BY KUDZAI KUWAZA
THE insurance sector is on the rebound after years of underperformance as a result of the economic crisis characterised by a debilitating liquidity crunch, currency volatility, low capacity utilisation and three digit inflation and low disposable incomes. Deputy Business Editor Kudzai Kuwaza (KK) caught up with the Insurance Council of Zimbabwe chief executive Tendai Karonga to discuss various issues which include the recovery of the sector, the impact of Covid-19 and the expectations of the sector from the 2021 midterm fiscal budget which shall be presented soon by Finance minister Mthuli Ncube. Below are the excerpts of the interview:
KK: Can you tell us a bit about the Insurance Council of Zimbabwe?
TK :The Insurance Council of Zimbabwe is the voice of the short-term insurers and reinsurers in Zimbabwe. It was established in 1964 and has 26 members comprising 18 short-term insurers and eight reinsurers. The insurance sector is a key pillar of the financial services sector as well as a central element of trade and economic development. Our members play a crucial role in economic development not just at macroeconomic level but also in terms of the activities of individuals and businesses. As ICZ we exist to promote, advance and protect the interest of our members as well as the insuring public.
ICZ also administers some insurance programmes commonly known as pools. The insurance pools were set up by members through pooling of resources. At the moment there are three major pools which are Motor Insurance Pool (MIP), National Bureau of Zimbabwe (Yellow Card) and Special Risk Insurance Programme (SRIC). Combined these insurance pools underwrite sizeable insurance business in this market.
In addition to the above, ICZ also administers two local bureaus which offer ancillary services to insurance, and these are Fire Prevention Inspection Bureau (FPIB) and Zimbabwe Insurance Crimes Bureau (ZCIB). These are specialist organisations which offer unique and specialised services that are complementary to the insurance offering. The FPIB provides inspection and commissioning services for fire preventions systems and installation designs for government, industrial, commercial and residential buildings. On the other hand, ZCIB handles all forms of insurance fraud. These organisations are independent and standalone but remain affiliated to ICZ.
KK: What has been the impact of Covid-19 on the insurance sector?
TK: According to the 2021 first quarter report of the Insurance and Pensions Commission, which is the industry regulator, only two classes (Engineering and Marine) failed to register real growth. However, premium earnings from the tourism industry were seriously affected as the sector experienced a 90% plunge in tourist arrivals causing a revenue loss of US$1 billion for the greater part of 2020. As the pandemic continues, ICZ members are continuing operations in a crisis mode, streamlining activities and containing costs with some insurers instituting voluntary retrenchments.
However, a positive effect was the digitisation of the business. The level of automation went up sharply.
In general, the reduction in individual’s disposable incomes has reduced growth prospects for the industry.
KK: Given the volatility of the Zimbabwe dollar, are US-dollar indexed insurance packages the way to go?
TK: The sector is appreciative of SI 268 which allowed the industry to transact in foreign currency. Consumers with free funds prefer to purchase cover in USD. Just like all other economic sectors, the industry will continue to index sum insureds and premiums to the US dollar until volatility in the exchange rates is under control.
To ensure strong economic growth a stable Zimbabwe dollar is the way to go.
KK: Can you enlighten us about the Yellow Card product in the insurance sector?
TK: The Yellow Card Scheme is a regional third-party motor insurance scheme for the Comesa region. The scheme was established by a Comesa protocol in 1986 and Zimbabwe was one of the first signatories to the protocol. The Road Traffic Act (13:11) designated the Insurance Council of Zimbabwe as the National Bureau of Zimbabwe in line with the protocol.
Operationally, once a motorist has been issued with a yellow card the motorist would meet the requirements of the third-party insurance of the Comesa country that the yellow card has been issued for. Further, while the yellow card is primarily a motor third party insurance policy, it is also effectively a trade facilitation instrument, facilitating intra-regional trade within the Comesa region through enabling easy transit of motor vehicles among Comesa member states.
Recently the yellow card scheme was extended to South African and Mozambican motorists through a business-to-business arrangement. The yellow card is issued by our members who are direct insurance companies and readily available to motorists wishing to travel in the Comesa region. In South Africa we have so far accredited three sales agencies.
KK: There is the belief that the insurance sector in Zimbabwe is over traded and undercapitalised. Do you share this view?
