Covid-19 nightmare for Zim insurance industry


Zimbabwe’s multi-billion insurance sector could face solvency challenges making it struggle to absorb severe shocks as the industry battles with the disruptions caused by the Covid-19 pandemic.

The sector is the largest source of domestic financing and has the potential to ramp up economic growth through massive injection of cash into the market. Experts told Business Times this week that solvency of insurers and pension funds, which refers to their capacity to meet long term financial commitments now and in the future, is core to the stability of the financial system.

This means solvency ratio, which measures the extent to which assets cover commitments for future payments for liabilities, are likely to go south, something which will impact insurers’ financial positions.

The sector has been battling loss of value following currency reforms in 2009 when the Zimbabwe dollar was converted to multi-currency.

Last year, the multi-currency regime was shifted back to the Zimbabwe dollar, a move which in turn stifled the companies’ financial capacity. Covid-19 exacerbated the situation.

The damage, largely caused by both Covid-19 and currency reforms, could threaten the existence of some insurance and pensions entities, especially those that are thinly capitalised, which have been described as potentially hotspots for solvency issues, industry players warned this week.

Analysts said while a strong capital base reduces the collapse of insurance companies as it is kept to guard against shocks, there were inherent risks in the local economy.

Apart from that, the economy is experiencing massive jobs cuts and business closures due to Covid-19 restrictions, meaning it may undermine a quick recovery of the insurance and pensions sector.

Companies in the sector are likely to face top-line pressures as revenues are likely to be strained. Analysts told Business Times there is a major opportunity for Zimbabwe insurers to offer insurance cover against pandemics post- Covid-19.

This could help the insurance uptake as companies have been battered by the effects of the pandemic.

“It would be irresponsible not to buy insurance against pandemics,” Tinotenda Zhou, an independent analyst told Business Times adding that “Given the damage so far suffered by companies, there is likely to be huge uptake for these”.

But, the rapid deterioration of microeconomic conditions and the effects of Covid-19 have reduced the appetite of insurance policies in Zimbabwe.

Insurance and Pensions Commission (IPEC) commissioner Grace Muradzikwa said there was trouble in the sector caused by Covid-19.

Muradzikwa warned that the pandemic is likely to erode portfolio returns over the short to medium term.

This, she said, has precipitated structural changes in the market. For instance, there is now an unprecedented behavioural shift by several policyholders who are downgrading to third parties contracts which could have impact on the sector.

“We have witnessed reduced uptake of insurance and pensions products. And, there is reduction in covers where they [policyholders] had comprehensive covers now and are opting for third party covers,” Muradzikwa said.

A recent baseline survey carried out by the insurance sector regulator revealed that only 34% of the population in Zimbabwe have insurance of some sort.

Out of that, 76% are in respect of funeral assurance policies. Companies in the sector are likely to have potentially heightened losses given the economic impact of the pandemic, with some already seeing some impacts on underwriting.

Champions Insurance MD Sten Maphosa said Covid-19 has impacted negatively on the traditional way of doing business and reduced activity.

“Previously we used to sell a lot of policies through the Zimpost offices but we have since reduced that line due to Covid-19.

Zimpost has drastically reduced the number of people in the banking hall in order to reduce the transmission of Covid-19, and naturally this has reduced our income,” Maphosa said.

“We are now operating with only half the staff who interchange every two weeks. Obviously this has an impact on the company’s performance as the salary expenses are still being honoured though employees are only working half the time.”

 An executive with a listed insurance firm told Business Times the issue of insolvencies “is a dominating discussion in the industry and it’s generally felt in the sector that it is likely to put stress on the ability to pay”.

“But, that’s true for any industry and it’s not unique to the insurance sector. The risk in the industry is certainly not zero and the situation has started to bring some challenges to the forefront.

However, we do not expect mass insolvencies,” said the executive, who requested anonymity.

Zimbabwe’s insurance and pensions industry is also battling a poor investment environment at a time they are prohibited from investing offshore to hedge against weakening currency and widen investment options.

By its nature, the insurance and pensions industry is more dependent on investment performance.

The sector deploys premiums and contributions in various investment classes including equities, property, Treasury Bills and the money market.

Insurers and pension funds are significant institutional investors on the Zimbabwe Stock Exchange (ZSE). But there has been serious volatility on the equities market.

Until this week, there has been a sustained bear-run at ZSE after the resumption of trades early August following its closure in June this year.

When the local bourse was closed market capitalisation was ZWL$228bn.

The bear-run saw the stock exchange shedding more than ZWL$80bn from August 3,2020 to Wednesday last week.

Market capitalisation stood at ZWL$144bn as of Wednesday last week. However, a bull run has returned to the local stock market.

Yesterday, market capitalisation stood at ZWL$178bn.

Muradzikwa said there was trouble in the property sector, where insurers and pension funds have packed significant policyholders’ funds in investments.

Apart from that about 80% of commercial buildings in almost every city in Zimbabwe are owned by the insurance and pensions sector players.

“We are also seeing a reduction in rental incomes as tenants are requesting for rental holdings or discounted rentals.

(Apart from that) we are seeing reduced occupancy as several companies are working remotely,” Muradzikwa said.

The property market has remained subdued largely due to the effects of the depressed economic conditions that led to streamlining of productivity and other expansion are activities and job losses.

Mashonaland Holdings Limited managing director Gibson Mapfidza said the operating environment has worsened as economic activity continued to shrink in the face of “very strong” headwinds.

“The property market continues to be at the receiving end of an economic environment characterised by declining capacity utilisation and monetary policy inconsistencies.

While the property market with regular rent reviews, the general reduction in economic activity meant that constrained rental growth could not match prevailing inflationary pressures,” Mapfidza said.

“The Covid-19 pandemic has further dented tenants’ rent paying capacity. As the sector navigates Covid-19 pandemic shock, occupancy levels across the market remain under pressure.”

Integrated Properties managing consultant Mike Juru said Covid-19 has resulted in restricted trading hours which meant limited cashflows for retailers and limited capacity to pay the rentals, office occupiers not recognised as essential services could not work and generate any money therefore no rental payments could be done.

“The property sector supports all economic activities in one way or the other and the shaky performance of other sectors is all contained in the property sector which has seen many companies now downsizing operations, some are in negotiations for downward review of space occupied and the rentals and voluntary space surrender,” Juru said.

Another investing lever that insurers and pension funds can certainly pull is that of prescribed assets.

But, the uptake of the prescribed assets has remained low with insurers and pension funds finding it difficult to comply with the thresholds set by the government due to liquidity constraints in the economy.

Prescribed assets as are government backed instruments issued by Stateentities, standalone companies or other public infrastructure initiatives.

Generally, they are viewed as unattractive given the legacy issues surrounding the 2009 currency conversion, coupled with recent currency reforms.

According to official data obtained from IPEC, less than 10% of pension funds were compliant with the prescribed asset threshold ratio of 20%.

More than half of insurers in Zimbabwe were also not prescribed asset compliant. John Legat, the chief executive officer Imara Asset Management said the country’s combined pension funds would need to invest US$15m of their cash into prescribed assets in order to meet prescribed asset level target.

“So, they have no other liquid asset to call upon except for equities, but they are too illiquid,” Legat said.

Insurers and pension funds seeking a home in TBs and money market have been getting a real return averaging 1% to negative 3% depending on the tenure.

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