REPORTING FOR INSURERS IN ZIMBABWE CLARIFIED

Transcription

1 REPORTING FOR INSURERS IN ZIMBABWE CLARIFIED

2 WHAT IS ON THE MENU 2 1. Purpose&Scope 2. Background 3. Research methodology 4. Clarification& Use of certain terms 5. Research Findings and Recommendations

3 Purpose & Scope 3 To clarify the appropriate financial reporting to insurers in Zimbabwe; To achieve uniform, technically correct and globally acceptable financial reporting by all Zimbabwean insurers.

4 4 Background the cause and concerns

5 Background 5 Lack of uniformity in reporting by insurance companies: lack of uniformity identified by stakeholders (regulator, analysts, auditors, e.g.) Technical acceptability: desire to achieve global acceptable and technically sound financial reporting by all insurers. Public interest: to protect the interest of all stakeholders vested in the insurance companies (investors, policyholders, e.g.)

6 Background (continued) 6 In order to address the above the Insurance sub committee of the Accounting Procedures Committee (APC) of the Institute of Chartered Accountants (ICAZ)(Z) was mandated to research and recommend appropriate financial reporting best practices for Zimbabwean insurers.

7 7 Research Methodology Research participants & expertise, coverage, documentation & evidence.

8 Research Methodology 8 Who was involved?: IPEC representatives ICAZ Insurance sub committee of Accounting Procedures Committee: Preparers of insurance financial statements Actuaries Auditors of insurance entities IFRS technical experts NB: The researchers worked in teams based on interest and experience.

9 Research Methodology 9 Research covered : reporting by Zimbabwean entities, compared to: leading financial services markets (South Africa, UK, USA, Canada and Australia) Insurance industry practices were compared to International Financial Reporting Standards ( IFRS ) requirements Considered of possible divergence between: Global insurance practices; IFRS requirements; Zimbabwean specific regulatory requirements (the Insurance & Pension Fund Act, e.g.)

10 Research Methodology 10 Findings and collation The findings were discussed & examined in relevant teams and with APC Insurance sub- committee. All results were collated in one paper and technical basis of findings and recommendations was prepared. The paper was presented & discussed with the ICAZ- Accounting Procedures Committee(main committee) and ICAZ Council It was finally presented & discussed with the regulator (IPEC) All parties agreed to discuss the findings in a wider stakeholder forum, hence, this forum.

11 Objective of this Workshop/Forum 11 to communicate the research findings to stakeholders to consult stakeholders on the proposed reporting practices for Zimbabwe insurers focussed on the following areas: accounting for changes in insurance liabilities (policyholder liabilities) Reserving premium accounting presentation & disclosures

12 12 Clarification & Use of Certain Terms Reason for definition? Insurer, Insurance, Insurance contract, insurance liabilities, policyholder, Owner/Shareholder

13 Clarification & Use of Certain Terms 13 Reason for definitions: To clarify: the affected parties (insurers providing insurance services) Certain misused terms: policyholder liability vs insurance/actuarial reserves vs insurance liability Policyholders vs Owners vs Shareholders

14 Clarification & Use of Certain Terms 14 Insurance: Insurance is defined as the equitable transfer of the risk of a loss, from one entity to another, in exchange for payment. (Wikipedia) Insurance Contract: A contract under which one party (the insurer) accepts significant insurance risk from another party (the policyholder) by agreeing to compensate the policyholder if a specified uncertain future event (the insured event) adversely affects the policyholder. (IFRS 4. Appendix A) refer to Appendix B for illustrative guidance on this definition.) Insurer The party that has an obligation under an insurance contract to compensate a policyholder if an insured event occurs. (IFRS 4. Appendix A)

15 Clarification & Use of Certain Terms 15 Insurance is classified into two groups: Life insurance: life insurance, annuities and pensions products. Non-life: general, or property/casualty insurance other types of insurance, e.t.c.

16 Clarification & Use of Certain Terms 16 Types of Insurance: Auto insurance Gap insurance Home insurance Health insurance Accident, sickness and unemployment insurance Casualty Life Burial/Funeral insurance Property Liability Credit Other types

17 Clarification & Use of Certain Terms 17 Insurance liability: An insurer s net contractual obligations under an insurance contract.(ifrs 4. Appendix A) Note : Contractual obligations include policyholder funds/actuarial reserves.

