Insurance firms get profit boost from life policy rules change

Insurers offering life policies are set to post higher 2016 full-year profits boosted by a change in the regulatory requirement in accounting for liabilities.

Some of the revisions have been prompted by the Insurance Regulatory Authority’s (IRA) requirement that all life insurers should prepare their 2016 full-year accounts based on the gross premium valuation (GPV), which analysts say is less conservative compared to the previous net premium valuation (NPV).

Britam and Sanlam have already announced improved profits after reviewing their liabilities, with others like CIC Insurance and Kenya Orient also expected to benefit from reduced provisions for liabilities. “GPV is generally less punitive in terms of reserving for liabilities compared to NPV,” an actuary at a life insurer said in an interview.
“The new system is largely driven by assumptions that the impact on profitability can be greater if the guidelines from the IRA are less conservative than what an insurer was using.”

The actuary added that underwriters with a relatively younger life book stand to benefit the most since liabilities mount as the covers approach the end of their term.

IRA declined to comment on the industry shift, including why NPV was abandoned and whether the GPV will help to better manage risk in the sector.

NPV is simpler to calculate and is only concerned with measuring premiums against benefits or liabilities over the life of the policies. GPV, which is more complex and may require the input of actuaries, factors in expenses.

The new accounting practice has lifted the fortunes of insurers who hardly make money on their policies and who have in the past relied heavily on investment income to book profits. Britam switched to GPV earlier, a move that nearly tripled its net profit in the half year ended June 2016 through a significant decline in insurance claims and expenses.

The company posted a net profit of Sh1.8 billion in the review period, up 184.8 per cent from Sh624.5 million a year earlier. The profit growth was largely driven by a 29.3 per cent drop in insurance claims to Sh3.6 billion, representing a saving of Sh1.5 billion.

“The group has valued its long-term insurance business liabilities using the GPV methodology which is a change from the previously applied NPV methodology,” Britam said in a statement at the time.

Sanlam announced on December 30 that it was anticipating its earnings to fall by at least a quarter in the year ended December but later retracted the profit warning after a downward review of its liabilities.

“The valuation of long term insurance liabilities and impairment reviews of the banking exposures have been performed in line with specific guidelines subsequently received from the regulatory authorities, resulting in a reduction in the level of actuarial reserving and impairment changes that were expected at the time of issuing the profit warning,” Sanlam said in a statement.

The company added that it now expects a markedly different profit for the period compared to the maximum of Sh20.5 million it was initially projecting.

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