Insurance and pensions: The bedrock upon which economies are built

PHILLIMON MHLANGA

Zimbabwe’s economy teeter on the brink. Yet, amidst the turbulence, two silent sentinels stand firm – insurance and pensions.

Often overlooked, these financial instruments are the unsung heroes of economic resilience.

They mobilise savings, fuel investments, and provide a safety net, enabling both individuals and businesses to navigate uncertainties with confidence. Their influence is profound and their impact transformative.

Insurance and pension funds are not mere repositories of savings, they are dynamic engines that mobilise capital for investment. By pooling resources, they accumulate vast sums that can be channeled into various sectors of the economy.

This capital infusion is vital for funding infrastructure projects, fostering innovation, and stimulating economic activities.

Consider the Netherlands. With one of the world’s most developed pension systems, Dutch pension funds have amassed assets exceeding 200% of the nation’s GDP. These funds are heavily invested in both domestic and international markets, providing a steady stream of capital that underpins economic stability and growth.

The rise of the Asian Tigers—Singapore, South Korea, Taiwan, and Hong Kong—demonstrates how insurance and pension systems can drive national development. Despite starting from conditions of poverty and instability, these economies leveraged insurance and pension funds as critical sources of long-term capital that helped them transition into high-income nations.

In South Korea, the National Pension Fund, established in 1988, became a major source of capital for industrial expansion, infrastructure, and technology. The government encouraged the growth of life insurance products, strengthening financial markets while offering individuals security.

A report by the Organisation for Economic Co-operation and Development (OECD) found that:
“South Korea’s pension and insurance sectors provided a stable pool of domestic capital, reducing reliance on volatile foreign direct investment and helping fund the nation’s rapid industrial expansion.”

Singapore’s Central Provident Fund (CPF), a mandatory savings and pension scheme, has been instrumental in funding real estate, healthcare, and infrastructure. Today, Singapore boasts one of the world’s most efficient financial markets, with the CPF acting as a stabilizing force.

The Monetary Authority of Singapore noted in a 2022 report:
“By channeling pension savings into government-backed investments, Singapore has ensured long-term financial stability while financing large-scale economic initiatives.”

Hong Kong’s thriving life insurance sector created deep capital reserves that were invested in banking, real estate, and corporate development. Similarly, Taiwan’s pension funds played a key role in financing its shift from an agriculture-based economy to a technology-driven powerhouse.

These examples highlight how insurance and pensions, when strategically managed, can serve as engines of national development, providing long-term capital while ensuring social security.

Risk is the shadow that looms over every entrepreneurial venture. Insurance serves as the light that dispels this shadow, offering protection against unforeseen events that could derail business operations. By transferring risk from individuals and businesses to insurers, it creates an environment where innovation and entrepreneurship can thrive.

As the Geneva Association report highlights:
“Modern economies need functioning markets for transferring risks and, as an extension, for insurance. Therefore, the rules that govern the conduct and trade of insurance are hugely influential, not just on the business but on the wider economy also.”

Pension funds represent long-term savings accumulated over an individual’s working life. When effectively managed, these funds become substantial sources of capital that can be invested in infrastructure development, real estate, and renewable energy initiatives. This not only yields returns for pensioners but also contributes to national economic growth.

Chile’s pension reform in the early 1980s serves as a compelling example. By transitioning to a fully funded pension system, Chile accumulated significant pension assets, which were then invested in various sectors of the economy. This influx of capital played a pivotal role in boosting the country’s economic growth and stability.

A study published in the SSRN Electronic Journal underscores this point:
“We find that pension funds mitigate negative effects and that the positive effect of pension funds on growth is conditioned by the level of development of the financial system.”

Industry leaders in Zimbabwe have highlighted the critical role of pensions and insurance in economic development and the challenges faced.

Dr. Grace Muradzikwa, Commissioner of the Insurance and Pensions Commission (IPEC):
“We need to rethink our product relevance and innovation. A well-functioning insurance and pensions industry does not just secure livelihoods but also contributes significantly to national investment pools.”

Dr. Charles Shava, Acting General Manager of the National Social Security Authority (NSSA):
“Pension and social security funds must be restructured to serve as reliable capital bases for infrastructure and economic development. In Zimbabwe, we are working towards aligning our pension schemes with long-term national objectives.”

Cuthbert Mujoma, Director at IPEC said:
“If Zimbabwe is to achieve sustainable economic growth, we need to create a pension system that can serve as a primary source of domestic capital, just as we have seen in countries like South Korea and Singapore.”

Tawanda Chitumu, a leading actuary in Zimbabwe said:
“The actuarial profession plays a critical role in ensuring that pension funds and insurance products are sustainable and beneficial to both policyholders and the economy. We must bridge the trust gap in Zimbabwe’s insurance industry and create policies that encourage more people to invest in pension products.”

These insights underscore the need for comprehensive strategies to enhance Zimbabwe’s pension and insurance sectors.

The lessons from the Netherlands, Chile, the United States, and the Asian Tigers illustrate how insurance and pensions can serve as economic accelerators.

By ensuring financial security, mobilising long-term capital, and deepening financial markets, these industries can help Zimbabwe—and any other developing nation—achieve sustainable economic growth.

However, for this potential to be realized, policymakers must address key challenges including strengthening regulatory frameworks to build confidence in the sector, encouraging the growth of micro-insurance and informal pension schemes to widen coverage, leveraging pension funds for national development projects, particularly in infrastructure and housing and enhancing public awareness to increase voluntary participation in pension and insurance schemes.

As Dr  Muradzikwa aptly noted, there is a pressing need to “rethink our product relevance and innovation” to address contemporary challenges and opportunities.

The question is no longer whether Zimbabwe can benefit from a stronger insurance and pension sector, but how fast it can adapt to unleash this untapped potential.