THE Zimbabwean financial services sector is arguably second to South Africa in Sadc in terms of competition and sophistication. The sector is comprised of several classes of banks, insurance and assurance companies, insurance advisors, investment management companies and securities traders among others.
After banking, insurance is the second biggest sub-sector. Current insurance legislation does not allow composite insurance companies. As a result there are several licenses which include short-term insurance (also called retail), life assurance, funeral assurance, medical assurance and reinsurance companies
Over the years, the sector has had a fair share of the countryâ€™s misfortunes. Though business has somewhat improved after the use of multiple currencies, the challenges are far from over.
Life assurance offers mainly general life cover and pension fund packages. Short-term insurers offer packages which cover assets such as motor vehicles, houses, household goods and trading stocks among others. Some innovative products include loss of profit cover, key man insurance and construction bonds.
Credit and travel insurance products fall under short term insurance.
Reinsurance is the general practice and a requirement by law for both short term and life companies to insure part of the risk underwritten with another third party. The technical term used is â€œretrocessionâ€ and companies which take a portion of the risk are called reinsurers. Â
In terms of market players, the sector has grown though gross premium written (GPW) has continued to shrink. According to the insurance sector survey of 2007 GPW from 2003 to 2007 shrunk by 99% from US$611,9 million to US$5,5 million.
The operating environment has been extremely hostile. Hyperinflation, coupled with a reduced customer base, high claims costs, lack of foreign currency and negative real interest rates on the money market were some of the challenges to the sector.
Both short term insurance and life insurance companies had their businesses hamstrung by hyper-inflation. Unlike the manufacturing and retail sectors, which quickly responded to the resurgence of inflationary pressures by adopting replacement cost pricing, this route was not open to the insurers.
Not only did hyper-inflation erode disposable incomes, thus reducing demand for products, it also eroded product values, and hence they became largely meaningless.
Shortâ€“term insurers were hit by â€œsoftâ€ premium rates as competition for a declining market intensified. Strict prescribed asset regulation restricted insurersâ€™ investments on the stock and property markets. To worsen the sectorâ€™s woes, their balance sheets were shrinking in US dollar terms, thus reducing their capacity to underwrite more business.
So how did insurance and assurance companies survive faced with all this?
The entities tried to maximise on investment income, most of it unrealised, whilst incurring losses on the core underwriting business. Another avenue, especially for listed companies, was the egos and rivalry which saw some entities being more aggressive in their revaluation of property portfolios in order to outdo competitors in terms of earnings per share and P/E ratios.
The introduction of multicurrencies in February was a welcome relief to the insurance sector players even though some had long discontinued offering services to clients that were not paying premiums in US dollars.
The obstacle to reviving the business, as is common with all other businesses in the economy, is the lack of US dollars liquidity in the country.
Given the state of the economy, one might conclude that the insurance sector is thus highly populated making the scramble for the shrinking cake ferocious. Increased competition from other investment alternatives, like unit trusts, has made the job of life insurance sales personnel even more difficult.
The public is now increasingly aware of individual investment options and hence the ability to self insure.
Group pension business has proved to be a boost for the assurers although the number of schemes has been reduced due to company shutdowns and low viability. It is now a mad dogfight with premium rates undercutting being the order of the day. Insurers might find it cheaper to market direct and do away with brokers.
Insurance is generally not regarded as a necessity. More consumers are moving away from comprehensive types of insurance that are more expensive. With companies and individuals battling to survive it is inconceivable to expect them to prioritise insurance even though it is necessary.
Local insurance companies do not have the capacity to enter regional markets to increase business. In essence the sector needs constant and frequent re-capitalisation in order to underwrite more business.
Even for ZSE listed entities doing a rights issue to raise capital may prove to be a daunting task.
The investors are apparently disinterested in the insurance business as reflected in the low market capitalisations for the listed firms. For example, Fidelityâ€™s market cap as at April 24 stood at US$1,6 million, Nicoz Diamond; US$3 million, Zimnat;US$4 million, Afre;US$8 million, Zimre;US$11 million. Some firms might be forced to merge to create the needed critical mass.
Days of relying on property and share portfolio adjustments to boost income are long gone. Companies have to aggressively manage their property portfolio in order to boost rental income.
According to a South African Insurance Industry Survey, the country expects non-life premiums to grow by 10% in US dollars terms up to 2012 whilst life premiums are expected to increase by 5%. The key driver in the growth is the anticipated rise in nominal GDP.
Zimbabweâ€™s economy has been on a freefall for the past ten years with GDP estimated to have fallen by a cumulative 50%. Last year the IMF estimated that GDP fell by 14%. It will obviously take time for the economy to recover. Like all other forms of business, insurance thrives in an environment of relative economic stability. Until this begins to happen, the sector woes might continue for some time to come.
BY EVONIA MUZONDOÂ