Insurance exists on a premise that the insurer assumes liability should the risk insured against materialize. As such, insurers receive premiums in advance to cover these risks. Part of these funds go to investment making insurers one of the largest investors in private equity and the capital markets. Over time, assets managed have increased their impact on their financials.
The year 2018 was a challenging one for most companies and the insurance industry was no exception. In 2018, some insurers reported huge losses with Britam and Sanlam leading the pack at Kes.2.3bn and Kes.2.0bn respectively. This could have been attributed to a tough economic environment and an underperforming stocks market. These were the explanation put out but all the losses stemmed from investment decisions which were impacted by the new financial reporting standards, IFRS 9.
Simply put, IFRS 9 is an accounting standard that deals with the reporting of financial instruments. Previously, investments were reported at book value but with the standard taking effect, these instruments were to be reported at fair value with any gains/losses recorded in the year they occurred.
With implementation of the said standard, fair value losses were recognized contributing to the groups’ losses. When these financials are compared to 2019’s, both companies recorded profits with Britam recording its all-time high profit of Kes.3.5bn. The fair value gains on their investments were also on a high of 4.7bn from a loss of Kes.3bn. From such revelations, it is evident that financial assets (equities & bonds) pose a short-term effect on insurance companies’ profits.
Other than insurance, collective investment schemes (mutual funds) are susceptible to such losses in the short-term and this may impact their value. Going forward, insurance and collective investment schemes have to re-evaluate their investment decisions to avert the adverse losses especially when confidence in the markets is at its lowest.
No comment yet, add your voice below!