Despite low uptake, re-insurance remains critical

PHILLIMON MHLANGA

Zimbabwe’s insurance companies are now sitting on a time bomb that could trigger at any time after it emerged the majority, surprisingly, are ditching the critical re-insurance arrangements, a move which exposes their balance sheet and policyholders.

The dangerous practice by local insurance companies has added widespread uncertainty in the already fragile sector.

Industry players who spoke to Business Times this week said the sector has lurched into a crisis, a situation which has left operators in a precarious position, confronted with a wide-ranging array of problems.

 Most of them are now living on the margins as they try to deal with the mounting threats.

A snap survey conducted by this newspaper this week and the official data obtained from the country’s insurance sector regulator, the Insurance and Pensions Commission (IPEC), show that all registered and operating dedicated funeral companies had no re-insurance arrangements in place at the end of June, whilst life assurers have deployed a paltry 1.92% of their gross premium written (GPW) to re-insurance.

The short-term or non-life sub-sector’s re-assurance ratio, however, stood at 42.44%.

It is understood that the embattled insurance industry’s reluctance to have re-insurance arrangements in place, perhaps misjudging the degree of the exposure, has contributed significantly to the crisis currently facing Zimbabwe’s insurance sector.

The sector is currently battling to settle claims and benefits. Policyholders are experiencing low benefits and loss of value. Industry players are also battling to comply with statutory requirements.

Consequently, this has significantly impacted on policyholders, who are no longer getting time value for their money, given the hyper-inflationary environment Zimbabwe is currently operating under.

Apparently, the teething problems in the sector have giving the regulator, IPEC, some serious headache.

“During the quarter ended June 30, 2020, the Commission received 135 complaints relating to low benefits, loss of benefits values, late and non-payment of benefits.

Regarding late and non-payment of benefits, the Commission encourages players to pay benefits timeously so that members can get value for their money,” IPEC commissioner, Grace Muradzikwa told Business Times.

Ordinarily re-insurance arrangements would have given insurers increased stability in a year hit by volatility because of the COVID-19 pandemic. They could have created strategic advantages by entering re-insurance arrangements.

But, this has not been the case in Zimbabwe’s insurance and pension sector.

More importantly, re-insurance is the backbone of insurance because it enables risks of loss to be spread more widely across companies and borders. Without the spreading of risks of loss through re-insurance, policyholders would find  it even  more difficult to obtain affordable insurance.

Insurers, the world over, use re-insurance to spread their risk of loss or to protect themselves from catastrophic risk. In fact, just as policyholders spread their risks of loss by purchasing insurance from a company that collects premiums from them, insurers need to spread the risks they assume from the policyholders to other insurance companies-the re-insurers -for a share of the premium received by the insurance company from its policyholders.

In other words, the same risks that were pooled together through the insurance company get spread further through the distribution of those risks to many other insurance companies called re-insurers, experts said this week.

But, this has not been the case in Zimbabwe’s insurance sector, something which is dangerous, exposing insurers and policyholders.

As a result, confidence in the sector has nosedived.

“With a rapidly evolving ecosystem paired with financial uncertainty amid COVID-19, the need for insurers to re-insure is more urgent than ever,” Busiso Dhlamini, an insurance expert told Business Times.

Also hitting the sector hard is the issue of capacity utilisation, which is declining, especially in the funeral sub-sector, resulting in some firms downsizing operations and others closing shop.

Funeral is still the most common form of insurance in sub-Saharan Africa, given its universal appeal.

The Zimbabwe Association of Funeral Assurers (ZAFA) general manager, Taka Svosve said the industry is suffocated by the high costs of meeting claims due to high inflation, a situation which leads to frequent premium adjustment.

Consequently, the entire funeral sub-sector, has not been participating in the critical re-insurance business.

IPEC Commissioner, Muradzikwa, raised the red-flag.

“It was observed that all funeral assurance did not have any re-assurance arrangements in place during the six months to June 30, 2020,” Muradzikwa said.

She added: “The risk management tool is important in improving capacity levels in the sector especially where issues of undercapitalization emanating from the deteriorating  capital positions and the need  to manage risks such as   mortality, investment and operational risks are concerned.

“Re-assurance also increases the amount of capital available as it would allow funeral assurers to write more funeral business and be able to withstand pressure from the life assurance business.

Re-assurance arrangements will also assist funeral assurers to comply with minimum capital requirements through issuance of guarantees by re-assurers in line with the provisions of Statutory Instrument 95 of 2017.”

Contacted to comment on why the entire funeral assurance sub-sector was shunning re-insurance, Svosve said the exposure in the sector was not as high as that of other insurance sub-sectors.

He, however, said the sector was seriously considering re-assurance strategies despite the low risk associated with the funeral business model in Zimbabwe.

Svosve said the funeral assurance contract mainly promises or pays a defined benefit in the form of a funeral service and related goods like hearses, mortuaries, caskets and so forth as opposed to cash payouts which are riskier.

“We focus our investments on these service assets which are not easily exposed like liquid assets,” Svosve said.

He added: “However, we are seriously considering re-insurance strategies especially where a catastrophe would happen, and sum assured needs to be paid in place of defined funeral service.

ZAFA has since initiated a process of structuring an industry-based re-insurance arrangement for its members and more details shall be provided as we progress.

In the life and non-life sub-sectors, it emerged that participation in the re-insurance market has plummeted to fresh lows.

“Re-assurance is an important risk management tool that life assurance players should utilize to protect their balance sheets in times of high claims experience.

“GPW amounting to ZWL$1.18bn was written by life assurers as at June 30,2020. The sector ceded ZWL$22.67m translating to 1.92% reassurance ratio,” Muradzikwa said.

She added: “The short-term or non-life assurers’ average retention ratio stood at 42.44%.

Muradzikwa said the importance of re-insurance cannot be over-emphasized in view of the sector’s lack of compliance with key regulatory areas such minimum capital requirements.

Adequate capitalization forms the backbone of a strong insurance player and by the same token adequately capitalized players form a resilient sector which is crucial for policyholder protection in times of financial distress and high claims experience.

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