THE Institute of Insurance of Zimbabwe (IIZ) last week hosted its annual conference in Victoria Falls under the theme Challenging Risk Culture, Rethink Business Models, Navigate Uncertainty. The theme spoke to the need to come up with strategies which challenge the risk culture, re-thinking and re-designing business models in order to navigate the uncertain business environment.
The conference came at a time the insurance sector is saddled with legacy issues that include loss of value, while it is also struggling to meet with capital requirements and prescribed asset ratios.
On the other hand, various issues at the macro-economic level have affected the industry, including currency transition, at a time the sector is expected to adapt to the incoming of International Financial Reporting Standard (IFRS) 17, a new accounting standard which all insurance entities are expected to comply with by 2021.
Business reporter Melody Chikono (MC) spoke to African Actuarial Consultants managing director Tinashe Mashoko (TM, pictured) to understand this new standard and how it is going to bring change to the industry. Find excerpts below:
MC: Take us through this standard and its possible impact on the industry.
TM: IFRS 17 replaces an existing IFRS 4 standard. It is a replacement and improvement on the IFRS 4 standard for insurance companies. It will govern the reporting requirements of financial statements for all insurance companies from January 1, 2021.
It is a significant improvement from the previous standard and what it aims to do is to improve the level of disclosure of insurance company profits, it aims to make insurance company profits more comparable so that investors, shareholders and decision-makers can easily compare which insurance companies are doing well and which are not.
It is going to require a lot of preparation and effort from the insurance companies particularly in the area of collecting the right amounts of data in the right groupings such that you can then determine the new calculations of profit, profit signature and profit profile into the future of the insurance company.
The sector will also require significant investment and improvement in information technology systems which already is an area insurance companies were working around.
The disclosures will result in companies understanding their profits better as well.Risks that relate to their products will be better understood. It will also result in companies making better strategic decisions based on profitability of products and which products one should be selling based on the new calculation requirements.
Quite a lot of work will be required of the various teams in an insurance company. The financial team and the actuarial team will have a lot more calculation of models, explain and training of the results and what they do. There will be work required of the marketing and the IT department as well.
So we see the standard bringing all the functions of the insurer to work better in understanding how the insurer is ultimately run. Importantly, given the gravity of the issues needing decision-making, it means that senior management need to understand this new standard and its new implications, thus has to be on the forefront of the implementation of the IFRS17 standard.
MC: What then should the industry expect?
TM: The industry should expect a transparent reporting profitability, which allows investors or brokers to be able to compare insurance companies for various purposes, be it where you should invest or where you want to place your business.
All this will allow the industry to make better decisions.It also means from a regulator perspective, they should be able to compare the financial strength of the insurance companies better.
We already have Ipec (Insurance and Pensions Commission), with effect from December 31, 2019 moving towards all insurance companies submitting financial statements to the regulator, but with an improved standard like this. It means the regulator can easily compare the profitability of the various insurance companies.
The standard will also look at balance sheet strength. Now all the future profits from an insurance contract need to sit as an asset on the balance sheet. This standard will allow better comparison of that balance sheet item that is sitting on the insurance company balance sheet in terms of future profit and link it better to the risk that relates to the contract and how those risks are moving overtime. Such information is useful for the industry, regulators, brokers and investors and policyholders as they make their decisions.
MC: What are the implications of IFRS 17?
TM: As an industry we do not have a choice around the standard’s implementation, so we have to implement it. But it is a standard that will require us to take account of our own unique circumstances as the Zimbabwe economy.
Issues around how assumptions for determining insurance company profits are being set. Those will remain challenging particularly considering our environment. For example, economic indicators like inflation are very volatile and sometimes difficult to determine because our markets are not deep enough.
All those will pose challenges that are unique to Zimbabwe when it comes to applying the standard because we do have the depth in our market to give us the right statistics in which to form the basis for the assumptions.
The standard will require a lot of technical skills, particularly in the area of investment of actuaries and IT skills. Beyond skills, it will require investment in resources, for example, IT systems or risk management systems that help companies understand their risks better.
