PHILLIMON MHLANGA
The incoming International Financial Reporting Standard 17 (IFRS 17) issued by the International Accounting Standards Board (IASB) is set to shake-up Zimbabwe’s insurance sector with business likely to become more complex and costlier to operate, the Insurance and pension Commission (IPEC) has warned.
IPEC’s acting commissioner Blessmore Kazengura indicated that the vast majority of insurance companies in Zimbabwe are not yet prepared for the new rule, which comes into effect in 2021, despite the significant risks it poses to their business.
Experts told Business Times that IFRS 17, which comes into effect after nearly 20 years of development, measures insurance contracts where losses are expected to be recognised earlier and will supersede IFRS 4.
By establishing consistent principles for the recognition, measurement, presentation and disclosure of insurance contracts, IFRS 17 represents a new era in insurance accounting. It does this by combining current measurements of future cash flows with the recognition of profit over the period in which services are provided. IFRS 4 did not require insurers to identify in a systematic way which insurance contracts were profitable or loss making except at a high level that involved significant discretion. This resulted in different companies offsetting profits on some contracts against losses on others in different ways, making comparisons challenging. That is one of the new features of IFRS 17: it requires entities to first identify homogeneous risk portfolios then divide these into groups based on their profitability.
That makes it much more visible whether new business creates or destroys value based on IFRS 17’s conventions.
It is expected to come with complexities on the financial disclosures of insurers and profound operational impacts on all aspects of the companies, meaning that Zimbabwe insurers will need to implement significant technical and practical changes to current practices. They need to completely overhaul their underlying actuarial models, financial reporting processes and systems, and transparency demands within their corporate governance structures.
It is expected that the way insurers will report income earned from life insurance business will change. They will not report future premiums earned from the life cover, creating a volatile environment for them financially.
The new rules are also expected to bring about radical changes whereby investment income, money put in stocks and government paper as invested will not be counted in the overall profits of the insurer.
The standard is the biggest change that has ever taken place in the sector in nearly 20 years.
In fact, under the IFRS 17 model, insurance contract liabilities will be calculated as the present value of future insurance cash flows with a provision for risk.
It’s designed to achieve the goal of consistent, principle-based accounting for insurance contracts, the new standard requires insurance liabilities to be measured at a current fulfilment value and provides a more uniform measurement and presentation approach for all insurance contracts.
IFRS 17 also requires insurance companies to identify portfolios of insurance contracts, which comprise contracts that are subject to similar risks and are managed together.
Warning insurance companies, Kazengura said given the mammoth task, the earlier companies start working on the changes, the better.
Kazengura added that the insurance industry should be “proactive and start discussing issues around” the implementation of the new version of the accounting system.
He said time was of essence because the implementation of IFRS 17 was a massive project with significant risks. Insurance companies, he said needed to be proactive and start now working on the implementation of the IFRS 17, which comes into effect in three years’ time.
“I wish to challenge the industry to commence discussions surrounding the implementation of IFRS 17,” Kazengura said.
“The standard (IFRS 17), which is likely to shake-up the industry, would have to be implemented in a few months from now since 2021 is just around the corner. Let us brace ourselves for such huge changes and be proactive in terms of recommending areas requiring regulatory guidance or improvements for our consideration.”
A partner at KPMG Chartered Accountants South Africa, who spoke at the KPMG IFRS, tax and business meeting in the capital last week, said IFRS 17 was “complicated” and insurance companies in Zimbabwe should expect significant impact and start running “dry-runs” in preparation for the implementation of the new standard, which for the first time, insurers will be on a level footing internationally. He said it will open up the ‘black box’ of current insurance accounting.
“This (IFRS 17) is an extremely extensive standard which has been in the making for 20 years for insurance companies. It’s complicated and will focus will be on the measurement of insurance contracts and various disclosures.
Key components of the new standard include contractual service margins, unearned profit, risk adjusted present value of future cash flows such as premiums and claims,” he said adding “Insurance companies in Zimbabwe should start preparing for the new standard which is not too far away from its effective date.”
Experts said IFRS 17 could see insurers changing their distribution
channels and the traditional broker could be rendered obsolete.
Speaking at a recent Institute of Chartered Accountants of Zimbabwe (ICAZ) meeting, Sijabuliso Moyo, an insurance expert, said IFRS 17 was likely to significantly impact on brokers as insurers seek to cut costs. He said many insurers would opt for direct contact with clients.
“The truth is that IFRS 17 will significantly impact insurance companies,” said Moyo.
“When underwriters are affected by the new rules, they will likely ignoring brokers as they try to cut their losses and opt for direct contact with clients.”
A broker sources for clients and connect clients with underwriters. The client doesn’t pay the broker but is directly remunerated by the underwriter. But, once these rules come into effect, insurers are likely to change their distribution channels, meaning the traditional broker could be kicked out, experts said.
Elles Mukunyudze, the Institute of Chartered Accountants of Zimbabwe (ICAZ)’s technical consultant, who is also the managing director of Training and Advisory Services, said that IFRS 17 will introduce significant changes to the way insurance entities report their financials.
“Much of the current insurance reporting is based on established practices largely due to lack of comprehensive guidance in the current IFRS. Although IFRS 4 deals with some principles, the standard when it was developed was meant to be transitory and not to comprehensively deal with insurance reporting.
“IFRS 17 will introduce significant changes to the way insurance entities report particularly life insurance companies.
When IFRS 17 is applied in 2021, it will provide investors, policy holders and other users of information with consistent information for all insurance contracts as well as new metrics for evaluating the performance of insurers. Information that may already be available for some companies through current measures will be available for all in a more comparable manner.”
