Inflation gives insurance sector headache

INADEQUATE inflation-linked government securities are choking the insurance sector as players fail to re-subscribe to them, NewsDay Business has learnt.

The situation is reportedly threatening the sector’s capacity to indemnify policyholders in the event of claims.

Government securities are a composite term which covers Treasury bills, government bonds, prescribed assets and over the counter traded bills issued by the government which are mainly issued to fund specific projects or issued to curb liquidity flow on the market.

Information availed at the just ended regulators retreat indicates that the bulk of Africa’s investments in the insurance sector were in government securities followed by term deposits, investment property and equities.

In Zimbabwe, however, the investment asset mix reflected a steep fall in government securities investments from around 55% to slightly above 25% as macro-economic ills took a toll on the sector.

Arguments are that macro-economic factors such as inflation, currency fluctuations and the exchange rate are making these securities less attractive in a volatile economy like Zimbabwe.

Grand Reinsurance Group managing director Tatenda Katome told NewsDay Business on the sidelines of the retreat that it was difficult to invest in local currency government securities in an environment which is characterised by high inflation and an unstable exchange rate.

“The challenge we are facing is that they are issued in local currency thus very vulnerable to inflation and exchange rate, making it difficult for insurance sector to re-subscribe to those government securities especially when the environment is quite volatile from a macro-economic perspective given that we are investing policyholder funds which are carrying certain liabilities to policyholders,” he said.

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Inflation gives insurance sector headache
“In the event of a claim, we still need to indemnify the policyholders to put them back in the position they were before the claim.”

Katome said there was a need to work with the government to come up with products packaged in such a way that they are linked to inflation and exchange rate distortions.

He added that the most difficult part was that the industry was compelled by law to have at least 10% of its assets invested in prescribed assets, many of which, by default, fell into the category of government securities.

While admitting that the assets were available as the government was making efforts, he said the options to choose from remained limited.

“If you do not invest in prescribed assets you are viewed as non-compliant and there are penalties to that.

“From the insurance and re-insurance perspectives, we have faced severe liquidity challenges which are being driven by monetary policies that are being availed to curb inflation, exchange rate.

“While we can see that the exchange rate has stabilised a bit for the past 2 to 3 months as a result of government choking the market where in particular they haven’t been paying contractors, we are not sure what will happen now that elections are over. Maybe they will start paying and this will eventually flood the market,” he added.

Insurance and Pensions Commission (Ipec)’s first quarter short-term insurance report shows that investments in prescribed assets by short-term insurers increased by 1 349,5% to ZWL$7,70 billion.

Short-term re-insurers increased by 605% in nominal terms to ZWL$14,90 billion.

Four out of the 20 short-term insurers were compliant with the minimum prescribed asset ratio of 10% while three out of the 10 short-term reinsurers were compliant, with the minimum prescribed asset ratio of 10%.

“For the period under review, the total investments in prescribed assets by the life assurance sector amounted to ZW$38 billion, translating to a sector compliance level of 8%.

“Three out of 11 life assurers were compliant with the minimum prescribed asset ratio of 15% of adjusted assets. Compliance with prescribed asset requirements remains very low. To ensure compliance with prescribed asset requirements, the commission will be escalating regulatory measures in line with Statutory Instrument 206 of 2019,” Ipec said.-newsday