The local data, governance, systems and skills considerations shaping IFRS 17 implementation for non-life insurers and reinsurers in Zimbabwe.
A non-life insurers and reinsurers perspective.
IFRS 17 Insurance Contracts is an accounting standard effective from 1 January 2023. It replaces IFRS 4 and sets out the requirements an insurer applies when reporting information about insurance contracts issued and reinsurance contracts held.
Implementation by Zimbabwean insurance companies is likely to require significant effort given current market practices. Zimbabwe has historically lagged behind some other markets in areas such as broad risk governance and principles-based supervision.
South Africa, for example, has the Solvency Assessment and Management framework, while Europe has Solvency II. These regimes arguably provided a useful foundation for adopting IFRS 17 through established governance structures, information management systems, and historical company and market statistics. Other markets were therefore ahead of the curve, while Zimbabwe had more ground to cover.
There was, however, a silver lining. The standard proved difficult to implement worldwide, as demonstrated by revisions and adjustments considered and adopted by the IASB following practical feedback from early adopters. Zimbabwe could benefit from this international experience.
The local market is also smaller than many globally competitive markets and may be able to apply carefully considered simplifications while remaining compliant. Materiality, proportionality and controlled expert judgement could be used in a measured way, including through the assessment of facts and circumstances.
This article considers the main challenges Zimbabwean non-life insurers and reinsurers could face when implementing IFRS 17, with particular attention to local market conditions.
Risk governance processes
IFRS 17 requires an insurer to separate onerous contracts from profitable groups. Onerous contracts are groups expected to have a net outflow from initial recognition after considering fulfilment cash flows. The standard requires these groups to be identified early, and profitable groups cannot offset losses arising from onerous groups.
An insurer therefore needs underwriting, reserving and pricing functions to work together effectively. At the time of writing, relatively few local insurers had this degree of integration embedded in their culture.
Pricing teams require input from underwriters when setting assumptions for claims, expenses and profit targets. Many insurers did not allocate expenses at product-line level and instead maintained a single company-wide expense ratio.
Pricing for many products was also driven by legacy approaches and market intuition, with limited scientific repricing. The available analysis often came from experience investigations performed annually or at similar intervals.
IFRS 17 analyses results largely on an underwriting-year basis. Most insurers and reinsurers in Zimbabwe traditionally relied on an accounting-year basis for internal reporting and analysis, creating another process and data challenge.
Data gathering and analysis
IFRS 17 has a major impact on how data is collected, stored and analysed. Insurers need enough granularity to:
- identify and consistently segregate groups of contracts at inception;
- retain inception dates and coverage periods;
- store historical cash flows;
- apply discount rates; and
- determine risk adjustments for each group of contracts.
This level of detail significantly affects actuarial models, financial reporting systems and their supporting data requirements.
Many Zimbabwean non-life insurers have legacy data issues arising from years of migrations, limited core-system upgrades, withdrawn vendor support, mergers, acquisitions, insurer closures and information stored outside core systems.
Motor insurance provides a common example. Underwriting information may not have been requested or captured because some fields were historically considered unimportant for pricing and reserving. Information can also be lost as group covers—such as motor fleets or company assets—move between intermediaries and insurers.
Similar information gaps can arise between insurers and reinsurers. The structure of service-level agreements and practical working arrangements between the parties can contribute to this problem.
Market statistics on underwriting and claims
At the time of writing, market data was primarily available through IPEC quarterly reports. These reports have a particular format and serve a specific regulatory purpose.
They provide a point-in-time view of each calendar period against the preceding period. For actuarial work, the market would benefit from historical claim-development triangles and statistics for different business lines updated consistently over time.
Where an insurer has insufficient data for a particular line, standard market-development trends could serve as credibility-weighting factors. Contract boundaries may also be difficult to determine from the information currently available.
Industry bodies such as ICZ, IIZ, ICAZ and ASZ could consider collaborating to build information that augments existing market disclosures.
