,600 × 10% = NPR 40,460
New CSM = 404,600 + 40,460 – 80,920 = NPR 364,140
Abstract Financial Statement (End of Year 1)
Statement of Financial Position (Insurance Liabilities)
|
Component |
Amount in NPR |
|
Fulfilment Cashflows |
1,764,940 |
|
Contractual Service Margin |
364,140 |
|
Total Liability |
2,129,080 |
Statement of Profit or Loss
|
Component |
Amount in NPR |
|
Insurance revenue (CSM) |
80,920 |
|
Risk adjustment release |
40,000 |
|
Interest on insurance liability |
(209,540) |
|
Claims and expenses (cash outflow) |
(500,000) |
|
Net Insurance Result |
(588,620) |
- Onerous Contract
As per IFRS 17, an insurance contract is onerous at initial recognition if total expected cash outflows exceed inflows, requiring the entity to recognize a loss immediately.
Initial Measurement
An entity shall recognize loss in profit/loss for net outflow for the group of onerous contracts, resulting in carrying amount of liability for the group being equal to fulfilment cashflows and contractual service margin of the group being zero.
Subsequent Measurement
Subsequently, if a group of insurance contracts becomes onerous (or more onerous), excess shall be recognized in profit or loss. Contractual Service Margin cannot increase and no revenue can be recognized, until the onerous amount previously recognized has been reversed in profit/loss as part of service expense.
- Premium Allocation Approach
It is simplified measurement model. It is optional. The Premium Allocation Approach may be used for short-term insurance contracts of one year or less, or when it gives results similar to the General Measurement Model.
Initial Measurement
On initial recognition, carrying amount of an insurance contract liability is determined by the premiums received, less any acquisition cash flows (unless these are immediately expensed), and adjusted for the derecognition of acquisition-related assets and other related assets or liabilities.
Insurance Contract liability = Premiums received − Acquisition cash flows (unless expensed) ± Adjustments for derecognized acquisition related or other related assets and liabilities.
Subsequent Measurement
Subsequently carrying amount of liability is increased by premiums received and any amortized acquisition costs not yet expensed. It is adjusted for the financing component, and reduced by acquisition costs recognized as expenses, insurance revenue earned, and any investment components paid or transferred.
If insurance contracts have significant financing component, liability for remaining coverage must be discounted, unless the coverage period and premium due date are within one year.
Subsequent liability = Liability for remaining coverage (future cash flows + remaining contractual service margin) + Liability for incurred claims (past cash flows).
Illustrative Example
Deshko Insurance Company issued 1,000 short-term insurance contracts on January 1, 2025. Each contract has coverage period of 12 months and provides vehicle insurance coverage. Company charges a total premium of NPR 120,000 per contract, which is received in full at inception. Expected claims and expenses are NPR 90,000 per contract, which will be paid evenly over the coverage period.
Deshko Insurance uses Premium Allocation Approach (PAA) under IFRS 17 for one-year coverage, recognizing revenue evenly over the period with no acquisition costs or financing component, and contracts issued at year start.
Calculation of liability for remaining coverage, insurance revenue, service expenses, and closing insurance liabilities as of Ashadh 32, 2082, is shown below.
Initial Measurement
Premium per contract = NPR 120,000
Number of contracts = 1,000
Total premium received = 1,000 × 120,000 = 12,000,000
Since the premium is received upfront before coverage starts, the full amount is recorded as Liability for Remaining Coverage (LRC).
Initial LRC = 120,000,000
End of First Quarter
Coverage period = 12 months
One quarter = 3 months (3/12) = 25% of coverage provided
- Insurance Revenue Recognized = 120,000,000*3/12 = 30,000,000
- Insurance Service Expenses (Claims/Benefits):
Expected total claims and expenses = NPR 90,000 per contract
Total = 1,000 × 90,000 = NPR 90,000,000 (evenly over the year)
Quarterly expense = 90,000,000 × 3/12 = NPR 22,500,000
- Liability for Remaining Coverage at Ashadh 32:
Initial LRC revenue earned = 120,000,000 – 30,000,000 = NPR 90,000,000
- Liability for Incurred Claims (LIC):
Since NPR 22,500,000 of claims have been incurred but not yet paid, this is recognized as a liability for incurred claims (LIC).
Abstract Financial Statements as of Ashadh 32, 2082
Statement of Financial Position
|
Component |
Amount in NPR |
|
Liability for Remaining Coverage (LRC) |
90,000,000 |
|
Liability for Incurred Claims (LIC) |
22,500,000 |
|
Total Insurance Contract Liability |
112,500,000 |
Statement of Profit or Loss (Q1)
|
Component |
Amount in NPR |
|
Insurance Revenue |
30,000,000 |
|
Insurance Service Expenses |
(22,500,000) |
|
Insurance Service Result |
7,500,000 |
- Reinsurance contracts held
The requirements in IFRS 17 are modified for reinsurance contracts held.
Recognition
As per IFRS 17, a group of reinsurance contracts held is recognized at the earlier of the start of their coverage or when losses on the underlying insurance contracts are recognized, if the reinsurance was already in place.
Initial Measurement
On initial recognition, the entity shall recognize any net cost or net gain of reinsurance contracts held is recorded as a contractual service margin, comprising fulfilment cash flows, derecognized prior amounts, current cash flows, and any income recognized in profit or loss.
CSM at initial recognition = Fulfilment cash flows + Derecognized prior amounts + Current cash flows + Income recognized in profit or loss.
Subsequent Measurement
Subsequently, reinsurance contracts held are accounted similarly to insurance contracts under general measurement model. Changes in reinsurer’s risk of non-performance are reflected in profit or loss, and not adjusted in Contractual Service Margin.