Insurance as an industry is going through some tough challenges. our customers do not have disposable incomes unlike in the past. we are seeing customers cancelling policies, insurance companies’ profitability being affected, which will then affect their ability to make required investments.
MC: Talking of investments, approximately how much might an insurance company need to put this system in place?
TM: For a reasonable implementation of this programme, an insurance company needs between US$150 000 to US$300 000 or equivalent. Some companies will need much higher than this, depending on their complexity and also depending on how well their actuarial and risk management were resourced to date.
We are seeing a general availability of resources and skill in the market. our universities are doing well in terms of churning out graduates especially in the actuarial department with the University of Zimbabwe producing at least 80 graduates per annum.
MC: What can you say are some of the shortcomings of IFRS 17.
TM: It is difficult to point out areas where one could say it was badly designed or it is not giving the right outcomes. It is actually a standard that has been in the making for the last 20 years across various platforms, so l believe it is robust and it will take us where we want to go.
There could be improvements on how the standard talks to other regulatory issues that relate to other aspects. For example, we are implementing our own risk-based capital regime project, ZICARP (Zimbabwe Integrated Capital and Risk Project).
The key issue will be that the two align. Yes, ZICARP is mainly focussing on issues on the balance sheet whilst the standard is mainly focussing on the profitability of the company.
The two talk to each other income statement and the balance sheet. You would want the two to be aligned, but to me those are implementation issues not weaknesses in the standard itself. l think the challenges could come as to issues could come as to how the standard is implemented as opposed to the standard itself having weaknesses.
MC: The changes come at a time the industry needs to be compliant with the new hyperinflation standard. How then do you see the industry battling with these compliance issues?
TM: From a timing perspective, the hyperinflationary standard is something that is immediate, so for December 31, 2019 financial statements need to be compliant to that hyperinflationary standard. Without doubt it will mean the financial statements will be kept very stretched in terms of having to implement those hyperinflation standards and then starting to plan and invest in systems for that new standard.
However, the hyperinflation standard is something that we are familiar with as an industry. we have reported on it before in the previous hyperinflationary era. Whilst the hyperinflationary situation itself is unfortunate, hopefully financial functions are better prepared for hyperinflation accounting.
MC: From your point of view as actuarial consultants, what is next for the industry?
TM: As consultants in the industry, we would be urging the industry to come together and manage how best we can implement the standard and manage from the perspective of cost. We think through working together some of the implementation issues can be addressed if the industry comes together and tries to develop common approaches and common implementation issues.
We will certainly be urging and encouraging that, whilst January 1, 2022 sounds far away, it is actually much earlier considering the fact that when we implement in 2022, you need to be having 2021 comparable financial statements.
So it means already you need to be producing your accounts from as early as 2021 for the purpose of having comparative positions which means by 2020 you need to be thinking about implementing the new standard.
A lot of stakeholders need to be engaged all of which point to a potentially complex project implementation. We would be encouraging insurers to be thinking sooner rather than later.
MC: Are there any penalties in case a company fails to comply?
TM: There are penalties in the form of the cost of non-compliance, for example a listed company’s statement needs to comply with IFRS so what you would not want is for accounts to be qualified or for your auditors to say you have non-compliant accounts because you have failed to comply with this one particular standard.
That comes with grave consequences in terms of qualifications on the overall accounts which the listed companies would want to avoid at all costs.
Again I would want to talk about the fact that this standard is also a very useful and timely intervention if one considers that we had our President appoint a commission of enquiry into the loss of value which happened from insurance and pensions institutions.
It is useful because it promotes a lot of the findings or failings which the commission of enquiry unmasked, for example failings around poor data management, poor investment in insurance company systems, lack of transparency and disclosure from insurance companies.
All of those weaknesses from the commission of enquiry the standard effectively addresses by improving levels of disclosure and levels of transparency, ultimately resulting in better data management and governance and better investment in IT systems.