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New solvency framework for Zim insurance sector

PHILLIMON MHLANGA

 Zimbabwe is set to implement a new solvency framework for the fragile insurance sector by June this year, a move which will see local insurers have capital aligned to the risk they carry.

The new framework, the Zimbabwe Integrated Capital and Risk Programme (ZICARP), is expected to help ensure that each insurer can withstand any risk it is exposed to and ultimately enhancing protection for policyholders.

Currently, insurers have a one size fits all regulatory capital requirement, regardless of their size and nature.

Life assurers are required to hold a minimum capital threshold of ZWL$75m, short-term assurer ZWL$37.5m and funeral assurers ZWL$62.50m.

The question, however, is what informed these capital thresholds.

Now, the Insurance and Pensions Commission (IPEC) wants the sector to move away from an unscientifically determined capital to one which is related to risk insurers carry.

The new thinking will see the sector moving from a rules-based to risk-based supervision, meaning there will be need to understand each insurer’s business line and products and identify risks in those activities and assess the quality of risk management, day to day management and oversight.

Basically, it means that the new risk framework aims to address weaknesses of the current capital regime which unscientifically determine the minimum capital thresholds of insurance companies.

The new framework will be responsive to market dynamics, experts told Business Times.

IPEC confirmed that ZICARP will be implemented by June this year.

“The Commission is in the process of developing a risk based capital framework called Zimbabwe Integrated Capital and Risk Programme, which is expected to be implemented in the first half of 2021,” IPEC said.

IPEC is hopeful the new framework will go a long way in ensuring that insurers have capital that is aligned to the risk they carry.

“Under the new solvency regime, the sector would migrate to an economic value-based risk based capital regime, which is expected to ensure financial soundness of the local insurers. This, in turn, would enhance policyholders’ protection,” Zeb Chikosha, an insurance expert told Business Times.

The development comes at a time when Zimbabwe’s insurance sector is in dire straits emanating from low confidence after policyholders lost more than ZWL$3bn after dollarisation of the economy in 2009.

The loss was attributable to bad investment decisions and excessive recurrent expenditures by insurers, 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.

But now, the new framework 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 enables orderly exit of insolvent insurance companies from the market and improve confidence in the insurance sector.

The new framework 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 way 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 by the International Accounting Standard Board, as the two—ZICARP and IFRS 17—apply similar principles.

IFRS 17 comes into effect in January 2023 after nearly 20 years of development and measures insurance contracts where losses are expected to be recognised earlier.

IFRS 17 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.

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