The value dilemma: Understanding policyholder assets post hyperinflation

Last week, we explored how hyperinflation reshaped Zimbabwe’s economy and financial future.

Today, we tackle a question that often arises in discussions about the insurance landscape: why do policyholder values appear low compared to the seemingly immense properties controlled by insurers across the country? Let’s unpack this issue.

In the aftermath of hyperinflation, property emerged as a significant asset for insurance companies, serving as a hedge against inflation.

The transition from the Zimbabwe dollar (ZW$) to the US dollar in 2009 allowed land and buildings from the ZW$ era to remain viable assets. However, determining their value in US dollar terms has proven to be a complex task, requiring careful consideration to ensure that policyholders receive a fair share of the value derived from these properties

.Challenges in Determining Property Values

To accurately ascertain property values, professional valuators were engaged. The worth of a property is typically based on the rental income anticipated over its lifetime, which is crucial for paying out policyholder benefits. Unfortunately, during the hyperinflationary period, many tenants struggled to meet their rental obligations, resulting in low property values.As hyperinflation escalated, numerous businesses closed their doors, leading to many rental units remaining vacant. Following the dollarisation in 2009, property values faced further depression due to liquidity shortages, which resulted in an oversupply of unoccupied properties.

This situation significantly impacted the overall market value of properties held by insurers.

You might wonder why insurers didn’t simply sell these properties to realize their value. The market conditions were far from favourable; there were very few investors willing to purchase properties at reasonable prices. Forced sales, often a last resort, would only exacerbate the problem, yielding even lower values due to the prevailing liquidity crisis.Thus, while these properties did not physically deteriorate, their market values diminished as a direct result of external economic forces.

This situation, compounded by the low valuations of other asset types, led to a severely depressed total value of assets available for distribution to policyholders.

A critical point to understand is that at the time of dollarisation, all properties were owned by policyholders, not shareholders. The value derived from these assets was meticulously distributed to existing policyholders in proportion to their contributions made before dollarisation.

This auditing process ensured that insurers could not benefit from properties at the expense of their clients.All assets belonging to shareholders were limited to various shares held as coverage for insurance liabilities. This structure emphasised a clear separation between policyholder and shareholder interests, aiming to safeguard policyholder assets during turbulent economic times.

It was a necessary measure to maintain trust and integrity in the insurance system.

Another significant aspect of the insurance landscape is the intergenerational transfer of assets.

Properties held by insurers do not only belong to pensioners; active members of pension funds also have stakes in these assets. Many current contributors may never have directly contributed to the construction of these properties, yet they benefit from them.

When rental, dividend and interest income from assets fall short of covering pension obligations, it becomes necessary to disinvest by selling portions of the assets held. However, due to the indivisibility of property; where it cannot be partially sold to meet minor financial needs, active contributors gradually acquire shares in existing properties.

This gradual acquisition results in a reduction of share ownership for pensioners. For instance, if a retiree owned one full share of a property 15 years ago, they might now own only a fraction of that share due to the necessity of selling off portions to meet their income needs. This phenomenon highlights the ongoing dynamics of asset ownership within the insurance framework.

The implications of this intergenerational transfer are profound.

As new contributors enter the system, they effectively buy into existing properties, while current beneficiaries gradually sell portions of their ownership to access necessary funds. This shift can lead to a scenario where the original owners of the assets—often pensioners—find their stake diminishing over time.

The story of hyperinflation serves as a critical reminder of the challenges faced during turbulent times. It highlights the importance of financial literacy and the need for effective risk management. As Zimbabweans continue to navigate the complexities of their economy, the lessons learned during the hyperinflation period remain relevant.

Awareness and preparedness are essential tools for individuals and families as they work to secure their financial futures. By understanding the risks associated with inflation and hyperinflation, citizens can make informed decisions that protect their assets and savings.

In summary, the low policyholder values observed today are a consequence of many policyholders sharing limited value derived from existing assets. No assets were transferred from policyholders to the insurers’ shareholders, and ultimately, both groups suffered from the decline in value.

As Zimbabwe continues to recover, the insights gained from past experiences will guide future actions. By fostering financial literacy and ensuring effective risk management, we can build a more resilient economy that protects the interests of all stakeholders.

Thank you for joining us on this enlightening journey. We invite you to engage with us—your views and contributions are vital to our efforts to rebuild and restore confidence in the insurance industry.

Together, we can set the stage for a brighter future for the sector and, by extension, for the economy of Zimbabwe.

We invite you to engage with us.

Your views, contributions and insights are vital to our efforts to rebuild and restore confidence in the insurance industry. Together, we can set the stage for a brighter future for the sector and by extension, for the economy of Zimbabwe.For Feedback Contact Us At:Physical Address: 7 Lloyd Close, Ballantyne Park, Harare Website: www.loa.co.zwEmail: info@loa.co.zwLandlines: (+263) 242 884 628, 884 646