Implementing IFRS17 in Zimbabwe: Challenges
IFRS17- Insurance contracts is a new accounting standard effective from 1 January 2023. This standard replaces IFRS 4 and sets out the requirements for an insurer to apply when reporting information about insurance contracts and reinsurance contracts it holds.
In Zimbabwe, the implementation effort required by insurance companies is likely to be significant considering the current insurance practices. Zimbabwe is currently lagging behind other markets in areas such as broad risk and principles based governance.
For example, South Africa has Solvency Assessment & Management (SAM) and other regions such as Europe have Solvency II or equivalent. Arguably, having
these in place lay a solid foundation for the adoption of IFRS17. This is true in the area of governance structures, information management systems, historical
company and market statistics that could be easily harnessed in IFRS17 adoption. In a way, others are ahead of the curve and our local market has
some heavy lifting to be at par.
There is, however, a silver lining in that the standard itself is proving difficult to implement world over as evidenced by some revisions and adjustments tabled and adopted by IASB from different jurisdictions.
These are mostly from practical feedback being provided by early adopters. Zimbabwe will thus have some hindsight benefit from the experience of other markets. Lastly, the market is nowhere near the size of most global competitive markets and could afford to carefully go with simplifications in many areas of the standard while remaining compliant. The principles of materiality, proportionality and controlled expert judgments could be tapped into in a measured way for some of the areas.
These principles are aptly captured in the application of Facts and Circumstances (F&Cs) when applying the standard.
This article dwells on the main challenges Non-Life Insurers and Reinsurers who operate in Zimbabwe could face as they implement IFRS17. An attempt is made to look at local challenges unique to the Zimbabwean market. These have to be mounted in all fairness as we adopt the standard going forward.
Risk Governance Processes
The new standard will require that an insurer separate onerous contracts from profitable groups. Onerous contracts are those that are deemed to have a net outflow from outset when fulfilment of cashflows are considered from the date of initial recognition. The standard requires that such onerous contracts are identified and notified early on. Profitable groups are not expected to be offset by onerous contracts.
To carry out this process flawlessly, ideally an insurer would need to have the underwriting, reserving and pricing functions work harmoniously. Locally at the moment, a few insurers could identify with this process being deeply embedded in their culture.
To illustrate, the pricing function would require input from underwriters to set assumptions around claims, expenses, profit target among other factors. Most insurers do not allocate their expenses to per product line granularity but keep them at a company global expense ratio.
The current pricing for most products has been legacy and market hunch driven with minimal scientific driven re-pricing being carried out. This feeds from experience investigations carried out by an insurer usually on an annual basis or similar
Furthermore, IFRS 17 is more on an underwriting year basis in terms of results analysis. Most, if not all insurers and reinsurers operating in Zimbabwe rely on an
accounting year for their internal reporting and analysis requirements.
Data Gathering and Analysis
IFRS17 will have a major impact on the way data is collected, stored and analysed. IFRS17 requires insurers to analyse their data with sufficient granularity, to identify and consistently segregate the groups of contracts at inception, store information on inception and the coverage period of the group of contracts, historical cash flows, discount rates, and risk adjustments for each group of contracts. This level of granularity will have a major impact on actuarial modelling and financial reporting systems, as well as supporting data requirements.
Most non-life insurers in Zimbabwe have legacy data issues. These could be a result of data migrations over the years, limited IT system upgrades leading to vendor withdrawal support, mergers or acquisitions and closures of some insurers and information archived outside the core IT systems.
A common example is under the Motor Insurance contracts where most underwriting information has not been requested for or captured onto the data management systems; with some fields being deemed unimportant for pricing or reserving. Data for group combined covers such as Motor Fleets or Company
Assets which go through intermediaries has a lot of information lost in transmission between intermediaries and insurers.
The same is also applicable between insurers and reinsurers. Nature of some SLAs or practical arrangements between these parties plays a part in this modus operandi.
Market Statistics on Underwriting and Claims
The market data available at the moment is in the form of IPEC quarterly reports. This information has a particular format and serves its own unique purpose.
Unfortunately, it represents a portrait picture of the market as each calendar year unfolds against the preceding period. One would desire to have market historical chain ladder triangles and statistics for the different lines that have been updated over time.
Where there is insufficient data for a particular business line standard market development trends could come in handy as credibility weighting factors. The definition of contract boundaries are also difficult to deduce.
This is an area where other parties like ICZ, IIZ, ICAZ, ASZ etc may consider to collaborate and start building up to augment the available market information.
