Introduction
In March 2004, the International Accounting Standards Board (IASB) introduced the International Financial Reporting Standard (IFRS) 4 - Insurance Contracts, as an interim standard, allowing insurers to apply varying national accounting practices. While this flexibility accommodated different markets, it led to inconsistencies in financial reporting, making it difficult to compare insurers' financial health globally. To address this deficiency, the IASB issued IFRS 17 - Insurance Contracts in May 2017, effective on 1 January 2023, introducing a standardised approach to recognising, measuring, and presenting insurance contracts. IFRS 17 enhances comparability, transparency, and financial reporting quality. Unlike the earlier version, IFRS 17 standardises liability measurement using risk-adjusted present values of future cash flows and a contractual service margin (CSM) [1] to defer unearned profits.
The standard also separates insurance service results from investment components, offering a clearer view of insurers' financial positions. In addition, IFRS 17 provides insurers with an option on how to recognise insurance finance income or expenses, promoting consistency in financial reporting while accommodating different business models.
The Kenyan insurance industry (the Industry) comprises 45 insurers (18 composite risk underwriters, 17 general (non-life) insurers, five long-term (life) insurers and five reinsurance companies). Under the IFRS 17 framework, financial reporting has been reshaped, impacting how insurers recognise revenue, manage liabilities, and disclose financial performance. As the Industry navigates this transition under the guidance of the Insurance Regulatory Authority (IRA), insurers face complex implementation challenges, including data management, actuarial modelling, and system upgrades. However, the long-term benefits - greater investor confidence, improved risk management, and enhanced regulatory oversight - position IFRS 17 as a game-changer for Kenya's insurance landscape. Two years into the global adoption and consent by IRA, the question remains: How well has Kenya's insurance sector adapted, and what lies ahead?
Financial Reporting Under IFRS 17: Approach, Adjustments and Implications for Insurers
The implementation of IFRS 17 has significantly altered financial reporting and profit recognition for Kenyan insurers, requiring a fundamental reassessment and regrouping of insurance contracts. Under IFRS 17, Insurers must adopt any of the three measurement models as noted in Table 1 below for the measurement and valuation of each insurance policies.
Most non-life (general) insurers in Kenya predominantly apply the Premium Allocation Approach (PAA) under IFRS 17, as it provides a simplified method for short-duration contracts. In contrast, life (longterm) insurers typically utilize the General Measurement Model (GMM) due to the long-term nature of their policies and the need for more granular risk assessment. The GMM is inherently more complex, as it requires detailed cash flow projections, discounting, risk adjustments, and the contractual service margin to defer unearned profits. This complexity necessitates greater actuarial expertise, as insurers must regularly update assumptions related to policyholder behavior, economic conditions, and future cash flow estimates, making data management and actuarial modelling more demanding compared to the PAA.
Agusto & Co. notes that this reclassification should lead to more transparent financial statements, offering deeper insights into profitability and outstanding liabilities. However, this also introduced complexities in revenue recognition, profit volatility, and component separation within insurance contracts. The standard mandates the identification and appropriate treatment of various contract elements, ensuring that insurance components are accounted for based on their true economic impact.
Under IFRS 17, insurance components and non-distinct investment components are measured together, while embedded derivatives and distinct investment components are separated and accounted for under IFRS 9 (Financial Instruments). Similarly, distinct goods and services within insurance contracts are measured under IFRS 15 (Revenue from Contracts with Customers). This structured approach enhances financial clarity and comparability but requires insurers to refine contract structures, adjust accounting policies, and upgrade reporting systems.
Furthermore, IFRS 17 has transformed revenue recognition by requiring insurers to recognise insurance revenue as services are provided, leading to a more systematic and consistent income reflection over the coverage period. This contrasts with previous practices, where revenue was often recognised upfront, causing fluctuations in reported earnings. Tables 2 and 3 show a comparison of the income statement and statement of financial position of the erstwhile IFRS 4 and IFRS 17 provisions.
Moreover, under IFRS 17, insurers must assess the overall profitability of contracts from the outset by evaluating the fulfilment cash flows (FCF), including acquisition costs and any expected outflows. If the total cash flows result in a net outflow, the contract is deemed onerous, requiring an immediate loss recognition, with the contractual service margin (CSM) set to zero. Subsequently, if a previously profitable group of contracts becomes onerous or more onerous, the excess loss must be recognised immediately, and the CSM cannot increase until the previously recognized onerous amount is reversed. IFRS 17 further mandates that each portfolio of insurance contracts be classified into at least three groups: onerous at inception, contracts unlikely to become onerous, and all remaining contracts. This structured approach ensures that expected losses are accounted for upfront, enhancing transparency in financial reporting.
