Insurance companies are reportedly in a quandary over rules that require significant discounting of certain investments in the calculation of regulatory minimum capital thresholds.
The new regulations mean insurance companies have to make asset adjustments to make up for shortfalls that will arise from discounts of as much as 20 to 30 percent for listed, unquoted and private equity investments.
It is understood the regulations apply with immediate effect. The regulations were gazetted a fortnight ago and may be cited as the Insurance (Amendment Regulations, 2017 (Number 19) and amend Section 2 (Interpretation) of the Insurance Regulations of 1989, published in Statutory Instrument 49 of 1989, also referred to as the principal regulations.
Part of the provisions require that a discount of 20 percent be applied on all quoted equities held by insurance companies, application of non-marketability discount of 20 percent and illiquidity discount of 30 percent on the fair value of all investments in unquoted and private equity investments, respectively.
In terms of cash and money market instruments, 100 percent of the fair value of assets shall be considered. The value of Government securities, prescribed assets and term deposits will also be considered in their entirety.
IPEC may also prescribe discounts for term deposits in line with credit rating of insurers’ counterparties holding them while deposits held with banks under curatorship will not be considered for purposes of calculating capital.
With regard to properties, the forced sale value will be considered and receivables other than premium debtors that shall only be considered if they are aged less than 60 days from due date. Valuation for private and unquoted equities properties shall be conducted by independent professionals.
In terms of the rules, Statutory Instrument 95 of 2017, minimum unencumbered capital for life assurance business, including funeral assurers, will be $5 million while minimum capital for non-life insurance business is now pegged at $2 million.
Minimum thresholds will be $7,5 million for entities involved in life and funeral assurance and non-life insurance business and $5 million for reinsurance. Life assurance firms, which solely provide funeral assurance services will be or are required to have minimum regulatory capital of $2 million.
Rattled by the stringent regulations, the Insurance Council of Zimbabwe put together a position paper, which has already been submitted to the Insurance and Pensions Commission, detailing the insurance industry’s concerns.
The regulations come as IPEC recently expressed strong concerns over the proportion of fixed or non-liquid assets on the insurers’ balance sheets, amid fears by the regulator that having a significant value of assets invested in illiquid form could compromise their ability to pay claims.
ICZ chairperson Mussa Bako, confirmed that insurance companies had submitted a paper with the regulator, detailing their reservations and seeking to agree with the authority a flexible framework within which to make adjustments to comply the new regulatory provisions for sector.
“The implications of the regulations are that we have to discount the items that the regulator said we have to discount in the calculation of capital and what it means is that whatever is left must comply with the regulations.
“We are in negotiation with IPEC. When we started negotiations with them after getting wind of the fact that this was what was going to happen and at the same time the increases that where proposed, it was at the stage where we could not reverse anything, but we have agreed to negotiate this (regulations) with the commissioner, we are working with the regulator to have the position further clarified or amended,” Bako said.
Bako would not be drawn into discussing the salient aspects of the insurance industry’s submission to IPEC, but he admitted that the requirement for discounting of certain assets ranked among priority issues. Insurance firms need to figure out ways to make up for the capital gaps that will emanate from discounted quoted equity and non-quoted equity investments.
“So what we will do is take those values (quoted, unquoted equities) out of your capital calculation. It is stricter, but from the regulator’s point of view, IPEC is saying that they want companies that are more liquid, a position where insurance firms are able to meet their obligations,” he said.
ICZ agrees with the reasoning by IPEC that insurers need to have the bulk of their investments in a form that they could easily and quickly liquidate to pay claims.
“For the most part we do agree, but there are certain areas where we felt that maybe the commissioner can give us a bit of breathing space, but the items the regulator wants are enshrined in the law, which is a Statutory Instrument, but basically we are not in a fight at all,” Bako added.
ICZ public relations committee chairperson Grace Muradzikwa and also managing director of NicozDiamond, Zimbabwe’s largest short-term insurer, said the industry agrees with IPEC’s perspective, as it instils confidence in the sector, especially regarding protecting policyholders’ funds.
“It’s a call for us really to look into our asset classes and the quality of our assets, which are underpinning our capital, which is in line with global developments around governance of insurance firms and making sure we run robust insurance companies and it is all in the policyholders’ interests.
“It’s something that we welcome, obliviously, we will be looking at it to see what the impact will be on our capital structures, but it’s a good development.
“It’s not as sudden as it seems because the regulator and the ministry have been in consultation with the industry for quite a long time, so we knew that this was coming and a lot of companies had already started preparing,” she said.
While Bako stressed the fact that he would not speak on behalf of the whole insurance industry, he said most firms certainly invested in these assets that the law now requires discounting when calculating capital.