One of the most daunting tasks of the Insurance business is to detect and evaluate risks that may affect the bottom line. Even when the risk has been recognized, its effect can be challenging to compute, yet it may possibly be substantial.
Identifying risks will enable insurers to predict, understand and manage risk. For the purposes of competitively pricing their products, pay claims on time and provide sustainable earnings growth to our shareholders.
According to a recent report from Insurance and Pensions Commission (Ipec), there are a number of risks funeral assurers need to protect against. Ipec’s top risks make it clear that the insurance sector needs to be compliant with set regulations, from paying of claims, pricing of products, investments and even management of expenses.
The Insurance and Pensions Commission 2017 Funeral Assurers Second Quarter Report 17, identifies 5 top risks for funeral assurers for the first half of 2017. They are:
- Compliance risk
Compliance risk is exposure to legal penalties, financial forfeiture and material loss an organization faces when it fails to act in accordance with industry laws and regulations, internal policies or prescribed best practices. Compliance risk is high in the funeral assurance industry; this is evidenced by failure of most players to adhere to compliance issues.
None compliance is prevalent in the following issues;
- Late submission of quarterly returns.
- Late submission of audited financial statements
- Non-compliance with prescribed asset ratios: As at 30 June 2017 the average prescribed asset ratio for the funeral assurance industry was 1.14 percent which is below the minimum prescribed ratio of 7.5 percent.
- Non-compliance with minimum capital requirements: As at 30 June 2017 4 funeral assurers had capital levels below the then minimum capital requirement of US1.5 million. The minimum capital requirements for funeral assurers were reviewed upwards on 25 August 2017 to US$2.5 million, and only 3 players are compliant with this new requirement. After taking into account the review in minimum capital
- Late payment of levies.
- Non-compliance with the minimum solvency margin: As at 30 June 2017 solvency ratios for players in the funeral assurance industry ranged from 4.52 percent to 154.2 percent. In line with international best practice the minimum solvency margin required is 25 percent
Players are encouraged to take compliance issues seriously and reduce their infractions with the law.
- Liquidity risk
Liquidity risk occurs when an institution cannot meet short-term debt obligations. For the half year ended 30 June 2017, the average current ratio of the industry was 177 percent which puts the industry in a safe zone in terms of its ability to meet liabilities. However due to the uncertain timing of claims liability and the concentration of the industry’s assets in non-liquid asset, liquidity risk still exists in the industry. Players still need to increase assets they invest in cash and cash equivalents.
- Underwriting risk
Underwriting risk refers to the potential loss to an insurer emanating from claims incurred outstripping the premiums received, as a result of inadequate pricing for risk. Underwriting risk in the funeral assurance industry is low as evidenced by the prevalence of technical profits. For the period under review technical profits decreased by 41 percent (from USD4.67 million to USD2.79 million) as compared to the same period in 2016. This was driven by a 17 percent increase in total costs (mainly driven by a 33 percent increase in management expenses).
The requirement by the Commission for actuarial valuation to be done for all new products have significantly reduced underwriting risk for the industry. Players are encouraged therefore to continue to be more vigilant and price for risk when developing new products or when repricing existing products.
- Market risk
Market risk is the possibility for an assurer to experience losses due to factors that affect the overall performance of the financial markets where an assurer’s assets which support liabilities are invested. Market risk is generally high due to liquidity squeeze and lack of diversity in available financial products in the financial markets.
- Operational risk
Operational risk arises from inadequate or failed internal processes, people and systems, or from external events such as fraud and natural disasters. Players are encouraged to put in place effective internal control systems, institute code of conduct, insure their properties and staff, and properly train their staff. This will help to reduce process failures, internal and external frauds which will all minimise operational risk.
This is an extract from the Insurance and Pensions Commission 2017 Funeral Assurers Second Quarter Report 17