HomeOpinion & AnalysisHow hyperinflation is hurting the insurance sector

How hyperinflation is hurting the insurance sector


PROTRACTED economic challenges in Zimbabwe, which culminated in the change of the functional currency and a return to high inflation, have hammered gross premiums in the insurance sector.

GCR Ratings, a leading rating agency in Africa said in a new report that it had tracked the trend for at least two years and noted that the future of the sector looks troubled.

Much more worrying has been a drastic reduction in insurance penetration in Zimbabwe, which has been adversely impacting the strength of the country’s insurance sector, according to experts.

The sector has gone through turbulences since 2008, which saw hyperinflation hit 500 billion percent, and affected consumers’ capacity to take up insurance cover.

In 2013, government said 4 600 firms closed between 2011 and 2013 alone, sending home 55 000 workers and dealing the sector a heavy blow.

Insurance sector turbulences were compounded by heavy premium undercutting that spouted as the industry battled to survive.

Many players reviewed premiums downwards to attract more policyholders.

While this worked in their favour briefly, blistering inflation continued to affect the sector, and even those that were dabbling in the practice failed to cope, leading to the collapse of some players.

Before that, many more firms had shut down, and several key insurance cover products like fire, aviation and motor car were crippled, while the huge migration of professionals to other countries also affected insurance cover.

There had been a brief relief until 2016, when government bought back the domestic currency, triggering a runaway black market, rocketing prices and other negative factors which have returned to haunt the sector.

“Protracted economic challenges in Zimbabwe, culminating in a change of functional currency and the onset of hyperinflation, has resulted in drastically reduced insurance penetration and gross premiums in 2019 and 2020,” GCR says in its report.

“Due to hyperinflation, earnings came under significant pressure with the majority of insurers registering inflation-adjusted net losses emanating from net monetary losses.”

“The long-term prospects of the sector has been particularly impacted, with low consumer confidence due to previous negative experiences of hyperinflation and currency instability in 2008/9,” it said.

The hyperinflationary environment also resulted in an increase in operating expenses.

However, GCR believes if the regulatory environment is enhanced relative to 2008/9 recent policyholder protection rules are likely to improve market confidence and boost insurance uptake, which is vital for the survival of this sector.

In 2019 and 2020, Zimbabwe’s insurance sector recorded gross premiums of US$138 million and US$156 million respectively, relative to the prior period in 2018 of US$703 million and a corresponding decrease in insurance penetration to 0,6% in 2020.

GCR views these declines as damaging for the industry.

The drastic reduction in insurance penetration from around 2,3% in 2018 to 0,6% in 2019, resulted in the market being de-ranked to a low tier level from a regionally competitive position two years ago, it said.

As a result, GCR lowered the insurance sector risk score from “3,00” to “2,75” in 2020 and maintained the score in 2021.

The insurance sector risk score, ranging from zero to 15, is key in the operating environment component score. The score of the GCR Ratings framework is based on its opinion that an entity’s operating environment largely frames its creditworthiness. As a result, the operating environment analysis anchors the underlying risk score for the GCR rating methodology.

GCR combines elements of the country risk and sectoral risk analysis, blended across countries for entities operating across multiple jurisdictions, to anchor an insurer to its current operating conditions.

Following the reintroduction of foreign currency underwriting on select products and the stabilisation of the exchange rate due to the introduction of a foreign exchange auction system, GCR said gross premiums had increased slightly.

“As such, the industry’s gross premiums rebounded to US$156 million in 2020. GCR judge this recovery will likely continue this year as the current disinflation trend is expected to continue to end-2021, with recent month-on-month inflation currently tracking at below 3%,” it said.

“However, GCR expects insurance penetration to remain below 1%. We have therefore, maintained Zimbabwe’s insurance sector risk score at “2,75” in 2021 albeit with the score sensitive to developments in earning risks,” it said.

GCR said the short-term sector had been less severely impacted by hyperinflation than the long-term sector.

As a result, short-term business contributed 70% of gross premiums in 2020, compared to 59% in 2019, registering a gross premium growth of 36% to US$111 million.

However, this remains lower than historical levels.

“The short-term industry proved resilient over the period due to an inherent quick repricing cycle as well as low exposure to retail risks (more susceptible to high unemployment and underemployment in the economy) compared to the long-term industry,” the organisation said.

Even during the difficult years of 2007/8, Zimbabwe’s short-term insurers remained resilient, and many of them survived the blows of the economic crisis, which saw Zimbabwe’s gross domestic product (GDP) falling by 50% in a decade, one of the sharpest such declines in southern Africa.

The drastic shift in premium composition was due to the life business shedding 21% of gross premiums in 2020 to US$45 million, having previously contracted by 87% in 2019 to US$56 million from US$426 million in 2018 due to reduced confidence arising from legacy losses on policy values during the hyperinflation period and currency transition in 2008/9.

Post dollarisation, government has moved to protect the sector from the effects of the hyperinflationary era a decade ago by rolling out a string of measures.

The crisis is, while these measures have helped the sector from potential collapse, they have worked against thousands of savers who had entrusted their funds with these players hoping to grow their wealth and use in the future.

But then, the argument has been, the insurance, as well as the pensions industry, must be nurtured in order to rebuild reserves, which are critical for driving major undertakings like national infrastructural projects. Government has struggled to strike a balance between the two.

  •  Follow Mthandazo on Twitter @MthandazoNyoni
  •   The story was taken from the Weekly Digest,an AMH digital publication


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