ZIMNAT Lion Insurance Company (Zimnat) says the high inflation rate has resulted in an under-insurance of policies while the statutory prescribed asset ratio has also caused viability problems in the sector.
Zimnat managing director Elisha Moyo, presenting the
short-term insurer’s results on Monday, said high inflation had been the company’s greatest threat to viability during the year as it had resulted in “an unstable pricing system”.
Reinsurers had been unable to cover themselves due to the foreign currency shortage, Moyo said.
Primary insurers, which include Zimnat, insurer themselves with local reinsurers who in turn insure themselves in foreign currency, a process called retrocession.
However, due to the shortage of foreign currency, local reinsurers had failed to properly insurer themselves due high costs arising from the depreciation of the local currency.
“Reinsurers cannot retrocede to the extent required because of the foreign currency component,” Moyo said.
Moyo said reinsurers were now demanding earlier payments from insurance firms to cover any expected exchange losses.
“They are demanding cash upfront,” he said.
Moyo said they have now resorted to local reinsurers to cover their business. But he warned that it was the issue of the prescribed assets ratio that remained a critical bother to the insurance industry.
Insurance and pension funds are compelled by law to invest 45% of their funds in prescribed assets, normally government securities.
“Imagine that we are operating in a shrinking economy and the number of players is increasing,” Moyo said.
He said some insurance firms had resorted to “cutting rates” as a survival strategy.
“Our market is shrinking and players are trying to out-perform competitors by cutting rates,” he said.
However, Moyo maintained that Zimnat was not going to follow suit.
He said instead, they were going to focus on underwriting for a technical profit.
“The key for us is to retain our market share and manage costs, particularly administrative.
The group’s administration costs grew by 380% in the year ended December 31, 2005, mainly due to the impact of the depreciation of the Zimbabwe dollar on foreign currency related expenses.
Zimnat recorded a technical loss of $26,3 billion in the period under review.
The group made a gross written premium of $415 billion in the period under review, 347% up on the previous year, 117% of which was attributable to the merger with AIG Zimbabwe.
A $130,20 earnings per share was registered compared to $6,65 in 2004.
Zimnat declared a $42 dividend payable on April 17 this year.