Funeral assurers on shaky ground

THE Insurance and Pensions Commission (IPEC) is concerned by lack of compliance with minimum capital requirements and prescribed asset ratios by funeral assurance companies.

As at September 30, 2020, five funeral assurers failed to meet minimum capital requirements, which are currently pegged at $62,5 million as prescribed in Statutory Instrument (SI) 59 of 2020.

During the same period, capital positions for funeral assurers ranged from $3,8 million to $104 million. However, there has been steady progress after significant growth in capital base compared to a year earlier.

The overall capital of the eight funeral assurers stood at $422,5 million instead of $500 million. Prescribed asset investments continue to be insignificant as they accounted for only 0,03 percent of the total asset portfolio instead of a minimum prescribed asset ratio of 10 percent as stipulated by SI 206 of 2019.

In nominal terms, investments in prescribed assets increased by 39,7 percent from $150 940 as at June 30, 2020 to $210 820 as at September 30, 2020.

Companies failed to submit compliance roadmaps as requested by IPEC, a trend that the regulator described as worrying.

“This is a worrying trend and shows a lack of commitment towards compliance,” reads part of the latest report.

Despite the glaring statutory capital inadequacies, none of the funeral assurers had any reassurance arrangement(s) in place for the nine months ended September 30, 2020. The regulator continues to encourage funeral assurers to consider having reassurance arrangements to support their balance sheets.

“This will enable them to write more business,” said IPEC.

The commission also continues to lobby the Government to facilitate the development and introduction of prescribed asset instruments that preserve policyholder value. The enactment of Statutory Instrument 280 of 2020 — a post-reporting event — is one such initiative that should be considered in value preservation and ensuring that policyholder premiums and benefits are not eroded in the foreseeable future.

The statute allows the insurance industry to underwrite new business in foreign currency.

Funeral assurers were allegedly understating their actuarial liabilities.

Total technical liabilities for the funeral assurance sector dropped by 3,5 percent from $225 million as at June 30, 2020 to $217 million as at September 30, 2020.

According to IPEC, some funeral assurers reported future policyholder benefits in their retained earnings, resulting in future policyholder benefits being reported under equity subsection, yet they should be reported under the liability subsection.

This gives the impression that funds under management belong to the shareholder when they are liabilities that are to be met in future.

This inherent risk is that it could lead to incorrect decisions being made owing to this misalignment, IPEC observed.

Funeral assurers are required to ensure that their liabilities are valued in line with the guideline issued by the commission to ensure that they hold adequate technical reserves all the time. Concerns were also raised over the skewed liquidity position.

While the on average the sector hold more than enough current assets to meet current liabilities, the composition of current assets is heavily concentrated in trade receivables, which make up 63,7 percent of total current assets.

According to IPEC, such a position may not support the ability to meet current liabilities for the sector given that some of the trade receivables may not be collected and the asset class does not earn any return.

Therefore, there is the opportunity cost being foregone by the funeral assurers as they are earning zero return on these funds. The regulator encouraged funeral assurers to align their current asset holdings by adopting credit policies that limit exposure on trade receivables.

“The commission continues to emphasise the need for funeral assurers to invest in appropriate short-term assets that are liquid, which allows them to meet their statutory and operational short-term obligations.”

Meanwhile, funeral assurers operating in the country registered a 27,1 percent increase in their asset base from $605,6 million as at June 30, 2020 to $769,8 million as at September 30, 2020,” reads the IPEC report.