TK: Yes and No. When the economy was severely depressed in the past this was true.
As the economy was shrinking, so was the insurance business. It made more sense to merge and consolidate then. However, in the present circumstances where growth is anticipated and participation in the free trade area is coming it would be preferable to invest in strengthening balance sheets and operational skills to compete effectively. If this process also requires mergers and acquisitions so be it. The market can accommodate all the existing players in view of the low penetration ratio. What may be needed is innovativeness to come up with new products particularly micro-insurance products for the small-to-medium enterprises, in the agriculture sector as well as the informal sector.
Currently all short-term insurance companies and reinsurers are adequately capitalised according to the requirements of Ipec.
Insurance companies have a unique and complex way of managing capitalisation issues, for example through reinsurance arrangements that then effectively support and strengthen the capital levels of the direct insurance companies. The regulator is currently at an advanced stage in introducing a solvency model called ZICARP which is a risk-based capital management framework that ensures that insurance companies hold capital that is commensurate with the risk they carry. In addition to the above, there are a number of local insurance companies that are regionally and internationally rated.
Under the current environment it may not be said that the short-term insurance sector is over-traded and undercapitalized.
KK: How successful has the insurance sector been in regaining market confidence lost due to mistrust and ways the sector is managing inflation?
TK: There has been much progress in this area. The regulator took some firm measures to strengthen the industry. Statutory Instrument 280 of 2020 allows the industry to write business in US dollars which is a reserve currency with a high value preservation effect. The declaration of insurance companies’ foreign currency accounts as transitory and therefore exempt from surrendering 20% of its monthly balances enables companies to provide indemnity.
The upward review of short-term motor statutory cover limits by Statutory Instrument 293 of 2020 protected the policyholder and improved the integrity of the insurer. Collectively these measures increased insurance companies’ capacity to underwrite and settle claims timeously apart from also aiding in the preservation of value.
The level and extent of externalisation of risks has declined. Measures to separate policyholder and shareholder funds introduced much needed transparency. Periodic reevaluations in pensions have contributed to increasing confidence.
The industry’s participation in national issues of concern to the public such as assistance offered to Cyclone Idai and the Covid-19 pandemic has improved public perception.
The growth in premiums in the last six months is a major indicator of rising confidence in the sector. The growing realisation by business of the role of insurance to provide security for production is visible, particularly in the engineering class of business. All short-term insurance and reinsurance companies meet the regulator IPEC’s minimum capital requirements signifying the ability to settle policyholders’ claims.
KK: What has been the impact of SI 127 on the insurance sector?
TK: Its impact on the insurance industry is minimal at the moment.
An impact analysis by commerce and industry is underway whose results will show the likely effect on insurance as these are our clients.
However, it can be said that its applications would be less problematic if all businesses in need had access to foreign currency from the auction. The objective of the instrument is sound, it is the timing that is questionable.
KK: What issues would you want Finance Minister Mthuli Ncube to address for the insurance industry when he presents his mid-term fiscal budget?
TK: To review some issues surrounding prescribed assets, the question of indirect taxes making our insurance products expensive and to continue strengthening economic fundamentals that lead to growth.
The introduction of fiscal and budgetary discipline by the authorities is paying dividends.
The budget surplus contributes to economic stability as this reduces fluctuations in the value of the Zimbabwe dollar.
The cash budgeting system has been effective.
The RBZ’s tight monetary control and auction system are contributing well to the overall quest to stabilise the economy by reducing inflationary pressures and improving exchange rate stability.
The Zimbabwean economy has been able to absorb exogenous shocks well, that is, Cyclone Idai and Covid-19.
It is critical to control the budget deficit within the Sadc recommended standards of 3% of GDP.
The IMF acknowledged the authorities’ efforts to stabilise the local currency and lower inflation. The government outlined appropriate policy measures such as containment of budget deficit and reserve money growth including the introduction of a foreign exchange auction system.
Having acknowledged these efforts they go on to say further efforts were needed to solidify the stabilisation trends and accelerate reforms.
The IMF is urging the implementation of structural reforms to improve the business climate and reduce governance vulnerabilities.
Clarification of what the IMF means by “further efforts are needed to solidify the stabilisation trends and accelerate reforms” would be most welcome.