Changes in insurance regulations give false sense of protection

IN MARCH 2018 the Insurance and Pension Commission (IPEC) announced changes in insurance service provision as provided for by Statutory Instrument 95 of 2017 and intended operational changes aimed at introducing an Insurance Policyholder Protection Fund and an office of the Ombudsman to handle policyholder complaints.

IPEC public relations manager Lloyd Gumbo, assured the insuring public of improved safeguards.

However, Statutory Instrument 95 of 2017 deceptively presents a false sense of protection to insurance policyholders as the instrument was made to appear to require insurance companies to hold enough money to meet all their obligations to policyholders, as and when the obligations fall due.

This insurance companies’ money holding is referred to as capital.

The Instrument then defines capital as the amount of the insurer’s total admissible assets in excess of the amount of its liabilities. Admissible assets means those assets statutorily permissible for this (capital calculation) purpose, while liabilities are ‘redefined’ under a Section of this Instrument entitled “Calculating capital for Insurers” on page 716 starting from item number “(9)” to . . “15”, of a very jumbled numbering.

Unlike the modern approaches such as in Solvency II (or closer at home in South Africa), distinguishing explicitly between liability and capital requirements for distinct insurance products, such as long-term and short-term insurance, the liabilities and capital requirements for all insurance products are in this instrument bundled together in a jumbled, confusing manner.

The liabilities are redefined to transfer responsibility of negligence on the part of insurance companies, actuaries, accountants and other experts, and costs of this negligence thereof, to policyholders. Poignant examples of provisioning of this Instrument serving to transfer liabilities to policyholders include “. . . any additional shortfall that may be expected because future premiums for future risk periods are unknown, or expected to be inadequate; future maintenance and claim settlement expenses, including the effects of inflation; inflation with respect to the cost of claims; any other factors as may be necessary.” Further, the liability calculation method is set out to use “. . . acceptable actuarial methods . . .”, which methods are not defined at all — a clear strategy to give absolute discretion to actuaries.

To be sure liability is simply the state of being legally responsible for something, and typically arises out of contracts, explicit or otherwise. The liabilities being provisioned by this Statutory Instrument, arise from insurance policy contracts that were set up a long time ago, in some cases.

In these existing policies, premiums for instance were set up as fixed regular payments that would not be varied, with insurance companies professing to the policyholders at the point of contracting that they would professionally manage risks such as inflation for the benefit of the policyholder.

By thus redefining the liabilities in this part of the Instrument, Statutory Instrument 95 of 2017, is illegally requiring policyholders to pay premium shortfalls that insurance companies, with their actuaries, can trump up, in the process changing the insurance policy contracts that were set up with specific objectives a long time ago.

The insurance companies are further reneging on their undertakings to manage inflation and other risks professionally. This provision reduces rightful benefits due to policyholders unconstitutionally.

The manner in which calculation of liabilities is provided for to give absolute discretion to actuaries is exactly the same as in the obsolete Insurance Act, which the Instrument seeks to improve. While with its flaws, the Report of the Commission of Inquiry has now confirmed formally that these actuaries got these valuations and management of pension funds all wrong.

In progressive economies the valuation of capital requirements and hence of assets and liabilities is explicitly provided to keep discretion by any individuals at an absolute minimum. Pillar 1 of Solvency II for instance sets out capital requirements that insurance companies are required to meet based on best estimate liabilities.

The method of calculating the best estimate liabilities is clearly laid out as the present value of expected future (projected) cash-flows, discounted using a “risk-free” yield curve (ie term dependent rates).

The calculation method concedes the uncertainties in the quantum of variables and parameters in the evaluation.

Notwithstanding the uncertainties, tight guidelines are provided for in order to avoid arbitrariness such as allowed for by Statutory Instrument 95 of 2017.

The minimum capital requirements is capital meant to cushion against future experience being worse than the best estimate given the uncertainties — it is essentially, the basic own funds for a given liability type, defined as the excess of the incumbent risk assets over the corresponding liabilities, under specific valuation rules.

Statutory Instrument 95 of 2017 provides that Life Insurance companies should hold a minimum of $5m, implying that an insurance company with 100 000 policies on book, would be deemed safe if it held $50 capital per policy, this notwithstanding the risk of the policies.

The Statutory Instrument clearly does not provide any safeguards to insurance policyholders as IPEC had the public believe, instead being prejudicial and should never have been enacted.

With regards the policyholder protection fund and the office of the Ombudsman, they are the last protection buffer after all activities in the value chain of insurance service provision have failed. The value chain cover regulation, actuarial service provision, investment management, benefit calculation, accounting, among others.

Apart from their own inherent risks such as moral hazard on the part of the insurance system, the protection funds only give a percentage of the full rightful benefit. Office of the Ombudsman services are very costly, and cannot be offered free of charge. It would not be advisable for such an office to be inundated with grievances at a national level.

The enactment of Statutory Instrument 95 of 2017 apparently standing to prejudice policyholders, without wide consultation firstly calls for its immediate abolishment, and secondly calls for a standing statutory order that such pieces of legislation cannot be enacted without wide public consultation. ◆ Martin Tarusenga is General Manager of Zimbabwe Pensions & Insurance Rights, email, martin@zimpirt.com; telephone; +263 (0)4 797 020; Mobile; +263 (0)772 889 716 Opinions expressed herein are those of the author and do not represent those of the organisations that the author represents