Inflation playing havoc on car insurance in Zim

It is compulsory for owners to have their motor vehicles insured in Zimbabwe. A car insurance policy protects your vehicle financially in case of an accident or a natural calamity. In other words, the repair work on your car due to an accident, is paid for by the insurance company.

Andrew Muzamhindo
Analyst

A comprehensive car insurance policy will offer you wider protection. It will cover damages to your car caused by an accident either by you or a third person. It will also cover any damage to your car due to theft or an act of vandalism or fire.

A third-party insurance policy will only cover for damages caused by you to other people’s cars or property or sometimes both depending on the accident. If your car gets damaged in an accident due to your fault, this policy won’t cover any repair work for your car.

The insurance company is only liable to pay to the third party involved in an accident caused by you. Because the damage cover is limited in this policy, your premium will be lower compared to that for a comprehensive car insurance policy.

You have to salute those who are managing to keep their cars running efficiently, paying comprehensive insurance on the real value of their car and fuelling it up.
Operating a vehicle in this tough economic climate can sometimes be a borderline decision with the costs over insurance, daily use and maintenance eating away a large chunk of one’s disposable cash. Suffice to say most vehicles are under-insured – they are either on third-party insurance or are not insured at all.

Zimbabwe’s annual rate of inflation currently is over 800%. Others have argued that it is well over 1 000%. Whatever figure tickles your fancy, prices in the shops do not lie. It is evident that we are in a hyper-inflationary environment. Consumer prices are surging daily. The cost of running a vehicle now outstrips most incomes. Replacing a single tyre with a new one now outstrips monthly salaries.

Our economy has been in the doldrums for years with galloping prices of food and fuel, coupled with shortages of the same. Zimbabwe’s hyperinflation is attributed to our national government.

It increased the money supply in response to rising national debt as there also were significant declines in economic output and exports.
Corruption in a weak economy also chokes our economy. The typical cause of hyperinflation is a large increase in a money supply relative to demand. Often, this occurs in an economy where the central bank assists the government in a budget crisis by monetising the debt created through significant deficits as has been the case in Zimbabwe over the years.

Covid-19 has piled the woes to an otherwise overloaded and dying horse. Salaries have failed to keep up with price increases. A collapsed health system tells a grim story. Everyone wants to be paid in foreign currency. When you have a situation whereby no one wants to be paid in their local currency, then it simply means it has no real value.
Faced with the above scenario, you still have to insure your assets. Your car is one of them.

Spare a thought for, say, a recently retired top civil servant. They went home with their latest Land Cruiser or Jeep as a retirement package. Just a spare wheel will cost not less than US$1 000. They will not afford to replace even that spare wheel from their pension. They will not afford to comprehensively insure the vehicle at its replacement value. It’s an accident waiting to happen.

The most common methodology for estimating inflation on your car insurance is to track the replacement cost of your car over a 12-month period as measured by a price index, such as the Consumer Price Index (CPI). The traditional method for creating the CPI involves tracking the relative price of a basket of representative goods over time. Your car should be part of your basket as you track it constantly

Inflation impacts on the price of insurance. Insurance may go up because of higher premiums during periods of higher inflation due to rising costs of labour and materials. Suffice to point out that inflation is not the only factor which contributes to fluctuation in insurance costs. Policyholders need to keep an eye on the value of the coverage. In an inflationary environment, replacement cost is eroded daily due to inflation.

In some countries, policyholders can purchase a feature known as “insurance inflation protection”, where the value of benefits will rise by a pre-set percentage over a set period of time.

This is especially beneficial for individuals looking to purchase long-term insurance policies.

Zimbabwe needs some of these products. For companies to request premiums in foreign currency currently does not make sense as they will miss a large segment of the market who are not paid in foreign currency, but need cover. Insurance inflation protection is handy because it mitigates the effects of these increased costs. As with any additional riders, insurance inflation protection is a feature you can add on to an existing policy for additional costs that directly impact premium prices. It is important to note as well that inflation protection insurance does not exempt the policyholder from having to face premium increases unless premiums are locked in for the life of the contract.

Inflation does not have an isolated impact on insurer performance. While high inflation by itself may increase claims of insurers, the interaction with other economic and financial variables may lead to a more complex risk assessment.

For insurance firms, high rate of inflation has a negative effect on returns of insurance claims in the short-run. They have to adequately deal with claims inflation risk when calculating reserves otherwise they will go bust.

Due to inflation, there is need for regular adjustments of sums insured to reflect increased values. There is some evidence that inflation erodes the underwriting discipline and profitability of insurance firms.

This happened in the United States in the 1970s. It coincided with subsequent drops in underwriting and overall profitability. This is an analysis for another day, where we can focus on insurance firms and how they are affected by inflation.
— andrew@mmuzamhindo.com

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