Regulatory reporting protects policyholders and fund member interests: IPEC Commissioner

Regulatory reporting protects policyholders and fund member interests:  IPEC Commissioner.

HARARE- The Insurance and Pension Commission (Ipec) says regulatory reporting by the insurance and pensions industry ensures policyholders and fund member interests are protected thus boosting confidence sector.

IPEC Commissioner Tendai Karonga told stakeholders at the IPEC-ICAZ Seminar that regulatory reporting calls for non-admissibility of certain assets whose availability to settle insurance obligations is questionable, such as intangible assets that include goodwill and encumbered assets.

“Whilst financial reporting is done in conformity with International Financial Reporting Standards (IFRS), Regulatory Reporting calls for some variations to the reports prepared in accordance with IFRS.

“The ultimate goal for regulatory reporting is to ensure that policyholders and fund member interests are protected. If policyholders and fund member interests are protected, confidence in the insurance and pensions industry will obviously be boosted,” he said.

He said that will in turn be a “good recipe” to achieve stability of the insurance industry thereby contributing to the stability of the financial sector at large.

Comm Karonga said assets such as goodwill cannot be liquidated to meet claim obligations and on the other hand, encumbered assets may not be available at all times should the insurer want to call upon them to honour its claims.

Meanwhile, below is part of the speech in which the Commissioner says relates to issues of regulatory concern gleaned from returns filed with the Commission. Karonga said such issues are of concern to the Commission since they may result in prejudicing policyholders and fund member interests:

  1. High levels of premium debtors and contribution arrears – Due to the harsh economic environment currently obtaining, some policyholders are entering into arrangements to pay premiums in instalments.
  2. However, in some instances the premiums are never remitted to insurance companies. Insurance          companies should come up with policies whereby they account for the premium debtors when they have realistic chances of receiving the premiums.

The Commission has come up with a position whereby, for example, short-term insurance companies are supposed to write off premium debtors aged more than 90 days.

Against this background, we implore the accounting profession to be always on the lookout for treatment of premium debtors vis-à-vis regulatory requirements.

This will ensure that regulated entities do not report “fictitious” assets, which create a false sense of security to their customers.

  1. Financial statements are finalized before finalization of Actuarial valuation reports – The liabilities feeding into the audited financial statements for insurance companies should be actuarially determined. However, the Commission continues to note challenges in the market whereby actuarial valuations are conducted after conduct of an audit for insurance companies. In extreme cases, the actuarial valuations are not even conducted a situation which casts doubt on the values of liabilities reported.

We believe that under subdued economic conditions, actuarial valuations should be conducted annually. We recognize that this has cost implications but the cost of not doing actuarial valuations is higher.

  1. Valuation of assets that are not conducted by qualified and independent professionals thereby casting doubt of the fair values reported – The accounting profession should interrogate valuation reports which form the basis of figures reported by insurance companies. This is in view of the fact that some asset valuations are being conducted by unqualified parties such as loss adjustors. Some valuations used in the audited financial statements are based on desk top valuations which are not credible. Desk top valuations should not be accepted.

Another issue of regulatory concern is that some insurance companies are relying on their in-house actuarial resources to conduct valuation of liabilities. This calls into question the independence of such valuations in the case where the same is not independently reviewed.

  1. Upward revaluation of assets owing to pressure to comply with revised minimum capital requirements – Since the adoption of the multicurrency regime, the Commission has on a number of occasions reviewed minimum capital requirements. In a bid to comply with the revised minimum capital requirements, some insurers have revalued their assets. This situation is worsened if the revaluation is conducted by unqualified and conflicted valuators. When conducting audits, the accounting profession should be on the lookout for such issues and report them to the Commission.
  2. Insider loans coupled with inadequate disclosures on the same – This is mainly prevalent in owner-managed insurance companies wherein insurers use premiums to bankroll their activities or bankroll other subsidiaries.
  3. Suitability of assets being applied as capital – Some questionable assets such as intangible assets, encumbered assets as well as assets not registered in the name of the insurer, are being applied as capital by the same insures.
  4. Quarterly Return Submission not tallying with figures reported in Audited Financial Statements – There are cases where figures in the quarterly returns do not tally with figures in audited financial statements. This mainly applies to opening balances in quarterly returns which should ordinarily be equivalent to closing balances in the latest audited financial statements. This is relevant for internal accountants.
  5. Failure to implement audit recommendations – The Commission has noted long outstanding issues in some insurers audited financial statements. Where such issues persist, we urge the accounting profession to report to the Commission.
  6. Asset concentration – Some companies’ financial positions are anchored on one building. This exposes the insurer to concentration risk.
  7. It is our hope that this seminar is a platform that helps to provoke the accounting profession to find ways of addressing the issues mentioned above in financial reports so as to prompt corrective action by the powers that be in the interest of policyholders.
  8. Ladies and gentlemen there are emerging issues in the Zimbabwean insurance and pensions landscape that may have implications on financial reporting and we urge the accounting profession to proactively equip itself to deal with these issues. Such issues include the following:
  9. Foreign currency shortages vs foreign liabilities – Some reinsurance companies are writing business in foreign markets. As a result, they are having to rely on their insurance pools domiciled locally to settle obligations in foreign markets.