18 Clarification & Use of Certain Terms 18 Policyholder: A party that has a right to compensation under an insurance contract if an insured event occurs. IFRS 4. Appendix A) Shareholder Any person, company, or other institution that owns at least one share in a company. (

19 19 Research Findings and Recommendations Bothwell Nyajeka to do the overview Anesu Daka to present the technical justifications. Take questions and comments at the end each recommendation.

20 Research Findings 20 Findings are centered on: Accounting treatment of the changes in insurance liabilities Reserving premium accounting presentation & disclosures

21 Research Finding 21 Research Findings Accounting treatment of the changes in insurance liabilities

22 Research Findings 22 Accounting treatment of the changes in insurance liabilities: No consistent treatment of the change (increase or decrease) in insurance liabilities Most entities did not effect this change in the profit and loss but rather in the appropriation account, This change has been consistently classified as a transfer to policyholder funds/life fund but no effect on the profit or loss The change seem to be misconceived as the deficit of insurance liability in relation to assets that funds them (investments), which requires owners to transfer funds (recapitalise) in order to correct the deficit. Some entities even present the policyholders in the SOCIE as a reserve and present as part of equity

23 Research Findings 23 Policyholders seem to be regarded as shareholders of the insurance company. Life fund sometimes treated as part of equity.

24 Recommendation 24 Accounting treatment of the changes in insurance liabilities All insurance companies in South Africa and other leading financial centres recognised the change in insurance liabilities (including change in policy holder funds) in the statement of comprehensive income as part expenses under claims and benefits.

25 EXAMPLE 1: CHANGE RECOGNISED IN APPROPRIATION ACCOUNT ONLY Statement of comprehensive income for the year ended Premium Income xx Net benefits and claims (xxx) Operating and administrative expenses (xxx) Underwriting surplus xx Investment income xxx ---- Other income xx Profit before tax xxx Income Tax Expense (xxx) Profit for the period xxx OTHER COMPREHENSIVE INCOME === Gains on property, plant and equipment revaluations xxx Total comprehensive income for the period xxx === Profit attributable to: Policy holders xxx Owners of the parent xxx Non- controlling interest xxx ---- Total profit for the period xxx === This is an incorrect way of recognising the change in insurance liabilities! Total comprehensive income for the period attributable to: Policyholders xx Owners of the parent xx Non-controlling interest xx ---- Total comprehensive income for the period xx == 25

26 EXAMPLE 2: CHANGE IN INSURANCE LIABILITY RECOGNISED IN APPROPRIATION ACCOUNT Statement of comprehensive income for the year ended for the year ended 31 December 2011 REVENUE Gross premiums xx Premiums ceded to reinsurers (xx) Net premiums xx Fees and commission income xx Investment income xx Fair value gains and losses xx Other revenue xx Total other revenue xx Total Revenue XXX Gross benefits and claims paid Claims ceded to reinsurers Net benefits and claims (xx) (xx) (xx) Finance costs (xx) Other operating expenses (xx) Other expenses (xx) Total benefits, claims and other expenses XXX Profit before tax xx Income tax expense (xx) Profit for the year X Profit attributable to: Group and Company xx Investment contract liabilities xx This is an INCORRECT way of treating change in insurance liabilities X 26

27 Technical justification 27 Accounting treatment of the changes in insurance liabilities IFRS 4.15, IG24, IG37(d) requires that the movement in insurance liabilities be recognised in statement of comprehensive income (P&L) IFRS4.BC214 likens the insurance liability to the provisions under IAS 37, and the change in provision (e.g. through discounting) is recognised in in P&L (finance costs) [IAS 37.60] The change in defined benefit obligations & plan assets under IAS is recognised in statement of comprehensive income. IFRS 4.IG22 classify insurance liabilities as liabilities in the SoFP.

28 Technical justification 28 Insurance liabilities shall be recognised as liabilities and NOT equity in the SoFP as follows: Insurance risk related IFRS 4.37(b)- Insurance Contracts Investment contracts - IFRS4.37(b) & IAS 39/IFRS9- Financial instrument: Recognition & Measurement NB: IFRS 4 requires no split is required to show policyholder assets separate from those of the owners. (see next slide)

