High claims drag profits for insurers

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As is traditional the Insurance and Pensions Commission (IPEC) released its first half report for short term (non-life) insurance companies.

Victor Makanda

Taking out insurance in Zimbabwe is generally regarded as a luxury and not a priority.

This view has been made worse by the liquidity crunch and the fact that most workers earn meagre wages which are not enough even for the most basic requirements.

People have also lost confidence in insurance, particularly life insurance, as some had their contributions wiped away by hyperinflation. The IPEC report reviewed the performance of short term insurers, reinsurers and insurance broking firms. This article will focus on the short term insurance sector.

Total gross premium written (GPW) for the six months to June 2013 rose by a subdued 7,56% to US$117,82 million compared with the prior years’ US$109,53 million.

Growth was mainly driven by increased business written in motor and fire insurance which contributed 41,6% and 20,74%, respectively.

Motor insurance continues to dominate owing to the growth in the national fleet due to the flood of cheap imported vehicles. Of concern, however, with this type of insurance is the dominance of third party motor insurance compared to full (comprehensive) cover which is regarded as relatively pricey by consumers.

Aviation insurance, despite its low contribution to Gross Premium Written (GPW), registered the highest growth, of 97,34% to US$4,03 million, due to the increased fleet of the airline industry. Hail insurance on the other hand registered a huge decline of 90,89% to US$0,38 million.

The shift in farming from large-scale commercial operators to small-scale commercial farmers explains the huge decline in hail insurance as the latter rarely opt for insurance products. The 7,56% growth in the first half mirrors the slowdown in the economy due to illiquidity. In June 2012 GPW grew by a respectable 30,27%. It therefore appears that double digit growth rate might be a thing of the past.

Net premium written (NPW), on the other hand, grew by only 4,33% to US$60,84 million as more business was retroceded to reinsurers. This saw the reinsurance premium for reinsures increasing by 11,25% to US$56,98 million.

The decision to retrocede more could represent low risk appetite by insurers. On the other hand, it could be lack of underwriting capacity due to small balance sheets.

Insurers would ideally wish to underwrite more business so that overall profitability increases. It therefore means that they need to strengthen their balance sheets through the injection of more capital.

Underwriting profits which is the core income for insurers declined by 18,79%, from US$6,60million for the six months to 30 June 2012 to US$5,36 million in the review period.

The decline was a result of the huge growth in net claims compared to growth in GPW. Claims grew by 13,26% to US$21,95 million, almost twice the 7,56% growth in GPW. Underwriting profit margins tumbled as a result to 8,8% from 11,3% in the same period last year.

Growth in claims is not anything out of the ordinary for the sector; rather it is a cyclical issue in line with the trends in the economy. In the early years of dollarisation, premiums grew faster than claims as the industry was in a growth phase. However, the industry appears to now be in the maturity stage where the opposite is true. In such instances insurers need to be innovative in order to increase GPW and also to prudently manage claims and expenses.

The major risk nonetheless has been the rise in fraudulent claims especially on motor, fire and health insurance.

Technical profitability may remain under pressure unless the rise in fraudulent claims is disentangled in the midst of slow growth in GPW.

Unrealised gains emanating from marking to market stock market investments saw overall profitability increasing by 21,41% to US$7,38million. This was supported by the bull-run witnessed on the stock market which saw it amassing a solid return 38,58% in the first six months of the year. However this sort of income is not sustainable as the stock market has since retreated 6,37% after election results.
Turning to the statement of financial position, IPEC reported that all direct insurers except Allied Insurance Company and Excellence Insurance company reported capital levels which were above the regulatory minimum of US$750 000 effective June 30,2013. The equity to asset ratio also increased 3,47 percentage points from 31,66% to 35,13% implying less reliance on debt. Whilst the improvement is encouraging the average debt/equity ratio for the sector which stood at 64,87% still remained high and needs to be lowered for this type of business. This might also see profits increasing as finance costs are lowered. High finance costs have been a thorn in the flesh of most corporates irrespective of their industries due to lack of affordable medium to long term funding.
The sector was also not spared the liquidity challenges that have crippled virtually all sectors of the economy. IPEC reported that the overall liquidity position deteriorated as a result of high levels of illiquid current assets such as premium debtors. Total working capital thus declined by 4,19%, from US$24,81million recorded in prior year to US$23,77million. Furthermore, the acid test ratio was a cause of concern as it stood at 0,38:1 which meant short term insurers had liquid current assets to cover only thirty eight cents out of every dollar worth of liabilities.

In other words, total liquid assets decreased 10,5% to US$39,95million. To make matters worse liquid assets were mainly concentrated in three insurers who accounted for 48,78%. This does not bode well for the sector.

Whilst the growth in GPW was a bit encouraging, the deterioration in liquidity and stagnant disposable incomes may result in lower growth rates being attained going forward. Though there has been an improvement in the awareness and uptake of insurance products, the stagnation in the economy may see consumers continue to shun insurance as they struggle to survive.

Competition also remains high in the sector as there are 28 players with the top 3 companies Cell Insurance, Nicoz Diamond and RM Insurance commanding 40,77% of GPW.

The high level of competition may see profitability in the sector declining through rate undercutting whilst earnings remain under pressure in light of the deterioration in liquidity.

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