PHILLIMON MHLANGA
Today the Asian Tiger economies of Hong Kong, Singapore, South Korea and Taiwan are booming, with sophisticated financial and trading markets due to a massive injection of cash largely by the insurance sector. Equally, Zimbabwe’s insurance sector has the potential to cause a substantial shift in the balance of the economy and contribute immensely to the development of the country.
The multi-billion-dollar sector can ramp up economic growth, especially after the government directed that local insurers should place a fixed
percentage of their investments in prescribed assets, which are government-backed instruments, using the savings of their clients, including pension funds, life insurance companies, and individual investors.
These assets could be issued by state-owned entities, stand-alone projects like highways, power plants or other specific public infrastructure initiatives, or by the government directly.
But, surprisingly, the large-scale forced asset allocation, the prescribed assets, are not sought after, resulting in local insurers failing to comply with the legislation on portfolio investments, due to its potentially negative impact on client returns, according to several industries players.
Instead, Zimbabwe’s insurance money has been seeking a home elsewhere, and have found one at the stock and property markets, which insurers consider most desirable and continue to be the major investment classes as the industry seeks to preserve and hedge against inflation.
It appears they are obsessed with these two preferred asset classes.
“The two assets (equities and properties) totalled ZWL$7.21bn, accounting for 76.48% of total industry assets. Consequently, these asset classes continued to be the ma
The agonising dilemma of Zim’s insurers ‘GBV victims suffer in silence’ for investment classes as the industry seeks to preserve long-term value by hedging against inflation,” the Insurance and Pensions Commission (IPEC) says. But Zimbabwe’s local stock market can be described as fragile.
Whilst listed equities are generally a hedge against inflation, the value of shares has not covered for inflation. Consequently, trends in the performance of the Zimbabwe Stock Exchange (ZSE) from January
to September this year has witnessed negative real returns on all counters.
It is actually trading below its historical averages. Nominal deposit rates continued to be flat for the first seven months of the year.There is now a lot of talk about whether the ZSE is overvalued. A good measure, and obviously not the only one, of whether a stock market is overvalued or undervalued is the price-to-earnings (PE) ratio. The PE of the ZSE is meagre compared to its
long-term averages.
Investing in the property market has also not been good for the insurance companies. Although the value of properties has been increasing in nominal terms in line with inflationary trends, rental yields are also depressed on account of the recent sharp rise in inflation and low occupancy levels.
The property industry has been experiencing severe rental arrears, as tenants are struggling to service their obligations. The question for insurers is: Do they jump from their obsessed investment classes or stay with equities and property markets? And if they jump, where do they land, because there is a huge problem; the alternatives are not great?
Certainly, they should not necessarily switch to cash or the money market. If they go into cash, they run the risk of losing money. Even if they lock into investments for two years or more, the investments will yield negative returns due to inflation and tax.
The bond market is looking sad and could become even sadder de-
pending on what the government decides to do. Maybe now is the
time when the argument for active management outweighs those for
passive management. The reason is that as the price of overvalued shares
go up, they can take up a greater and greater weighting of the portfolio.
A passive fund has no choice but reflect the components of the index that it tracks. An active manager on the other hand can go lighter in shares that are considered to be overvalued.
Interestingly, the insurance and pensions industry has a critical role to play in the achievement of the government’s Vision 2030 plan.“The economic success of any country is hinged on the insurance and pensions industry, given its unparalleled ability to mobilise long-term savings,” says Albert Nduna, the IPEC board chairman.
The government, through IPEC, has been vigorously pushing for the insurers to invest in prescribed assets, which measures the percent-
age of pre-arranged retirement fund assets that legally would have to be allocated to certain government-approved instruments.
These are issued by the government, local authorities, quasi-government organisations. They are meant to ensure that subscribing clients and beneficiaries’ savings remain secure in the future. It is also a way of mobilising resources to support key national projects.
But the beleaguered industry players have not been complying with the minimum threshold. Short-term insurers are required to invest about
10% of the total funds in prescribed assets. But investment decreased by
about 25% to ZWL$22.67m this year, representing a 2.17% compliance level, according to IPEC’’s latest report published last Friday. No player was compliant.
The minimum prescribed asset ratio for funeral assurers is 10%.
But all funeral assurers were not compliant with the minimum prescribed asset ratio. They only invested ZWL$289,000, representing a 0.13% compliance level. This was a decrease of about 70%, from
ZWL$961,340 in June this year, according to official data obtained
from IPEC.
Although, there was an increase in investment in prescribed asset ratio
by the life assurers to ZWL$1.4bn, this only represented a 13.36% compliance level against the required 15% stipulated in the Statutory Instrument 2006 of 2019.
The minimum threshold for pension funds is 20% but the sub-sector invested ZWL$722.22m towards prescribed assets, representing a
7.64% compliance.Nduna says while the government may come up with its own projects, which may not have appetite to invest in the insurance sector, the industry itself should come up with its own projects which can then beconferred with prescribed assets status, as long as they are of national importance.
“For instance, we are currently grappling with power outages, what stops you as the industry to get together and build a power plant, not only to alleviate the situation but also to get valuable returns,” he says.
But, industry players say the threshold remains an attainable benchmark for many operators, given the volatility of the Zim dollar that continues to bedevil the economy. They are now calling on the government to bring instruments or papers that create an appetite for the industry.
Taka Svoswe, general manager of the Zimbabwe Association of Funeral Assurers, told Business Times: “It’s not that we are not keen. But this is an issue of compliance and not voluntary. So most are not able to meet the requirement.” He suggested that the government should bring down the prescribed asset requirement for funeral assurers,saying it worked against the business model of industry players.
To him,the industry is compromised by the legal requirement to invest 10% in an unrelated asset class. The Insurance Council of Zimbabwe chairman, Panganai Sanagurai, recently said the industry could contribute immensely to the development of the country.
But in the absence of an inflation index, it was difficult for local insurers to preserve value through prescribed assets. “Most of the paper available is not consummate to the inflation that is prevailing in the country,” Sanagurai said. “The government should come up with other partnerships like infrastructure development or low housing development. If these assets are given prescribed assets status, the industry will then store value.”