29 29 Accounting for the change in insurance liabilities. Investments Actuarial Liabilities Initial recognition Dr Investment(SoFP) Cr Bank Dr Change in actuarial liabilities(p/l) Cr Actuarial liabilities(sofp) For insurance liabilities on 1 January 2009fromZimDollarera-DrNDR Transactions (dividends, interest, claims, e.t.c) Dr Bank Cr Dividends income(p/l) Cr Interest Income(P/L) Dr Claims expense(p/l) Dr Business Admin costs(p/l) Cr Bank Cr Outstanding claims(sofp) Subsequent recognition Dr Investment Cr FV adjustment(p/l) Cr FV adjustment(oci) Dr Change in actuarial liabilities(p/l) Cr Actuarial liabilities(sofp)

30 EXAMPLE 3: RECOGNITION OF THE CHANGE DIRECTLY IN P&L (CORRECT TREATMENT) Consolidated income statement for the year ended 31 December 2010 REVENUE Gross premiums xx Premiums ceded to reinsurers (xx) Net premiums xx Fees and commission income xx Investment income xx Fair value gains and losses xx Other revenue xx Total other revenue xx Total Revenue XX Gross benefits and claims paid (xx +/-Change to policyholder liabilities (xx) +/_Change in reinsurance asset xx Claims ceded to reinsurers xx Claims paid during the year (xx) Net benefits and claims (xx) This is the CORRECT way of recognising the change in insurance liabilities and reinsurance assets! Finance costs (xx) Other operating expenses (xx) Other expenses (xx) Total benefits, claims and other expenses XX Profit before tax xx Income tax expense (xx) Profit for the year XX Profit attributable to: Owners of the parent xxx Non- controlling interest xxx ---- Total profit for the period xxx === Total comprehensive income for the period attributable to: Owners of the parent xx Non-controlling interest xx ---- Total comprehensive income for the period xx == 30

31 31 Anesu Daka CA(SA) Chartered Accountants Academy

33 33

34 Research Finding 34 Reserving Reserving

35 Research Findings 35 Generally all short term insurance companies were reserving for Incurred But Not Reported claims(ibnr). Some life insurance companies were not reserving for IBNR. Some companies were not disclosing accounting policies with regards to IBNR and Unearned Premium Reserve, No disclosure of the methodology used to compute IBNR, No disclosure of the methodology used to compute UPR (1/365 or 1/12 method e.t.c)

36 Research Findings 36 No disclosure of whether or not Annual liability adequacy test was done.

37 37 Recommendation and Technical justification Reserving IFRS 4.IG17(d) requires the disclosure of accounting policy and methodology for all reserves. Annual liability adequacy tests are also required by IFRS 4.15, hence, insurers are recommended to carryout annual actuarial valuations, unless there is other ways to perform liability adequacy tests.

38 Research Finding 38 Premium Premium Accounting

39 Research Findings 39 Premium accounting premium generally accounted appropriately, however, contention was identified on: Accounting for premium debtor reversal of uncollectible premiums. Zimbabwean insurance industry practice is to reverse from the gross premium the uncollectable premium income rather than impair the premium debtor. Reasoning- non-reversal may overstate the UPR and reinsurance liabilities as these are derived from premium.

40 Recommendation 40 Premium Accounting The industry practice of reversing uncollectible premiums from gross revenue was found to be fair and in-line with IFRS.

41 Technical justification 41 Premium Accounting Revenue is the fair value of amount received or receivable (IAS 18 Revenue ) hence, if it is not receivable it not revenue. (Conceptual framework 4.4- probability of economic benefits) An insurer does not have recourse for unpaid premiums except rejecting claims until outstanding premiums are paid. Where a premium is not received no risk has been transferred or the insurance contract lapses. Insurer must state accounting policy, including assessments performed to determine whether the premium income is receivable or not (is contract in force?)

42 Research Finding 42 Presentation and Disclosure Presentation and Disclosure

43 Research Findings 43 Presentation & disclosures issues identified: Not all insurers carried out annual actuarial valuations - (Zimbabwe regulation requires 3 year cycle) Actuarial valuation methods & valuation assumptions are not disclosed Disclosure of whether the insurer meets the Minimum Capital Requirement (MCR) are not done. Effect of changes in actuarial assumptions. Financial + Insurance risk management disclosures NB: it is was also observed that RSA and most leading insurance industry presented a signed statutory actuary s report in the annual financial statement of the insurer.

44 Recommendation 44 Presentation & Disclosure Annual actuarial valuation of the policyholder funds. The independent actuary s report should also be included in the annual financial statement together with the auditor s report. Insurers are encouraged to disclose embedded values

45 Technical justification 45 The statutory actuary report provides a fair valuation of policy holder liabilities/fund.