Zimbabwe’s dedicated funeral assurance companies have ditched re-assurance arrangements, a move which exposes their balance sheet and policyholders, it has emerged.
The exposure has added uncertainty in an already fragile sector.
The dangerous practice by all of Zimbabwe’s funeral assurance companies might result in investors pulling out of the sector due to uncertainty caused by lack of reassurance in the business.
According to official data obtained this week from the Insurance and Pensions Commission (IPEC), all registered and operating funeral assurance companies in Zimbabwe are not deploying funds to re-assurance companies.
IPEC advocates insurers to have an active role in as far as re-assurance is concerned.
Zimbabwe has eight registered funeral assurance companies namely, First Mutual, Moonlight, Foundation, Vineyard, Ruvimbo, Sunset, Passion and Orchid.
“It was observed that all funeral assurers did not have any reassurance arrangement(s) in place for the six months ended June 30,2020. The Commission urges funeral assurers to have reassurance arrangements,” IPEC said, adding, “The risk management tool is important in improving capacity levels in the sector where issues of under capitalisation emanating from deteriorating capital positions and the need to manage risks such as mortality, investment and operational risks are concerned.”
It said reassurance arrangements would also assist funeral assurers to comply with minimum capital requirements through issuance of guarantees by re-assurers in line with the provisions of Statutory Instrument 95 of 2017.
Asked why all local funeral assurers were shunning reassurance arrangements, the Zimbabwe Association of Funeral Assurers general manager, Taka Svosve, told Business Times this week that the exposure in the sector was not as high as that of other insurance sub-sectors.
He, however, said the sector was seriously considering re-assurance strategies despite the low risk associated with the funeral business model in Zimbabwe.
Svosve said the funeral assurance contract mainly promises or pays a defined benefit in the form of a funeral service and related goods like hearses, mortuaries, caskets and so forth as opposed to cash payouts which are more risky.
“Funeral assurers therefore focus their investments on these service assets which are not easily exposed like liquid assets.
However regardless of the low risk due to the funeral business model in Zimbabwe, funeral assurers are seriously considering re insurance strategies especially where a catastrophe would happen and sum assured needs to be paid in place of a defined funeral service. ZAFA has since initiated a process of structuring an industry based re insurance arrangement for its members and more details shall be provided as we progress,” he said.
The sector is also challenged in several other fronts.
Zimbabwe’s traditional funeral assurers are also battling mounting threats from life assurance firms who are now writing a huge chunk, estimated to be more than 90% of the funeral business in the country.
The traditional funeral assurers is already in a precarious position as total technical liabilities for the funeral assurance sector significantly increased by 689.91% to ZWL$225.7m at the end of June 2020 from ZWL$28.57m in March 2020.
The number of policies written by the dedicated funeral assurers decreased by 41.44% to 138 580 at the end of June from 236,648 policies in January 2020.
This was largely attributable to dwindling disposable incomes due to the prevailing harsh economic environment.
Consequently, the number of lapsed funeral policies increasing during the period under review.
The industry’s capacity has also seriously declined due to inflationary macroeconomic environment and declining real incomes, resulting in some downsizing.
The sector is also negatively affected by adverse decreasing GPW and persistency ratio which is an indicator of customer satisfaction. A high ratio indicates a large pool of satisfied customers and gross premium written (GPW).
Low persistency ratio indicates inability to retain customers in the face of increased competition from life assurance companies.
The sector’s inflation-adjusted GPW decreased by 45.63% to ZWL$6.74m from ZWL$12.39m recorded in the comparative period in 2019. Profit before tax decreased by 80.34% in real terms to ZWL$708 430 in the six months to June 2020 from ZWL$3.60m in the same period in 2019.
The expense ratio for the industry increased to 67.76% in the six months to June 2020 from 61.95% in the same period in 2019.This means more financial resources were deployed towards expenses during the review period as compared to 2019.
In line with the increase in expense ratio, the real profit before tax declined to ZWL$0.708m to ZWL$3.6m in the comparative period in 2019.
“The decline in profitability by the sector is in tandem with the decline in the number of policies written by the sector.
The decline in the performance of the sector was also evidenced by the non-proportional increase in liabilities as compared to the increase in assets.
Liabilities for the sector increased by 499.13%.
Compliance with prescribed assets declined to 0.02% at the end of June from 0.04% at the end of June 2019.
Total assets for the sector, however, increased by 26.42% in absolute terms to ZWL$711.59m from ZWL$562.87 in March 2020.
Investments in prescribed assets decreased by 26.04% in nominal terms to ZWL$151 240 in June from ZWL$204, 490 in March 2020.
In terms of compliance with the regulatory minimum requirement of ZWL$62.50m, only Foundation reported a capital position above the regulatory minimum requirement of ZWL$62.50 million which is prescribed in Statutory Instrument 59 of 2020.