PHILLIMON MHLANGA
For many years, it has been a rocky passage for Zimbabwe’s economy which has remained tenuous with severe consequences compromising the local insurance and pension industry’s ability to appropriately, safely and sufficiently carry risks.
Zimbabwe is one of the few countries in the world experiencing hyperinflation alongside Venezuela.
They all have been struggling to get out of it.
Annual inflation hit 766% in April and is expected to skyrocket as prices of basic commodities continue to soar.
Twice -in 2008 and 2020-the economic crisis has seen the Zimbabwe dollar plunging to unprecedented levels leaving policyholders shaken by the painful loss of value of their policies and pension benefits due to inflationary pressures triggered by government’s policy inconsistencies which have caused the loss of value of the local currency.
The instability has seen the insurance industry grappling with confidence challenges since the adoption of the multi currencies in 2009, which saw erosion of pension fund values that was attributed to the preceding decade of hyperinflation.
The loss of values crystalised at the time of conversion of pension and insurance values from Zimbabwe dollar values to the United States dollar.
Policyholders lost more than US$3bn when their years of investments were eroded by hyperinflation which ravaged Zimbabwe’s economy, according to a Justice Smith’s Commission of Inquiry report which investigated the prejudices insurance policyholders suffered when the country dollarized in 2009 to escape hyperinflationary pressures.
The denomination of the Zimbabwe dollar saw the entire pension industry receiving a mere US$135 000 in lieu of the bank balances that were held by the pension industry at the time of the adoption of the multi-currency regime.
The Commission also observed that there was regulatory failure in that there was no adequate guidance that was given to the industry in handling the conversion of pension and insurance policy values from Zimbabwe dollar to US dollars.
The Insurance and Pensions Commission, headed by Grace Muradzikwa, has since come up with a pension reforms paper that had a raft of measures aimed at dealing with challenges bedeviling the pensions industry.
The signs suggest Zimbabwe’s economic woes are far from over following the government’s decision to ban the use of foreign currencies in domestic transactions after it made the Zimbabwe dollar the sole legal tender in June last year, ending a decade of dollar is action.
Government’s abrupt ban on domestic use of foreign currencies, though it has since allowed the utilisation of free funds in local transactions as part of measures to deal with the effects of coronavirus pandemic-caught the market by surprise, resulting in the Zimbabwe dollar being besieged again.
This week, a single US dollar was trading at ZWL$90 in the black market.
It requires ZWL$25 to buy a single US dollar on the interbank market, but it’s not easily accessible, forcing individuals and companies sourcing the US dollar from the black market, where it’s readily available although premiums are punitive.
Now, the government wants to revamp it.
This means the industry is faced with yet another challenge that threatens pensioner and policyholder values, before the implementation of the recommendations of the Commission of Inquiry into the conversion of insurance and pension values from Zimbabwe dollar to the greenback, which among other issues seeks to redress lost values.
Insurance coverage has remained low.
The puzzle also spreads to pensions, which has also received significant attention especially because of the challenges associated with the industry.
The challenges included assets and benefits which were deemed inadequately distributed to targeted groups, especially retirees and senior citizens.
There are also difficulties in contributing pension schemes in which employees and employers are expected to pay a certain percentage of the employee’s monthly earnings to a retirement savings account from which they will be drawing their pension benefits after disengage mentioned from service.
It is also on record that companies refuse to offset arrears of pension and gratuities, which have accumulated for months or years, violating the law, reducing pensioners to beggars as they are denied their rights and entitlement after they used the greater part of their adult life for national development.
However, both insurance and pensions are an integral part of the economy and the players the world over play a key role in socio-economic transformation.
A robust Zimbabwe insurance industry can play different roles in economic development.
This can be through prescribed assets (PAs). This is an attempt by the government to make sure insurers invest their float money in specific infrastructural projects.
However, players in the sector have not been complying with the minimum threshold, meaning they can do more.
The potential contribution of the multi-billion industry to Zimbabwe’s economic and social development is clearly recognised by the Finance and Economic Development Minister, Mthuli Ncube.
