By Admire Mavolwane
THE decline in the official inflation rate has brought about many distortions and misunderstandings in the interpretation of various transactions in the economy.
Even more serious are some of the decisions being arrived at on the basis that the inflation rate is declining. For instance, do asset values continue to appreciate if inflation is southbound?
Retracing back to early 2004, the central bank had to educate the public that the decline in the inflation rate does not mean that prices of goods — especially in the shops — are supposed to be reduced but that the rate of increase has slowed down.
However, there is still a lot of confusion when it comes to asset values. Should assets be revalued or should the value remain constant or should it be devalued?
To put it into perspective, when the year-on-year inflation rate was 622% in January 2004, the insurable value of a car could have been $200 million, now that the inflation rate is 127,2%, at what value should the car be insured? What has happened to the value of the asset in the meantime?
The sector that has borne the brunt of this confusion is the short-term insurance sector, as results released by both Zimnat Lion and NicozDiamond bear testimony.
Growth in the top line, gross written premiums, suffered from consumer resistance. The companies experienced strong resistance from clients who opted not to readjust their sums insured in line with replacement costs.
The end result was a lot of under-insurance and a switch from comprehensive type of policies to the inferior third party.
The withdrawal of premium finance facilities by many banks in the first half of 2004, as the liquidity crunch took its toll, further compounded the problem.
As if this was not enough, increased competition in the second half of the year saw players compete for a dwindling market which meant premium rates softened.
NicozDiamond for one produced a disappointing set of results. Against the background alluded to earlier, gross written premium growth at 261% to $48,8 billion lagged the average year-on-year inflation rate of 381%.
Net written premium, after reinsurance costs, grew by an almost identical rate of 256% to $31,8 billion as the retention ratio remained constant at 64%.
On the other hand, operating expenses grew by a massive 599% to $30,1 billion driven mostly by staff-related costs, rentals, particularly of the head office and service fees for the IT system.
After accounting for a 292% increase in claims to $46,2 billion, an underwriting profit of $12,2 billion was achieved — a threefold increase on the prior year.
Investment income performance was abysmal, showing a 152% growth to $22,2 billion as the company opted for an ultra conservative strategy, investing 73% of the portfolio in treasury bills.
The bank closures and uncertainties prevailing in the stock market were blamed for the softly-softly approach taken by management. Consequently, the growth in the bottom line was a lucklustre 130% to $23,4 billion.
Initial reaction to Zimnat’s results which were released earlier this month was disappointment, however, after the unveiling of Nicoz’s financials, a sobering understanding and appreciation of the economic circumstances had crept in, albeit reluctantly.
Gross premiums written by Zimnat increased by 206% to $92,7 billion. An improvement in the retention ratio from 49 to 60% augured well for net premium which grew by 274% to $56,1 billion.
A surge in operating costs and a rise in the number of large claims saw the insurer recording an underwriting loss of $6,9 billion.
As has been the norm in recent years, investment income came to the rescue achieving a remarkable 416% increase to $18,3 billion. Attributable earnings only doubled to $8,7 billion.
The table below shows the numbers from the two short-term insurers.
The results from the two insurers show the impact of the double whammy struck by the decline in the inflation rate.
Whilst clients were resisting an upward adjustment in premiums and sums assured, citing a decline in the inflation rate, employees would not accept the same argument when negotiating salary and wage increases; neither would other service providers.
In the end the game was lost on the insurers, especially Zimnat, which incurred a loss at the core business level.