Modification of insurance contract
If an insurance contract is substantively modified, the original contract is replaced by a new one.
Contract modification is substantive if it changes the contract’s scope, cash flow allocation, direct participation features, or causes it to no longer qualify under the Premium Allocation Approach.
If no conditions are met, changes from contract modification are treated as updated fulfilment cashflow estimates.
Derecognition
An insurance contract is derecognized when it is expired, settled, cancelled, or substantively modified.
Presentation
Under IFRS 17, insurance contracts are presented in the financial statements with liabilities shown separately from other obligations, and reinsurance contracts held presented as assets. Similarly, insurance revenue is recognized over the coverage period. Service expenses include claims, changes in liabilities, and acquisition costs. Further, changes in future cash flow estimates and risk adjustments are recognized in profit or loss. Contractual service margin is recognized systematically. Contracts are presented by groups with similar risks, and disclosures which includes movements in contract balances and the contractual service margin.
Disclosures
IFRS 17 requires extensive disclosures related to insurance contracts, including qualitative and quantitative information like amount, timing, and uncertainty of future cash flows from insurance contracts. The disclosures as per IFRS 17 also depict information about contract balances, revenue, expenses, risks, and measurement assumptions for transparency and decision-making.
How IFRS 17 differs from IFRS 4?
Shift from IFRS 4 to IFRS 17 marks a paradigm shifts in insurance accounting. IFRS 17 replaces IFRS 4 with consistent framework, improving transparency, comparability, and accountability in insurance. IFRS 4 was issued for temporary purpose as an interim standard while IFRS 17 is principle based comprehensive standard. IFRS 4 had allowed to use existing methods or approaches for measurement of insurance contracts whereas IFRS 17 has introduced different measurement approaches like General Measurement Model, Premium Allocation Approach and others.
Similarly, mandatory use of time value of money, explicit use of risk adjustment and contractual service margin in IFRS 17 has made accounting of Insurance Contracts more consistent and comparable than IFRS 4. IFRS 17 has provided extensive and detailed disclosure where as IFRS4 provided the basic disclosure requirements.
Necessity of IFRS 17 in Nepal
Adoption of IFRS 17 and its implementation is necessary in Nepal because of following reasons:
- Enhances Transparency and Comparability
IFRS 17 standardizes measurement and disclosure of insurance revenue, profit, and liabilities, improving reporting quality and stakeholder confidence.
- Strengthens Insurance Sector
IFRS 17 promotes Nepal’s insurers’ stability by improving liability valuation, enhancing accountability with disclosures, and showing unearned profits via the Contractual Service Margin.
- Supports International Alignment
NFRS 17 aligns with global standards, aiding foreign investors and partners in understanding financial statements of insurance companies of Nepal.
- Better Regulatory Oversight
Regulators like Nepal Insurance Authority can have better oversight of insurers’ solvency, risks, loss recognition, and long-term profitability.
- Encourages Professional Development
Implementing IFRS 17 builds capacity in Nepal’s audit firms, insurers, finance, accounting, and actuarial professionals through actuarial valuation and risk modeling.
Key Challenges in implementing IFRS 17 in Nepal
Implementing IFRS 17 in Nepal presents several challenges, considering the evolving stage of Nepalese insurance sector. Key Challenges in implementing IFRS 17 in Nepalese Context are:
- Limited Expertise
IFRS 17 requires complex actuarial models, especially for valuing insurance liabilities. However, there are limited qualified actuaries, IFRS 17 experts and IT professionals for developing valuation models/systems.
- Complexity of Measurement Models
The decision to use measurement model amongst various model is a technical matter which is technically complex and unfamiliar to most of the insurers in Nepal.
- Cost Concern for Implementation
IFRS 17 implementation involves costly system upgrades, consultants, training, and change management, posing challenges for many insurers
- Lack of Awareness and Training
Without proper training, risk of misapplication increases hampering quality of financial reporting and compliance.
- Coordination Challenges
Limited knowledge about IFRS 17 among regulators, auditors and insurers including employees and their resistance to change may pose coordination challenges for its implementation
Conclusion
Adoption of IFRS 17 in Nepal is a crucial step towards aligning the nation's insurance reporting practices with international standards. Understanding and implementing NFRS 17 takes a lot of investment in the form of money, time and other related resources. This shift isn’t just about ticking regulatory boxes, it’s a chance to elevate transparency, make financial comparisons more meaningful, and build stronger trust among regulators, investors, and the public. However, implementation of IFRS 17 in the form of NFRS 17 in Nepal is not an easy task and it is not without challenges. Implementation of NFRS 17 in insurance sector of Nepal sector must overcome hurdles such as limited actuarial expertise, technical complexities, cost burdens, and the need for extensive training and awareness. Successful implementation of this standard requires coordinated efforts among insurers, regulators, professional bodies, and technical experts. With commitment and capacity building, only the country can stand to significantly strengthen its financial reporting landscape with respect to insurance sector through the global convergence.
References:
International Accounting Standards Board (IASB). (2025). IFRS 17 Insurance Contracts. https://www.ifrs.org
Accounting Standards Board (ASB) Nepal. (2024). Nepal Financial Reporting Standards (NFRS). http://www.asbnepal.gov.np
The Institute of Chartered Accountants of Nepal. https://www.ican.org.np
Nepal Insurance Authority (NIA). https://nia.gov.np
EY (Ernst & Young). (2021). IFRS 17 A closer look at the new Insurance Contracts Standard https://www.ey.com/en_gl
KPMG International. (2020). IFRS 17: The New Insurance Contracts Standard – A Global Perspective. https://home.kpmg
Deloitte. (2020). Implementation of IFRS 17 Insurance Contracts. https://www2.deloitte.com