Ncube wants to deepen the insurance penetration beyond the current 4% of gross domestic product and wants to improve the contribution to go beyond the capital market.
Insurance helps improve individuals and households’ resilience.
Insurance can contribute directly to individual welfare by providing a mechanism for households to build resilience in the face of financial shocks and peace of mind if no risk events occur.
It enables households to take productive risks to invest and grow their incomes. Insurance also plays an indirect role by enabling households to access other services such as credit but also health and education.
Insurance can also help improve business resilience and productivity.
Insurance can contribute to business development in at least three ways.
Entrepreneurs can transfer the financial impact of a risk occurring from their own account to the insurance industry, which may bolster their survival rate.
Insurance also covers risks related to cross-border trade, which facilitates exports and imports and enables foreign investment.
Risk management to mitigate risk and enable more efficient resource allocation.
Companies can use the tools and techniques created by insurers to develop risk management plans and mitigation strategies to prevent risks from occurring.
The availability of many forms of business lending, mortgages, project finance and leasing depend on insurance and has seen a reduction in the risk of borrower default or provides alternatives to collateral to reduce lender risk, which allows for more credit to be extended on better terms.
Insurance markets are also skilled at the pricing of risk and their exposure-identification and exposure –mitigation skills and tools may enhance credit providers’ ability to lend on terms that are commercially viable.
The insurance sector can also play an important role in the deepening and efficiency of capital markets to support growth objectives.
This can be done through several channels including mobilising capital through premium collection and pensions. Insurers are able to pool savings from numerous small investors and in the process accumulate significant investable funds.
Larger funds are more efficient to manage and invest and they allow greater diversification of investments.
Insurers can allocate capital more effectively to productive opportunities than individual investors by investing over longer time horizons, building professional skills and data to manage assets and identify opportunities for investments by transacting at scale with greater efficiency and by reducing the unproductive capital that investors need to hold as a precautionary measures for potential risks.
The industry is, however, still faced with challenges such as low disposable income, which act as a barrier to insurance inclusion, low confidence, outdated legislation, pension contribution arrears and resurgence of inflation pressures, which is threatening benefit values for policyholders and pensioners again.
As would be expected, many local insurers are battling to a larger extent to carry the risk especially in the aftermath of Zimbabwe’s currency catastrophe.
And many perceive the negative impact of insurance failure as greater than the upside of keeping premiums on-shore.
In search of yield, local insurance players are now asking to invest much of their assets abroad to preserve value, saying if allowed the sector can pick up the stimulus button, which is likely to offset increasing economic headwinds.
They said a decisive monetary policy action is crucial, needed and would be successful in response to the financial crisis Zimbabwe is battling.
While Zimbabwe’s economy is expected to contract by more than 10% this year and given the drive to extricate the economy from its mess, the insurance sector however remains nascent and could be the engine to support resilience.
In fact, the opportunities more than ever remain substantial.
It means that when households and businesses have access to financial compensation for loss events, the underlying capacity of an economy to absorb shocks is enhanced.
Many believe that the government’s strategy for economic recovery and development must ride on the facilitative role that the insurance and pensions industry can play.
The sector has the potential to contribute to the key areas such as achieving agricultural and food security, ensuring energy sufficiency in power and petroleum products and driving industrialization by focusing on SMEs.
While the formal economy is unable to absorb the growing workforce, the informal is buoyant, particularly driven by small-scale traders.
It is estimated that Zimbabwe insurers control more than 60% of funds invested on the Zimbabwe Stock Exchange.
In its economic blueprint, the Transitional Stabilisation Programme, government has set targets for the insurance and pension industry, which include broadening insurance support to agriculture, increasing insurance penetration ratio from 4% to 20% by year 2020, relax licensing requirements for micro insurance service providers and intermediaries and institutional pension reforms.
The implementation of recommendations of the Commission of Inquiry report was also among the set targets.
The rapid economic deterioration over the last two decades, coupled with increasing macroeconomic instability, means the Zimbabwean market has great potential for development if key constraints can be eased.
