IFRS adoption brings India's actuarial liabilities under audit scope

Background and adoption date

Indian insurance companies so far have been reporting financial results under Indian GAAP. Following a preparatory period, the Indian insurance regulator, IRDAI, has asked insurance companies to transition to Ind AS, the local equivalent of IFRS.

The adoption date is effectively 1 April 2027, with early adoption permitted on 1 April 2026 (the Indian financial year runs from April to March).¹ In practice, only a handful of insurance companies have adopted IFRS effective April 2026; most insurance companies are expected to adopt it effective April 2027.

There is a dual reporting (Ind AS and Indian GAAP) requirement for the next two financial years “or for such period as may be specified”. During this time, every insurance company will need to keep preparing the Indian GAAP and Ind AS financial statements, both of which will be subject to audit.

Actuarial liabilities: The pre-IFRS situation

Actuarial liabilities comprise a significant portion of any insurance company’s liabilities. Under the earlier Indian GAAP accounting standards, IRDAI regulations had scoped out these liabilities from statutory audit; the auditors were only to verify that the liabilities had been certified by the insurance company’s Appointed Actuary.

This may have been somewhat justifiable (if still problematic) 25 years ago, when actuarial talent was scarce and Appointed Actuaries were external consultants. However, to institutional investors in the 2010s and 2020s, this represented a major corporate governance risk.

Effectively, under Indian GAAP, Indian insurance companies’ reported financial position depends significantly on the unaudited judgement of a single individual, the Appointed Actuary.

This individual is employed by the company whose reported financial position he largely determines, can be dismissed by this company at will, and a significant part of his remuneration is usually in company ESOPs that would be more valuable if he were to subvert his statutory duties by undervaluing its liabilities. ²

The IFRS reform

Under the IRDAI regulations which introduce Ind AS, actuarial liabilities are no longer scoped out of statutory audit. Auditors signing Ind AS financials can now more genuinely opine that they present a true and fair view, since they no longer need to disclaim a significant portion of the liabilities.

It is true that auditors largely lack the expertise to review actuarial liabilities. However, this is a global problem with a globally accepted solution that is straightforward to implement in India: The auditor must engage an independent actuary to advise it on the appropriateness of the company’s actuarial provisions. Such scenarios are already covered by an existing Standard on Auditing issued by ICAI (the Institute of Chartered Accountants of India): SA 620, “Using the Work of an Auditor’s Expert”.

With this reform, India falls in line with other major jurisdictions, and institutional investors can draw more comfort from Indian insurance companies’ financial statements.

Footnotes

1. IRDAI framed it differently, as an official adoption date of 1 April 2026, with insurance companies being allowed to apply for “forbearance” to push out the adoption date to 1 April 2027. Most insurance companies opted to apply for forbearance. ↩

2. This is how institutional investors saw it, but the situation was not really quite as dire even 5-10 years ago. Firstly, IRDAI used to not permit Appointed Actuaries to be remunerated with ESOPs; this was gradually relaxed and, in 2023, reversed with the KMP remuneration guidelines. Secondly, AAs used to be difficult to fire because replacements used to be difficult to hire; this is no longer the case since the number of qualified and experienced actuaries has increased over time. Lastly, there is a peer review mechanism for actuarial liabilities, but in my view this mechanism does not usually ensure adequate challenge to the AA’s valuation assumptions or calculations. Another India-specific regulatory quirk also bears mentioning: The Appointed Actuary cannot be dismissed between January and June; while this may in theory maintain the sanctity of the most recent year’s valuation, it is somewhat undermined by the threat of later dismissal. ↩