Discounting assumptions
IFRS 17 requires projected cash flows to be discounted over their settlement period. Direct writers may have some relief because many contracts are short-tail and cover periods of one year or less.
Even for liability classes, the local market often writes risks on a claims-made basis, limiting the period over which legacy claims emerge. An insurer might therefore conclude that discounting is immaterial for some portfolios, but this conclusion would still require evidence.
Engineering, fire and other classes may contain multi-year contracts. Discounting may also be more significant for reinsurers, where multi-year contracts and risk-attaching arrangements are common.
Discount-rate assumptions could be informed by investment yield curves. Zimbabwe does not have comprehensive yield curves for both short- and long-dated bonds or similar instruments. Market participants may therefore need to develop alternatives that remain within the standard’s principles.
Information management systems
Establishing suitable information management systems is likely to require significant investment and effort.
Systems need to recognise the contractual service margin for each group of contracts and store historical, current and projected cash flows, discount rates and risk adjustments. Insurers may require greater processing capacity, data storage and changes to their core technology.
Several existing insurance systems may not be equipped to meet IFRS 17 requirements for complete calculation and reporting of a contract group’s building blocks.
Skills are key
Insurers need specialist skills to implement new systems and encourage closer collaboration between finance, actuarial, technology, risk management and other departments.
Required data originates across the organisation and must be processed in new ways. Gap analyses are therefore needed to identify required changes across existing systems, processes and teams.
Available resources will affect implementation costs. Insurers that previously used less rigorous measurement techniques may have a greater need to employ specialists with appropriate skills.
Training is also essential for stakeholders who need to understand IFRS 17 expectations and outcomes. This includes users of financial statements, who need support interpreting the results and implications of applying the standard.
Disclosures and reporting
IFRS 17 introduces extensive disclosures. These explain:
- amounts recognised in the statement of financial position and statement of financial performance;
- significant judgements made when applying the standard; and
- the nature and extent of risks arising from insurance contracts.
Insurers need to align reporting processes with new statement and disclosure requirements. IFRS 17 requires more detailed information on estimation approaches, risk information and confidence intervals, which may require substantial changes to existing processes.
Initial implementation costs
The cost of implementing new accounting requirements depends on each insurer’s circumstances. It may vary according to business volume, contract duration, existing information systems and current processes.
Implementation effort is also affected by the quality and granularity of information maintained in day-to-day operations. In this respect, Zimbabwean insurers face challenges similar to those encountered in other markets.
Going forward
IFRS 17 requires continuous and frequent updates, creating more ongoing demands than previous simplified approaches.
The scale of the challenge depends on:
- how frequently estimates change;
- the complexity of contracts issued;
- the number of contracts affected; and
- the systems used to capture and process information.
Companies with many contract groupings and limited system integration may incur higher costs. Insurers with longer contract boundaries may need to implement the full General Measurement Model, because it could be harder to justify the Premium Allocation Approach. This may be particularly challenging for reinsurers.
Some recommendations for the local market include:
- refining underwriting classes and creating consistent definitions so industry statistics can be aggregated reliably;
- enhancing market statistics to complement quarterly regulatory disclosures and support consistent assumptions; and
- determining appropriate methods for developing discount rates where these are required.
The ongoing Zimbabwe Integrated Capital and Risk Programme (ZICARP) could potentially support aspects of IFRS 17 implementation. However, IFRS 17 differs substantially from Solvency II and risk-based capital regimes. Contract definitions and recognition requirements, for example, may differ significantly. Care is needed not to underestimate the standard’s distinct implementation requirements.
Most areas of IFRS 17 are also more demanding to evidence from an audit perspective than comparable IFRS 4 requirements. Governance will be important to auditors, and some insurers may need to reconsider structures ranging from board composition to day-to-day management.
Claims, expenses and premiums will need to be analysed together even though many insurers and reinsurers previously considered them separately. The time and resources required to achieve full compliance may therefore be significant.
Authored by the Claxon Actuaries Team.