New rules to shake-up insurance sector

HARARE - Players in the local insurance industry will in three years’ time be required to adopt a new version of the International Financial Reporting Standard 17 (IFRS 17) issued by the International Accounting Standards Board (IASB).

Experts told The Financial Gazette that the new regulations, which come into effect in 2021, could see insurers changing their distribution channels and the traditional broker could be rendered obsolete.

The new rules dictate that financial firms report their financial statements, to the capital requirements and transparency demands within their corporate governance structures. 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.

Insurance expert, Sijabuliso Moyo, told The Financial Gazette that 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 ignore 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 told The Financial Gazette this week 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.”

But, Mukunyudze, who is also a director of Chartered Accountants Academy, did not agree with Moyo on the impact on brokers.

He said the impact of IFRS 17 on brokers will be minimal. He, however, admitted that there were processes underway to see how best brokers can be dealt with.

“For nonlife insurance where brokers play a more significant role the impact of IFRS 17 will be minimal thus I do not think underwriters will cut brokers to maintain profitability,” Mukunyudze said.

“The decision of whether or not to cut brokers will largely be driven from continuous process to cut costs which is already ongoing but not as a direct result of IFRS 17. For the life business there will be a significant impact arising from IFRS 17 and performance measures will need to be reassessed. Also some of the costs increase will probably come as a result of increased use of actuaries.”

Joachim Kolschabach, KPMG’s global IFRS insurance leader, said he expected significant impact. But, he admitted IFRS 17 will ensure greater comparability and transparency.

— The Financial Gazette


 

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