New accounting rules spell doom for insurance brokers

Association of Insurance Brokers Chairman Nelson Omolo. (James Wanzala,Standard)

Insurance brokers are jittery of the move to introduce new rules for the sector that could see them edged out.

The deadline is looming - perched on a comfortable pedestal marked “January 1, 2021’.

And with it, comes a change in the entire financial services sector beginning with banks, followed by insurance companies.

The change is being brought by a set of new radical accounting rules dubbed (International Financial Reporting Standards) ‘IFRS 17’.

The new rules dictate that financial firms report their financial statements, to the capital requirements and transparency demands within their corporate governance structures.

Broker mourning

The brokers’ jitters arise out of the requirements that will make most insurance and reinsurance companies to cut down on their liabilities, which include the already low commissions that they pay.

This is as they consolidate their capital bases and seek ways to come up with new products that can entice a market where penetration has stagnated at a meagre three per cent.

Most underwriters have responded clinically by cutting out brokers altogether and opting for direct contact with clients, especially the government.

“You see the truth is that these rules are affecting insurance companies greatly and there is a ripple effect out there. When they affect the underwriters, we are also affected because underwriters have started to ignore us as they cut their losses,” said Association of Insurance Brokers-Kenya Vice-Chairman Nelson Omollo in an interview with Financial Standard.

“Currently, we are engaging financial services firm KPMG which is doing research work for us so that we can see how we will survive this storm,” he added.

In a recent forum to explain how the new rules are going to impact the industry, especially the brokers, Alex Mbai, a partner at KPMG called for new thinking by brokers if they are to survive.

“To start with, insurers will be compelled to hire more actuaries than they do today. They will be required to invest more in data collection while preparing their financial statements,” noted Mbai. 

Mr Mbai said the way insurers report income earned from life insurance business will change since they cannot report future premiums earned from the life cover.

All these create a volatile environment for them financially. “They are turning up the heat on brokers and in order to survive, they will have to cut them off,” Mbai explained.

Mr Mbai said the rules will also bring about radical changes whereby investment income, money put in stocks and government paper as interest will not be counted in the overall profits of the insurer.

The quality of assets will also be measured at a higher level. He said companies will need to invest in technology, there will be a change in product pricing which means premiums charged will have to change.

“The belt is tightening on the waist of the entire industry,” Mbai said.

He said the tighter things get for insurers, the worse they will get for the brokers.

Typically, a broker sources for a client and explains to him or her about the policy and connects the client with the best underwriter who can fully handle their needs.

The client doesn’t pay the broker.

The broker is directly remunerated by the underwriter.

“Once these rules come into effect in 2021, insurers will have to change their distribution channels. The traditional insurance broker could be kicked out,” Mbai asserts.

Recently, brokers accused the government of cutting them out when it came to advertising tenders for providing insurance services.

Market share

They said that government procurement officers were bypassing them and going directly to the underwriters, costing the brokers a wholesome 50 per cent in market share.

However, Mbai argued that the trajectory is not nose-diving entirely to the detriment of the brokers.

They still have four years before the rules come fully into force to try and salvage their future in the industry.

“The magnitude of evolving insurance accounting change should not be underestimated, particularly when considering the impact of the new financial instruments and revenue standards,” Mbai said.

“If brokers start planning now, the wave of change could open up opportunities for synergies.”

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