THE importance of the insurance sector to economic growth can never be overemphasised, especially in a global village where risks emanate from all angles from geopolitical tensions, war, climate change, policy changes, trade disputes, fall in commodity prices and other multifaceted factors.
The insurance industry is a key component of the economy by virtue of the amount of premiums it collects, the scale of its investment in any economic sector and, more fundamentally, the essential social and economic role it plays by covering personal and business risks.
Insurance (including reinsurance) is an integral part of the economy, performing a variety of important functions especially in guaranteeing economic transactions and providing capital to infrastructure development projects.
Insurers are a vital source of long-term capital at competitive rates, providing stability to financial markets and the overall economy. Insurance is a necessary precondition for many economic activities that would not take place otherwise.
Without the guarantee of insurance (and reinsurance), most businesses may not operate as they do today, and construction projects could not go forward with the risks that could potentially impact them.
Most consumers would not be perceived as good credit risks and could not borrow money from lending institutions.
Overview of insurance in Zimbabwe
Zimbabwe’s insurance sector was also affected by the global outbreak of the Covid-19 pandemic, which led to unprecedented disruption and created material uncertainty.
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The successive lock-downs first introduced on 30 March 2020 as well as other restrictions to manage the spread of the virus had a far-reaching negative impact on the level of aggregate demand and economic activity within the country.
The erosion of disposable income across the economy coupled with uncertainty over the ability of the sector to cover claims against the impact of the pandemic has resulted in a low appetite for insurance products.
The insurance penetration ratio in Zimbabwe is less than 3, 6%, well below Insurance and Pensions Commission’s (Ipec) expectations.
Zimbabwe’s highest penetration rate was 5,7% of 2004 and lowest was 1,5% in 2016.
Insurance penetration is lower due to supply side and demand side barriers to insurance inclusion. Over 13,5 million (over 90%) of Zimbabweans lack health insurance and the numbers are going up due to the increase in cost of living, high inflation and low disposable income. At least 80% of homes remain uninsured in the country.
The number of corporates and small businesses that are uninsured is rapidly increasing due to economic instability, high levels of inflation, negative perception on insurance, self-insurance and limited disposable incomes.
Despite it being compulsory by law, at least 30% of motor vehicles are uninsured. By comparison to the flag bearer in insurance on the African continent (South Africa), insurance penetration in the rainbow nation was 13,9% as of 2021, one of the highest in the world, better than the United States and United Kingdom.
South Africa generates 70% of the continent’s insurance premiums at a value of US$50 billion.
At least 60% of South Africans have an insurance product, while insurance assets under management were valued at US$201 billion with life insurers holding 93% of the industry assets.
Persistent economic vulnerabilities
Zimbabwe is extremely vulnerable to climate change risks. Over the past century temperatures have risen by approximately two degrees Celsius, while annual rainfall has decreased by 20 to 30%, leading to diminished fresh water for food security.
The obvious impacts of climate change on insurance are those linked to the coverage of natural catastrophes.
Several types of property insurance are affected (at various degrees depending on local conditions):
Agricultural insurance (damages to crops, forestry, livestock);
Insurance of buildings, contents, machinery, equipment and transport; Marine insurance; insurance in tourism; and business interruption insurance in all sectors.
Climate change also has direct impact to power generation in Zimbabwe as the country generates 60% of its power from Lake Kariba.
Importance of insurance
Insurance drives economic growth by expediting the recovery of claimants and beneficiaries. Insurers pay claims whenever there is a covered loss described in the insurance contract.
Insurers help to stabilise the economy, especially during times of a financial crisis such as the global financial crisis of 2007 and 2008, which had ripple effects to investment in Zimbabwe.
The high levels of country risk, economic risk, political and country specific risk that bedevils Zimbabwe require insurance to local and foreign investors who pour in capital to fund projects or business locally. Despite the sharp decline in foreign investment, pension funds and local businesses have filled the gap in key sectors of the economy, such as tourism and manufacturing with sound advice and backing from some of the country’s trusted insurers.
Insurance and business cover
Local businesses rely on supplies for a variety of goods and services from the furthest countries on the globe, such as China, Singapore, South Korea and Russia among others.
Supermarkets rely on manufacturers to supply goods for them to sell, and manufacturers rely on supermarkets to sell their products.
Manufacturers rely on other business to business suppliers to make components or supply goods that are not produced in Zimbabwe.
These risks stem from rapid advances in technologies that lead to the exponential growth of economic interdependence among markets and nations. While this is a benefit, it comes with associated risks and costs for importers or exporters. As the system becomes faster and more complex, it becomes more vulnerable to global shocks.
The more sophisticated a technology, the narrower the range of tolerable error because accidents and managerial failures have more severe consequences.
As such, insurance sector development is an important determinant of economic growth. Zimbabwe must undertake a range of regulatory initiatives towards a climate resilient economy, without compromising social and economic capabilities of its citizens. Insurance can play a vital role in alleviating the risks of climate change.
Ipec must develop a structured and comprehensive climate change based framework to encourage development of products that are aimed at reducing the impact of climate change and also steer the country to products that appeal to small businesses that anchor the Zimbabwean economy. The regulatory challenge that will always arise is to balance these concerns with equally important questions of insurance access and affordability.
There is also a need for proper collaboration between the policy-maker and the private sector on climate change awareness to encourage innovative products that mitigate the effects of climate change. This article was first published in the Insurance Survey magazine, which was sponsored by the National Social Security Authority, in partnership with the Zimbabwe Independent.
- Bhoroma is an economic analyst and holds an MBA. — [email protected] or Twitter: @VictorBhoroma1.