To be able to do more to the economy, the Zimbabwe insurance industry, however, wanted a special waiver to allow it to operate in US dollars citing that the greater economy was re-dollarising and pushing out the player from the financial sector.
The sector is experiencing low demand owing to tough economic environment which has been exacerbated by a rapidly depreciating Zimbabwe dollar.
The Zimbabwe Insurance and Pensions Apex Council (ZIPAC), an umbrella body for the sector said the government should allow it to re-dollarise and contract in the US dollars.
The greenback is the currency of choice as it stores value with minor exceptions in towns or settlements close to the border with South Africa using the rand and those closer to Botswana using the pula.
“We need immediate rescue,” Tassius Chigariro, the ZIPAC chairman said.
He added: “The financial institutions that we so need to help in the recovery of our nation are formally de-dollarised but completely taken out of the financial system. Please do not watch us dying.”
A well-functioning insurance industry minimizes the risk associated with economic activity in these sectors and enables the efficient allocation of risk in the broader economy.
Within the development sphere, the multi-billion sector can enhance individual and household resilience of lower income households to shocks, thereby increasing welfare, these are important facets of the contribution of insurance to society.
Equally, the sector can play a key role in supporting sustainable development and growth.
The current uptake of insurance products remains relatively limited and insurance penetration remains low at 4%. This indicates substantial scope for growth of the insurance sector and with that its role in society.
The potential role of Zimbabwe’s insurance sector has been recognised by the Ministry of Finance. There are multiple links between insurance and growth.
Zimbabwe’s finance minister said for any economic transformation, a robust insurance sector plays a critical role through prescribed assets.He said, insurance plays a critical role in achieving safety nets through Prescribed Assets.
Ncube said there were opportunities for development.
“Government is committed to reforms including the implementation of the Justice Smith report. We are also seized with legal reforms, all the three Bills will be introduced in Parliament soon. I urge the insurance industry to be part of the process. Foreign investment, one of the three Bills is going to deal with that in an orderly manner.”
But, Ncube, shot the suggestion down saying the sector should consider investing in offshore assets instead.
“It should be about investing in offshore assets not contracting in US dollars. I prefer that kind of language,” Ncube suggested.
He added; “That’s the window (to invest in offshore assets) we are trying to open. The window will go a long way in dealing with the problem. Currently, the curve is sloping downwards. But, if the sector contracts offshore, the yield will be upward.”
Apart from that Ncube has also suggested Real Estate Investment Trusts (RETZs).
These could be the new asset class to allow the players in the insurance and pensions sector to create liquidity.
REITs are securities that are publicly traded on stock exchanges the same way as equities.
They give investors the option to invest directly in the finished real estate products that are already earning money such as residential and office units, hotels or shopping malls or even infrastructure ventures like roads and power plants.
Apart from creating liquidity, REITs tick various boxes, in terms of risk management.
REITS, analysts say play a critical role in providing investors to participate in real estate projects even with a small fund size. They derive the majority of their income real estate activities, including rents from properties and interest from mortages.
REITs holders get a regular return, which is usually a higher rate of dividends than equities or many fixed income investments.
REITs usually receive special tax considerations and typically offer investors high dividend yields, as well as a liquid method of investing in real estate, experts said.
The development comes at a time when investment by players in the insurance and pensions sector is skewed towards equities and property, which does not create liquidity.
“We notice investments by the sector are heavily weighted in equities and properties. It shows you have good asset managers.
But, we need to do something for the insurance sector because we notice exposure to the property sector is high. We need to create liquidity. So, we need to introduce RETZ to allow the insurance sector to create liquidity.
We want to make sure REIZ takes off. That will give a positive yield. The curve currently is sloping downwards,” Ncube said.
The Reserve Bank of Zimbabwe governor, John Mangudya defended de-dollarised ion strongly. He blamed behavioural economics.
“Yes, the Zimbabwe dollar is constrained. The problem in Zimbabwe is no longer a monetary issue. It’s the behaviour of our people who expect inflation to go up.”
