The Insurance and Pensions Commission (IPEC) is pushing for the establishment of a compensation scheme for the multi-billion insurance industry meant protect policyholders against any losses in the event that a player becomes insolvent and would up operations.
The insurance regulator said the Policyholder Protection Fund (PPF) is expected to serve as the final safety net for policyholders when insolvency of an insurance company occurs.
The creation of the fund comes at a time several local insurance companies are enduring serious financial difficulties, meaning policyholders are severely exposed and face potential financial losses as their claims may not be fully met in the event that an insurance company becomes insolvent.
This means policyholders in Zimbabwe currently face risks they thought had been transferred to a third party.
IPEC said the scheme will ensure that prejudiced members of the insurance and pensions sector schemes get their benefits without compromising stability and confidence of the sector.
Apart from that, the PPF is expected to also allow a smooth exit mechanism for incompetent insurers from the industry.
The model of the proposed fund will be similar to the Deposit Protection Fund where banks create a pool of resources which enables depositors to access their funds quickly when a bank fails.
A policyholder protection fund, however, can alleviate significantly the difficulties that policyholders might face in the event of an insurance company closing down.
“We are developing a policyholder protection fund as a commission,” said Sibongile Siwela, IPEC director of insurance.
Several policyholders told Business Times this week that the move to ensure that policyholders get compensation due to them in the event of market shock or failure was critical and a welcome development.
“The world over, the insurance sector is built on the public’s confidence. The creation of the fund can help public’s confidence in the sector just like bank which have the DPF in place,” a Harare-based policyholder with a listed insurer, Amos Mangisi told Business Times this week.
An actuary, Sekai Chikuriro said: “A protection fund makes it possible to deal with bankruptcy cases of insurance firms without exposing policyholders to risks of severe losses.”
In the absence of policyholder protection fund, IPEC has been using the minimum capital requirements regime to ensure that players in the insurance and pensions sector remain safe and sound to meet policyholder obligations as they fall due.
However, most of the players in the industry have been struggling to meet the minimum capital thresholds.
Apart from minimum capital levels, most insurance companies have reinsurance arrangements meant to ensure that there is another layer of protection should the primary insurer have limited capacity to meet risks.