IPEC revamps solvency regime as risk based capital regime gains traction 

PHILLIMON MHLANGA

Zimbabwe is revamping its solvency regime, moving towards the economic value based risk based capital regime to ensure financial soundness of the local insurers, a move which several analysts said will enhance policyholders’ protection.

This comes  at a time when the country’s insurance sector  is in dire straits  emanating from low confidence  after dollarisation of the economy in 2009, after ditching its defenseless Zimbabwe dollar due to hyperinflationary pressures. This saw insurance and pension funds losing about $3,2 billion through bad investment decisions  and excessive recurrent expenditures, which was eroded by decade long hyperinflation and low activity in the economy, according to a report by a Commission of Inquiry set up by former President Robert Mugabe in 2015, to look into the conversion of insurance and pensions values from the Zimbabwe dollar  to the United States dollars. The industry is also battling to regain confidence after players in the sector failed to honour their obligations.

Current insurance rules, set out in the Insurance Act and Statutory Instrument of 2017,  require that general insurance  companies  to have a minimum capital  of $5 million across the sector, while all re-insurance companies are expected to hold a minimum of $7,5 million.

But now, to enhance protection of policyholders, the insurance and pension regulator, the Insurance and Pensions Commission (IPEC), this week launched a new framework called the Zimbabwe integrated capital and risk project (ZICARP), which is expected to improve the safety and soundness of insurance companies in a bid to foster protection of policyholders.

It also forms part of an early warning system with a supervisory ladder of intervention that enables IPEC to timely take necessary measures in the interest of policyholders. It also enable orderly exit of insolvent insurance companies from the market and improve confidence in the insurance sector. It also promotes standardization across the country’s insurance market and alignment to international regimes.

Other countries are already applying the risk based capital regime, which requires or promotes consistent and comprehensive disclosures by insurance companies to protect policyholders.

Countries taking a lead in the implementation of risk based framework in the African continent are South Africa and Kenya.

 Such disclosures are expected to enhance market discipline and understanding risks which insurers are exposed to and the manner in which the risks are managed.

Insurance companies will also be fully equipped to conform to the global accounting standard called the International Financial Reporting Standard 17 (IFRS 17), which is set to be introduced  in 2021 by the International Accounting Standard Board, as the two apply similar principles.

IFRS 17, comes into effect in January 2021 after nearly 20 years of development and measures insurance contracts  where losses are expected  to be recognized earlier and will supersede IFRS 4, which is the standard currently being used by insurance companies for financial reporting. It’s expected to shake-up the insurance sector because businesses are likely to become more complex and costlier to operate.

Blessmore Kazengura, IPEC acting commissioner said it was crucial to revamp the sector in order to protect the policyholders.

“We are motivated by the quest to development a sound insurance regulatory and supervisory framework to enhance policyholder protection,” Kazengura said.

“We have called it an integrated project because it covers three main aspects namely risk , market disclosure framework and  an own risk and solvency assessment framework. The three main aspects of ZICARP are consistent with the three pillars of Solvency 11 which will be customized for the local situation.

“The envisaged risk based capital framework is aimed at addressing weaknesses of the current capital regime such as unscientifically determined minimum capital requirements such as the 45 million for life and $7,5 million for reinsurance companies and transforming the current rules based  capital adequacy framework based on Section 24 of the Insurance Act and SI 95 of 2017 to a risk based regime that is responsive to market dynamics. While the risk based capital framework will address weaknesses of the current capital framework, it is important to bear in mind that the implementation of the risk based capital framework does not eliminate minimum capital requirements. There will still be minimum capital requirements, the level of which will be determined by the new framework. It is intended to determine the capital each insurance company or medical scheme should hold, based on the risk that they assume. It will help to ensure that each insurer can withstand any risk it is exposed to and ultimately enhancing protection of policyholders,” he added

Josephat Kakwere, IPEC acting director of Insurance agreed with Kazengura.

“The traditional approach is one size fits all regardless of size and nature of the insurer. In 2009, when the country dollarized the minimum capital threshold was $300 000, in 2013 it was increased to $1 500 and currently its $5 million, but the question is what was informing these capital changes? ,” Kakwere asked.

He added: “It is a move away from unscientifically determined capital. Capital should relate to risk and its (traditional framework) not in line with international best practice. Now, the new thinking is that of moving from supervision from a rules based to principle based in the form of risk based supervision. This means we now have to understand each insurer’s business line and products and identify risks in those activities and assess the quality of risk management that day to day management and oversight. It has three pillars namely the quantitative determination of capital, risk management and the disclosure requirement of regulation and assess earnings that is capital and liquidity required to support operations of the regulated,” he added.

Tinashe Mashoko, managing director of African Actuarial Consultants, which is the implementing agency said: “IPEC is revamping the solvency regime, and want to come up with a regime that is relevant. It’s a step in the right direction and presents a strong foundation. It’s going to calculate the minimum capital required based on the business. It’s no longer a definite (capital) figure. With the imminence of IFRS 17, we really need to get going and move to economic balance sheet,” Mashoko said.

He added: “It’s no longer going to be a fixed capital regime across all insurers. But, there are huge challenges, which include the complexity of calculating the viable capital, availability of reliable system especially the IT platforms, data requirements and this will come at a cost for full implementation to consider the impact on users. In doing so, there is need.”

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