FINANCIAL markets are by nature a reflection of the collective confidence of the transacting public.
The insurance industry is by no means an exception to this general rule as it sells financial promises that in some instances take a lifetime to materialise.
It is true that for anyone to make a bank deposit, lend, borrow, save, and buy insurance or trade in any financial instrument, confidence has to exist.
In fact, confidence is the glue that establishes the bond between a consumer of insurance products and the provider.
In Zimbabwe, insurance is an emotive subject as periods of hyperinflation and currency changes have rendered some of the products valueless, leading to significant loss of confidence in the industry.
Insurance product spectrum
The spectrum of what the public considers insurance is broad, ranging from long-term products like life assurance, pensions and funeral services to medical aid and short-term insurance.
It is possible that many adults in Zimbabwe would have at some point interacted with one form of insurance or another.
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The interaction ranges from simply mandatory insurance to enable one to licence their vehicle, a deduction on your payslip for medical aid or contribution for group life assurance or pension to complex corporate risk transfer mechanisms.
This article attempts to keep the focus and perspective of the customer hence taking a very non-technical approach to dissecting the issues relating to confidence building.
Negative connotations
It has to be noted that generally, insurance products do not enjoy the good publicity of other financial products given the technical nature of the product.
In addition, benefits normally flow in times of great human pain.
This is so because the triggers are normally some misfortune, accident, death, injury, illness and rarely in good times upon retirement or premium rebate.
In some instances, the beneficiaries of the product may not be the ones to have purchased it.
The consumption of insurance is therefore by nature a highly emotive issue.
Currency challenges
Zimbabwe has seen periods of high inflation like in 2008, which culminated in dollarisation in 2009. The same phenomenon would happen again post 2018. In a sense, the industry operates in the same operating environment as any other businesses.
It follows, therefore, that the major vagaries to have befallen the financial markets have affected the insurance industry in equal measure.
The most important of these vagaries over the years has been currency changes from Zimbabwean dollar in 2009 to a basket of currencies anchored on US dollars, introduction of bond notes in 2016, introduction of nostro accounts in 2018 and concurrent floating of the RTGS.
These policies are a panacea for value erosion for both long and short-term insurance products.
Without dwelling much on the causes of these high inflation periods, it is important to note that significant value is lost on people’s savings like pensions.
A good number would go on to retire into a poverty and financially insecure life.
These are real issues, but blame apportionment is always a difficult task given the technicalities.
Government policy
At the heart of value preservation of insurance products is the need to have a stable currency for transacting insurance business.
At a very idealistic level, an insurance currency could be, for instance, the South African Rand, the US dollar or any other currency that is stable enough over a long period of time to preserve the value of people’s savings.
The challenge further arises with ability to continue paying in foreign currencies, when the Zimbabwe dollar is the currency freely available given fluidity of government policy. Further, insurance business is subject to prescribed asset requirements.
This means a portion of investments have to be made in government backed securities to raise funds for government projects.
Government could provide inflation proof securities for money mobilised from the insurance industry.
Indexing
The insurance industry can adopt inflation adjusted policies that respond to inflation trends.
This involves setting a base currency in a stable currency with the policy value in local currency converted at the official exchange rate.
Challenges associated with the forex market will also be inherent and market changes will mean that premiums may be unaffordable in times of huge gallops in a short period of time as incomes do not always rise at the rate of inflation.
The advent of Artificial Intelligence provides a long shot solution to this challenge.
Investment mix
The investment mix of the industry is regulated and generally details the proportion of investments in property, securities, money markets, cash and cash equivalence.
This is to enable the industry to have an acceptable mix of both short and long term investment mix. In the extreme, property investments are better at value preservation.
But cash is required to finance operations and liquidate current liabilities mainly claims that have to be honoured timeously.
The shares, money market securities and prescribed assets, all are subject to inflationary pressures and can be wiped away in times of galloping inflation, leading to significant loss of value.
Some schools of thought is for regulation to allow a portion of the funds invested in offshore vehicles.
Regulation
In the case of pensions, the regulation is too tight to liquidate own or employers contribution. Regulation around this area should allow contributors to be able to liquidate a portion of their pensions based on inflation triggers in the market.
The obvious challenge with this approach is obviously a form of a run on pension’s funds where everyone might want to exit at once, thus creating significant financial constraints to the insurance industry.
Another work around would be some form of premium payback plan where part of the premium is paid back to the policyholder at regular intervals like a year.
The point is that regulation can play a big role in promoting the good perception of the insurance industry by creating visible benefits of insurance products in Zimbabwe.
Simple products
Empirical evidence shows that insurance products across the globe are almost generic and have experienced very little fundamental changes over the last century.
Generally, the product spans many pages in technical legal language commonly referred to as small print. It is this small print that the transacting public believe is used by the industry to avoid honouring claims or compensation.
Many people are not insurance literate, making it very difficult for the consumer to comprehend fully what they have or have not bought.
It is usually when you have a claim or want to bury a loved one or seeing any form of compensation that you become aware of what you did not buy.
The industry has to address this information asymmetry by simplifying contracts into both legally sound and simple to understand documents.
Simplicity encourages scaling through high acceptance.
Conclusion
To regain confidence, the industry needs to be afforded a very stable currency. A stable currency insulates the industry from loss of value of the publics’ savings.
Inflation is a form of tax on people’s savings and once it gallops beyond single digits, there will be significant value loss.
To foster, retain and grow confidence and trust, it is important to manage price risk in the form of inflation and exchange rates to maintain real value of insurance products.
Manyika is seasoned risk management and insurance professional with over 11 years of practice in the insurance and risk management field in Southern Africa. — [email protected].
