THE insurance industry says the catastrophic situation of 2008 when hyperinflation wiped out pensions is still haunting it. But before the dust has even settled, another bout of turmoil is rocking the insurance sector into chaos. Economic instability is hampering the insurance sector’s ability to deliver to clients who no longer have confidence in the industry due to inflation. Zimbabwe Independent business reporter Cloudine Matola (CM) spoke to Insurance Institute of Zimbabwe president Ushe Mungaraza (UM) about how the impact of the fresh meltdown on insurance sector. The institute recently convened its winter school in Nyanga. Below are the excerpts:
CM: This year, you were running under the theme Insurance in a Hyperinflationary Environment. Why did you come up with this theme?
UM: Month-on-month inflation stands at 39,26% as at June 2019 (officials say it is now down to 21,04% for July) and year-on-year for June 2019 is 175%, while Professor (Steve) Hanke said it’s 522%. The truth is maybe somewhere in between the official inflation figure and Professor Steven Hanke’s. Ministry of Finance stopped the publishing of year-on-year inflation figures till February 2020.
The danger is, the markets will fill in the gap, possibly with inflation rates higher that actual. Insurance is an industry that sells a promise and this promise is fundamentally challenged under a hyperinflationary environment.
Indemnity, a core principle of insurance, becomes difficult to achieve.
Similarly, we should guarantee the value of pensions to our pensioners, not an easy task under hyperinflation. So the theme was meant to prepare our delegates to be able to deal with the hyperinflationary challenges, in terms of product design and customer service under the current condition
CM: What are the obstacles your professionals are facing in Zimbabwe and outside Zimbabwe?
UM: Our professionals in Zimbabwe have not been spared the economic challenges bedevilling the country. Wage suppression is real as incomes have not been adjusted in line with expenses. We have IIZ graduates that can’t be absorbed in the industry. Companies have cut back on training spend as many are in survival mode.
CM: As an insurance institute, how is the country’s economic decline affecting you?
UM: Our funding is derived from our membership so if the industry sneezes, we catch a cold. Less candidates are taking exams and attending short continuous professional development courses. Our membership fees have been supressed under the current inflationary environment. Similarly and more importantly, as the training board of the insurance industry, the economic woes have greatly affected our ability to deliver on our mandate.
CM: What are other challenges affecting your institution?
UM: We are revamping our curriculum as we are benchmarking with our sister institutes, Chartered Insurance Institute (CII, UK) and Insurance Institute of South Africa (IISA). This requires sizeable forex resources that we have not been able to access from the banking systems. I must say we are not sitting down and just crying as an institute.
We are reinvigorating our regional efforts and I am happy to say that in the past 12 months we have added two regional exam centres which are Swaziland and Lesotho in addition to Botswana and Mozambique that have been in existence for years. Lesotho, for example, is giving us 100 examination candidates on their first sitting in October and we expect to have processed more than 500 candidates in three years. This should meet our forex requirements and even help bring the much-needed forex in our country.
CM: How were you affected by the introduction of the Zimbabwean dollar?
UM: The introduction of the ZWL was rather sudden and unexpected. Value was lost upon conversion on our asset balances. We have seen expenses growing way more than our revenue as many substances were effectively removed with the introduction of the ZWL. Starting October 2018 our members were writing business in forex, the introduction of ZWL, as the mono-currency meant we can’t deliver our promise in US dollars. In the budget statement, the (Finance) minister (Mthuli Ncube) has said we are able to pay claims in forex to those who paid their premiums in US dollars.
This is yet to be operationalised and US dollar claims are piling up. Similarly, to be able to meet that US dollar promise, premiums that are currently blocked along the insurance value must be allowed to move. The various industry bodies have made representations to Ipec (Insurance and Pension Commission) who are seized with this matter and we expect a resolution to these issues soon.
Just as an example, following the mono-currency regime, we currently can’t issue travel insurance to local travellers going abroad, as this has to be underwritten by foreign partners, requiring cover and premium payment in forex. But to be fair to the authorities, there may not have been better timing to reintroduce the Zimbabwean dollar. As the minister of Finance (Ncube) has repeatedly said, the twin evils of budget and current account deficits, particularly the former, are under control and that presented a good opportunity for currency reforms.
Yes, inflation spiked in tandem with both the interbank and alternative market rates but we have seen more convergence and stability in the rates lately, perhaps vindicating the authorities. The next months to December 2019 will be interesting and instructive.
CM: How has inflation affected insurance in Zimbabwe?
UM: Inflation compromises our ability to deliver on our promise to our clients. The application of average for example means that clients have to contribute more to their claims as the sums insured are eroded. More importantly, the evils of 2008 are still fresh in people’s minds. Pension values and life insurance policies have been lost twice within a decade. Confidence has been eroded, as we fall short on our promises.
CM: What do you think should be done to preserve the value of clients?
UM: I certainly believe complaining won’t help. It is upon the industry to come up with innovations that help preserve value, working with the regulator Ipec and ministry of Finance. This includes, with the approval of Ipec, Exchange Control at Reserve Bank of Zimbabwe and ministry of Finance, offshoring of investments which helps in ring fencing assets held in trust for policy holders and pension funds. Statutory Instrument 95 of 2017 sets out the required capital levels for various sectors of the industry, more importantly dictating what forms of capital a regulated entity should hold, or what assets we should invest in different proportions.
Given the current inflationary environment, allowing the industry to invest more in real assets like real estate and stocks will help preserve the value of investments and intern the value of clients. Post 2008, the industry virtually lost everything held as cash and invested in government securities.
There of course has to be a balance between the liquidity needs of players and role of the industry in participating in funding national projects through prescribed asset ratios. It is the view of the industry that those individuals and entities who hold free funds must be allowed to insure in foreign currency using free funds.
Exporters, for example, should be able to insure in forex such that insured losses won’t force them to queue in the interbank market to import and replace plant and machinery. Similarly, those with relatives in the diaspora who can fund insurances of their local assets and policies in forex may be allowed to do so as this will help harness the much-needed forex into the country and formal market.
CM: What can be done by the insurance companies to remain afloat in the current inflationary environment?
UM: Innovation. For example inflation-linked products that allow the values of sums insured to track inflation and investment in technology to reduce operational costs.
CM: What is your outlook for the final four months of 2019?
UM: In relation to our theme, we have seen month-on-month inflation falling to 21,04% in July from 32,96% the previous month. This is positive and will be helpful if this trend continues to December 2019 and beyond. The economy appears to be entering a serious recession as the buying power of consumers has been eroded, on the background of biting liquidity crunch. The Ministry of Finance is grappling with the liquidity issue and they want to bring back liquidity in the economy in a non-inflationary way. We are entering the 2019/20 farming season and our preparations have to be spot-on. Reports that tobacco seed sales are 50% down 2018/19 season are very concerning. We hope the heavens will bless us with more rains in the coming season.