Industry Impact: Adoption Progress and Challenges
The transition to IFRS 17 has been a gradual yet intricate journey for Kenyan insurers. Quarterly reports from the Insurance Regulatory Authority indicated that most insurers continued to report under the previous IFRS 4 in 2023, underscoring the challenges in fully embedding IFRS 17 into their financial frameworks. However, Agusto & Co. notes that the transition to IFRS 17 has disrupted financial reporting cycles, with some insurers delaying their financial year results due to compliance complexities. In addition, insurers have incurred significant costs linked to various aspects of IFRS 17 implementation; training programs for internal teams to enhance IFRS 17 expertise, hiring actuarial and accounting specialists to support compliance, and upgrading technology and systems for data management, risk assessment, and financial reporting. As at 31 December 2023, CIC Insurance Group Plc, Liberty Kenya Holdings Limited, Britam Holdings Plc, Sanlam Kenya Plc and Jubilee Holdings Limited out of the 45 licensed insurers and a reinsurance company complied with IFRS 17 in preparing the audited financial statements for the year. However, only CIC Insurance Group Plc, Liberty Kenya Holdings Limited, and Britam Holdings Plc, restated their 2022 financial results for comparability as required by the accounting standard. Based on the H1'2024 report by the IRA, many of the general, long-term and reinsurance companies are now reporting in line with IFRS 17. Going forward, Agusto & Co. expects a significant shift, with many insurers complying with IFRS 17.
The implementation of IFRS 17 has placed greater reliance on data-driven decision-making, particularly in the life insurance segment, where long-term policy liabilities require detailed actuarial assessments. However, the Kenyan insurance industry faces a severe shortage of actuarial professionals, with only 62 Fellows and 17 Associates registered as of 31 December 2024 . This limited pool of actuaries presents a significant challenge in modelling complex life insurance contracts, which require continuous valuation of future policyholder benefits, risk adjustments, and contractual service margins. The data-intensive nature of IFRS 17 further exacerbates this challenge, as insurers must collect, process, and analyse granular historical and projected cash flow data to ensure accurate financial reporting.
During the first six months of 2024, the Kenyan insurance industry generated Kshs 151 billion (US$ 1.2 billion@Kshs 129/$) as insurance revenue. The non-life (general) segment remained dominant and accounted for 75.4% of the insurance revenue, while the life (long-term) risk underwriters contributed the remaining 24.6%. The asset base of the insurance industry expanded by 14% year-on-year to Kshs 1.2 trillion as at 30 June 2024. The investment portfolio, which grew by 15.1% year-on-year, remained dominant and represented 87.1% (30 June 2023: 86.3%) of the asset base as at the same date. Meanwhile, the Industry's shareholders' funds stood at Kshs 222.7 billion as at 30 June 2024, an 18.2% year-on-year growth on the back of partial retention of the improved profit generated. In Kenya, insurance companies are required to maintain a Capital Adequacy Ratio (CAR) of at least 100% of the minimum capital prescribed under the Insurance Act. However, the Insurance Regulatory Authority (IRA) has been enforcing risk-based supervision guidelines, requiring insurers to maintain a CAR of at least 200%. General insurers are required to hold a minimum capital of Kshs 600 million, while life insurers must maintain at least Kshs 400 million. As at 30 June 2024, two life insurance companies and six general insurers had breached the regulator's capital adequacy requirements.
In the near term, we expect mergers and acquisitions in the industry as some insurers struggle to remain profitable and meet capital adequacy thresholds. The overarching growth highlights the industry's resilience and adaptability amid the ongoing implementation of IFRS 17 and other market shifts. As IFRS 17 continues to take root, Kenyan insurers are gradually refining their processes to ensure full compliance, enhance financial transparency, and improve investor confidence.
Outlook
Two years into its global adoption, IFRS 17 continues to reshape the Kenyan insurance industry, enhancing transparency, comparability, and investor confidence. The shift to standardised liability measurement and revenue recognition has improved financial disclosures, fostering trust among stakeholders. In addition, emerging trends in reinsurance strategies, policyholder behaviour, and pricing adjustments indicate an evolving market as insurers adapt to risk-adjusted cash flows and the contractual service margin. While enhanced financial reporting under IFRS 17 improves transparency, we note that the standard itself does not directly lead to credit rating upgrades or downgrades. Credit rating agencies assess insurers based on financial strength, earnings stability, capital adequacy, and risk management frameworks, rather than compliance to changes in accounting standards alone. However, greater consistency in financial reporting can provide clearer insights into insurers' financial health, enabling more accurate assessments of solvency and risk exposure.
Despite these advancements, key challenges remain, particularly in data quality, automation, and operational efficiencies. Insurers must enhance actuarial modelling, improve data integration processes, and streamline financial reporting workflows to fully leverage IFRS 17's benefits. The acute shortage of actuaries in Kenya, with only 62 Fellows and 17 Associates, remains a critical constraint, especially for life insurers dealing with long-term contract valuations and risk adjustments. As IFRS 17 demands granular data and complex actuarial projections, insurers are increasingly relying on limited in-house actuarial expertise or external consultants, further driving up compliance costs. We note that the Insurance Regulatory Authority could introduce regulatory refinements based on industry feedback to address compliance complexities. Ultimately, as insurers continue to adapt, IFRS 17 is set to drive a more transparent, resilient, and investor-friendly insurance landscape in Kenya.
[1]The Contractual Service Margin (CSM) represents the unearned profit from an insurance contract, recognised over time as the insurer provides coverage. It prevents immediate profit recognition at inception by deferring earnings systematically. The CSM is adjusted for changes in future cash flow estimates and risk adjustments, ensuring a consistent profit release throughout the contract's life.