Rising lapse ratios threaten viability of life assurance sector

PHILLIMON MHLANGA

Zimbabwe’s life assurance companies are under severe pressure from increasing policy lapse ratios and are threatening the viability of the sector, Business Times can report.

This, according to the players in the industry, the regulator and independent analysts could be a sign of economic hardship and shrinkage in disposable incomes, which would be detrimental to the industry’s sustainability.

Rufai Mafukeni, secretary general of Life Offices Association of Zimbabwe, told Business Times this week that: “These (rising lapse ratios) cause a crisis in the (life assurance) industry since the companies in it are facing liquidity issues that could endanger their financial stability.”

It coincides with an unrelenting increase in the cost of goods and services, causing Zimbabwe’s inflation to continue  its upward trend in the month of November 2023 at both the annual and month on month inflation  rates.

According to the Zimbabwe National Statistics Agency (ZIMSTATS), the annual inflation for the month of November 2023 rose jumped to 21.6% from 17.8% in the previous month. Month on month inflation also surged to 4,5%, rising from 2.5%.

The inflation calculation was recently transitioned from using  the arithmetic aggregation to geometric aggregation to compute weighted price indices. This method change, effective since September 2023, resulted in a notable decrease in annual inflation from 77.2% in August to 18.4% in September.

However, independent economists, especially, Steve Hanke, a professor of economics at Johns Hopkins University in the United States of America, who tracks Zimbabwe’s inflation, this week said the unrelenting inflation rate, which is the overall rise in the prices of goods and services over  a certain period of time  for November 2023 stood at 426%,  erodes the purchasing power,

As a result of the decreasing disposable income, many policyholders had increased their payment defaults and, in the end, stopped paying their premiums, which has led to an increase in lapse ratios.

The Insurance and Pensions Commission (IPEC) commissioner, Grace Muradzikwa told Business Times that the rising lapse ratios was exposing the fragility of the life assurance sector.

“This implies that the businesses in the life insurance industry are vulnerable to these increasing lapse ratios, which also highlight the exorbitant cost of the current policies, a situation which is not ideal,” Muradzikwa told Business Times.

She continued: “Its (rising lapse ratios) an indication of   economic hardships and shrinkage in disposable.

“The life assurance sector had a total of about 1.5 million lapsable policies at the beginning of the third quarter of 2023, of which close to 170 000 policies lapsed during that time, equivalent to a lapse ratio of 12% compared to the same period in 2022. A high lapse ratio in the life insurance industry is also caused by a variety of factors, including mis-selling of policies, competitive pricing, changing life circumstances, and a lack of perceived value.”

According to official data obtained from IPEC, Nhaka Life and Econet Life had the highest lapse ratios at 57% and 23% respectively at the end of September this year. These ratios are higher than the industry average of 11.53%.

CBZ Life had 5.57% while Doves Life and Fidelity Life had 8.13% and 0.87% respectively.

First Mutual Life had 8.81% while Nyaradzo Life has 4.37%.

Old Mutual Life, ZB Life and Zimnat Life had 7.72%, 6.33% and 5.79% in that order.

An insurance actuary, Tawanda Chituku, echoed the concerns of Mafukeni and Muradzika.

He heightened the fears saying in the end, life assurance companies will be ultimately plagued by poor product management. This includes   failing to underwrite policies that allow large-scale, immediate policyholder cash-outs, inadequate portfolio liquidity to enable redemptions and having poorly anticipated disintermediation risk, as a result of deteriorating economic conditions.

He, however, believes that with improved planning and stress testing, the majority of insurers, if not all, facing insolvency, might be saved.

“Policyholders will always stop paying their premiums under hard economic times. But, insurers can only make “educated estimates” regarding lapse rates because  new products  lack a track record,” Chituku told Business Times.

He added: “Certain index-linked products have gained popularity but have not endured over many market cycles. These policies offer upside appreciation as equity markets rise in addition to a downside floor to guard against market corrections. Even long-standing products, like deferred annuities, might not have lapse data collected.”