Discounting Assumptions
IFRS17 recommends discounting of projections over their settlement period. There is a reprieve for direct writers as they have short tail duration contracts; often up to one year. Even for liability classes the local market mostly underwrites these risks on claims-made basis; which shortens period of any legacy claims that may emerge over time. The application of the standard could consider discounting as an
immaterial aspect to impact outcomes, but justification will still be needed.
Upon analysis there are also contracts designed under classes such as Engineering and Fire which are multi-year. Reinsurers could also find this being a material area as multi-year contracts are common. Some of these are written on a risk-attaching basis.
When setting discount rates, the assumptions could be driven by use of investment
yield curves. Locally, we do not have yield curves for both short-dated and long-dated bonds or similar instruments. Alternatives may have to be considered by the market players but still remain within the confines of the standard.
Information Management Systems
Setting up information management systems is likely to be an area which will require significant investment and effort for most insurers.
Information Management Systems will need to recognise the contractual service margin for each group of contracts, store information about historical, current and future cash flows, discount rates and risk adjustments for each group of contracts. System changes including IT processing capacity and increased data storage would need to be made.
Currently, several insurance core systems may not be equipped to meet IFRS17 requirements around unabridged calculation and reporting of a contract grouping’s building blocks.
Skills Are Key
Insurers will need to invest in specialist skills to not only implement new systems, but also encourage greater collaboration between finance, actuarial, IT, risk management and other departments. Enhanced collaboration is anticipated going forward. Data that is required to meet the standard will need to come from a wide range of areas and be processed in new ways. There will also be a need to perform a gap analysis to identify the changes required in the existing processes and systems conducted by the various experts.
The extent of available resources is expected to affect implementation costs for insurers. Insurers that have used less rigorous measurement techniques in
the past may have a greater need to employ additional resources with appropriate skills.
Training is key for several stakeholders in order to understand the expectations and requirements of IFRS17. One such stakeholder is the consumer of financial statements who needs to be assisted to understand the results and implications of applying the standard.
Disclosures and Reporting
IFRS17 requires several disclosures. It provides additional information about the amounts recognised in the Balance Sheet and in the Income Statement, the significant judgements made when applying IFRS17, and the nature and extent of the risks that arise from issuing insurance contracts.
An insurer is expected to align the reporting processes with the new requirements for its balance sheet and income statement. The new disclosure requirements introduced by IFRS17 introduce higher detail to the current disclosures including estimation approaches, risk information and confidence intervals which require changes to an insurer’s reporting processes.
Initial Implementation Costs
Quantifying the cost involved in implementing new accounting requirements is difficult as they depend on specific circumstances. Actual implementation costs may vary for each insurer depending on factors such as volume of business, duration of company contracts, current information systems and processes. The cost for
insurers to implement an update to IFRS4 would be impacted by the information that they maintain daily to prepare the financial statements. However, this area is not too dissimilar to other markets at the moment.
Going Forward (1/2)
IFRS17 requires an insurer to carry out continuous and frequent updates. This inevitably comes with increased underlying challenges compared to the current simplified approaches.
The significance of the ongoing challenges is expected to depend on the frequency of the change in estimates, the complexity of contracts issued, the number of contracts affected and the systems used to capture this
information.
Higher costs could be incurred by companies that have a large number of contract groupings and that do not use integrated systems on an ongoing basis. Insurers with longer contract boundaries could have higher relative cost through possibly implementing the full General Measurement Model as it could be harder to justify use of Premium Allocation Approach/Simplified Approach. Most reinsurers would struggle in this area.
Some recommendations for the market to consider;
- Refining business underwriting classes to come up with consistent definitions where statistics could be
pulled together consistently for the industry. - Enhancing market statistics to complement regulatory quarterly disclosures. This will assist in developing market consistent assumptions for this process.
- Deliberating on best ways to develop discount rates where these are needed.
It is hoped that the on-going implementation of Zimbabwe Integrated Capital and Risk Programme (ZICARP) by the regulator could be harnessed for IFRS17 implementation. However, IFRS17 has many areas that are different to Solvency 2 or Risk Based Capital management and supervision. This could be the case for ZICARP. For example, contract definitions and recognitions may differ widely. Great care is needed in not underestimating IFRS17 unique implementation requirements. A different article would be dedicated to drawing the parallels and overlaps between risk-based supervision; using Solvency 2 and SAM and IFRS17.
Most areas of the standard will be harder to evidence from an audit perspective when compared with current IFRS4 requirements. For example, governance issues will be key to auditors. Inevitably, some insurers will have to relook and change their stakeholders from the Board composition to day to day management of the business. Claims, expenses and premiums would need to be put together as these are currently being looked at separately by most insurers and reinsurers. The time left to implement the standard and be fully compliant may be significantly limited for most insurers unless the implementation timelines are pushed further backwards!