Given the foreign currency shortages in the country and delays in remitting funds, settling of offshore obligations using funds in the local insurance pool may give rise to increased outstanding claims due to bottlenecks in the system.

It is important to maintain a good reputation. 

  1. Three-tier pricing system and its implications on financial reporting – There are cases where the same product may have three prices namely cash price, bank transfer price, and offshore price. This may have implications on financial reporting especially in cases where the payment of off-shore prices is facilitated through a subsidiary based in a foreign country. The accounting profession should ensure that legitimate processes are followed to avoid negative transfer pricing.
  2. Anti-Money Laundering and Combating of Financing of Terrorism (AML-CFT) and proliferation of weapons of mass destruction – The accounting profession is one of the professional bodies designated by the Financial Action Task Force (FATF) to play a key role in AML-CFT. It should therefore look out for suspicious transactions when conducting audits.
  3. As a way forward the Commission expects the following with a view to improving financial reporting:
  4. Mandatory publication of financial results – The Commission, through the proposed amendments to the Insurance Act, will require that all insurance companies publish their financial statements, regardless of whether they are listed on the stock exchange. This will help in instilling market discipline since stakeholders will now be more informed and will therefore punish insurers whose financial statements will not be depicting a good standing.
  5. Capital Adequacy Self-Assessment – Insurers are now called upon to proactively conduct solvency self-assessments. This will call for upskilling of the regulated entities themselves and the need for auditing firms to train their personnel on how to review the self-assessments.
  6. Reporting on Risk Management Issues – We urge the insurance companies to borrow a leaf from colleagues in the banking industry by ensuring that there is a comprehensive risk management system in place to enable a detailed analysis of the risk management situation in the annual financials which are then used by different stakeholders. The commission implores the accounting profession to also look out for insurance fraud when conducting their audits as this is a menace to the industry as it eats up around 30% of premium funds. It is important for accountants and auditors to devise more stringent measures to prevent and control fraud.
  7. Claims Processing Systems – The auditing profession should asses and report on the claims processing systems in place. The Commission expects insurance companies to timely meet their obligations to policyholders as opposed to practices that we have noted in certain cases where claim settlements are made in instalments.
  8. Adequate Reserves – The reserves set aside should be adequate to cater for all reserves including incurred but not reported claims, unearned premium reserves. For unearned premium reserves, the 1/365th method is more accurate. The insurers should also practice sound asset-liability matching.
  9. Fit and Proper Person Assessment Criteria – Some of the challenges noted with regards to financial reporting in the insurance industry are mainly emanating from incompetence by some officials. In a bid to address this challenge, the Commission has come up with fit and proper assessment criteria to vet all proposed office bearers for key positions within an insurance company. This criterion will be looking at qualifications, experience as well as integrity of the proposed appointees.
  10. Effective Credit Control – The Commission expects insurance companies to have effective credit control mechanisms to deal with challenges emanating from premium debtors. This can be specially facilitated by competent information systems. Auditors should ascertain adequacy of information systems in place.
  11. Robust IT Systems – Insurance companies especially life and funeral assurance companies should maintain robust IT systems to enable maintenance of critical data for longer periods.
  12. Broker trust accounts should be audited. At the moment, the level of compliance is very low.
  13. Adherence to IFRS and regulatory circulars issued by IPEC;
  14. Continued cooperation between ICAZ/IPEC/PAAB on financial reporting matters;
  15. Prompt reporting of regulatory breaches by auditors to the Commission.