IPEC reviews capital requirements

Published: 14 June 2014

The Insurance and Pensions Commission has reviewed assets that insurance companies can use for the purposes of calculating capital.

This follows findings by the commission that some insurers had been "window dressing" their capital positions for the sake of complying with minimum capital requirements, yet the quality of their capital was not effectively playing its role as required.

These include instilling confidence in the insurer, cushioning policy holders in case of a loss, cushioning the insurer against risk, offering financial flexibility to support innovation and expansion.

According to circular 1 of 2014 issued last week by IPEC, operating assets such as motor vehicles, furniture and fittings, and Information Technology hardware will no longer be accepted for calculating capital if the company is a going concern.

However, IPEC said the same assets will be considered in the event where the insurer is winding up operations as these will be key in meeting the insurers' liabilities.

Other assets affected include intangible assets such as goodwill and software, guarantees given to the insurer and all other off-balance sheet items, other than guarantees given by a reinsurer in the course of reinsurance business and encumbered assets including assets which are under legal disputes.

In addition IPEC said it would not accept assets on which the insurer in question does not have legal title.

For example those assets pledged by shareholders and yet legal title is yet to be transferred to the regulated entity and premium debtors aged more than 90 days from the date when the

premiums were debited by non-life insurers.

"In the case of reinsurers, premium debtors aged more than 120 days shall not be considered," IPEC said.

Insurance companies will also not be able to use unsecured loans or loans which are, in the Commission's opinion, inadequately secured, exposures to related parties in form of loans, debentures, or unquoted shares, prepaid preliminary or prepaid organisational expenses such as deferred tax assets and deferred acquisition costs and any admissible assets which shall form an excess over the threshold for a given asset class.

"In the case of a "gone concern" some of these excess assets shall be considered where possible; and any other assets as may be determined by the Commission from time to time," IPEC said.

IPEC said it will consider 100 percent of the fair value of cash and money market instruments, Government securities/prescribed assets and term deposits for the purposes of calculating capital.

Other admissible assets include quoted equities and unquoted or private equities.

"Given the volatile nature of equities a discount of 30 percent, as may be amended from time to time, shall be applied on all quoted equities for insurers.

"The discount is based on the volatilities of the Zimbabwe Stock Exchange which were measured in terms of the standard deviations of monthly prices of the industrial index and mining index for the period since the inception of the multi-currency regime in February 2009 to March 2014," the commission said.

IPEC said all private equities shall be valued by an independent and qualified professional.
- The Herald