tawandamusarurwa
Tawanda Musarurwa
THE country’s insurers are still coping with the effects of their failure to meet obligations following the demonetisation of the Zimbabwe dollar in 2009.
The demonetisation of the local currency followed years of hyperinflation, which wiped out most savings.
Although the fundamental problem was the state of the macroeconomic environment at the time, the Justice Smith Commission of Inquiry, which was commissioned by Government in 2015, highlighted that the regulation of the local insurance sector did not meet international best practice in various areas.
While progress has been made towards the amendment of the Insurance and Pensions Commission Act (Chapter 24:21) and the Insurance Act (Chapter 24:07), sector regulator, the Insurance and Pensions Commission (IPEC) has been addressing weaknesses in the insurance sector.
Some of the key initiatives to enhance the soundness of the insurance sector include, the implementation of IFRS 17 and the Zimbabwe Integrated Capital and Risk Programme (ZICARP).
The regulator has also introduced Zimbabwe-specific mortality tables, and moved to end premium debtors in the insurance sector.
A key initiative that was implemented this year was the push for all insurers to adopt the financial reporting standard, IFRS 17, with effect from January 1 2023.
With regards to financial reporting, the Justice Smith Commission of Inquiry highlighted that financial statements for the insurance industry masked critical information such as unsustainable operational expenses through salaries and insider loans.
An insurance sub-committee of the Accounting Procedures Committee (APC) of the Institute of Chartered Accountants (ICAZ), which was mandated to research and recommend appropriate financial reporting best practices for Zimbabwean insurers, found that IFRS 4 had significant limitations.
For instance, with IFRS 4 there was no consistent treatment of the change (increase or decrease) in insurance liabilities, and it appeared as if policyholders were regarded as shareholders of the insurer, among other issues.
At mid-year, the regulator was receiving IFRS 17 dry run financial statements at June 30 2022, and it noted that “generally, there were no sufficient disclosures in the dry run reports.”
IFRS 17-compliant dry run financial statements as at December 31 2022 were submitted on July 31 2023.
Failure by insurers to provide IFRS 17-compliant financial statements at the end of 2023 going forward will see the companies receiving qualified audits, which can cast doubt on the accuracy and reliability of their financials.
It is expected that the adoption of IFRS 17 will also help the regulator in enforcing the separation of assets between shareholders and policyholders, to avoid transfer from one category to another.
One of the key regulatory gaps indicated by the Justice Smith Commission of Inquiry was the issue of separation of assets, which contributed to undervaluation of assets.
Presenting the Justice Smith Commission of Inquiry report to the National Assembly in May 2018, then-Finance and Economic Development Minister Patrick Chinamasa said:
“Asset values for the period, 1996 to 2008 are however, understated due to the fact that big institutions such as Old Mutual, First Mutual, ZB Life, Fidelity Life and Comarton Consultants failed to provide accurate, consistent and reliable asset values for the period prior to dollarisation.
“The assets were mainly invested in property and listed companies in order to hedge against inflation.”
Another key initiative for the industry is the ongoing implementation of the ZICARP framework, which addresses challenges with rule-based supervision.
“We are at implementation stage of ZICARP.
“Before we had capital requirements that are uniform for every insurer, but the risk-based approach ensures that capital is calculated according to the risk that you are carrying,” said IPEC director of insurance and micro-insurance Mrs Sibongile Siwela:
“If you are carrying high risk, then the minimum capital has to be commensurate with the risk.”
The regulator has also been working on an initiative to index the insurance sector’s minimum capital requirements to the United States dollar, in view of concerns over an inflationary environment.
Said Mrs Siwela:
“In this environment, we will have to keep coming up with new figures on a regular basis, so a decision was taken to index the minimum capital requirements against the US dollar.”
As at June 30 2023 all the short-term insurers were compliant with the minimum capital requirement of $37,5 million (Zimbabwe dollars).
At the time the country’s official exchange rate was 5 739,79 to the US dollar.
The importance of this initiative was buttressed when Government promulgated Statutory Instrument 218 of 2023 at the end of October, which extended the use of the multicurrency system (with the US dollar as its anchor) to 2030.
Meanwhile in July, IPEC launched Zimbabwe-specific mortality tables, which are expected to better inform the development and pricing of insurance policies.
The mortality tables, which were developed by a local consultant, are for individual and retail life business; annuity business; pre-retirement pension business; post-retirement pension business; group assured lives; as well as funeral assurance and micro insurance.
And the promulgation of the “no premium, no cover” regulations through Statutory Instrument 81 of 2023 in May, is expected to improve the financial standing of the short-term insurance industry and other players in the value chain.
Because insurers were allowing insurance on credit, increasing bad debtors were causing financial strain for the companies.
Official figures show that as at the end the second quarter this year, premium debtors accounted for the second largest asset class for short-term insurers at 20 percent, after investment property (24 percent).
Section 5AA. (1) of SI 81 of 2023 reads:
“The receipt of an insurance premium shall be a condition for a valid contract and there shall be no cover in respect of an insurance risk unless the premium is paid in advance.”
“Insurers that have a large number of premium debtors compared to their total assets may find that a significant portion of their capital is not easily accessible to support their daily operations…
“This approach (no premium, no cover) serves as a stop-gap measure to mitigate the risks associated with unpaid premiums and safeguard the financial stability of insurers,” writes risk management and insurance expert Mr Jeremia Mupereki.
“This is because insurance companies depend on these payments to sustain themselves and to fulfil the promised benefits to policyholders.”
Like any other sector, the local insurance sector is at the whims of macroeconomic developments, but the continued strengthening of the industry at institutional level will ensure that the devastating value loss of 2009 does not recur.
Online Reporter