Why the “no premium, no cover” rule is a game-changer

Tawanda Musarurwa

INSURERS are not credit specialist companies, but due to the lack of specific regulations to discourage ‘insurance on credit’, Zimbabwe’s insurers have been playing a game that posed significant risks to the entire insurance value chain.

The dangers are borne out in the statistics.

Between January and June 2023, 61 percent of complaints received by the Insurance and Pensions Commission (IPEC) were related to delays in the settlement of claims.

Because insurers had been accepting insurance on credit, policyholders had a false sense of security.

But, so too had every other player in the insurance value chain.

Because insurers were accepting insurance on credit, reinsurers had become exposed to huge liabilities without the corresponding recompense.

In some cases, insurers and reinsurers have had to write off bad debtors, which constrained their liquidity, and thereby capacity to meet various obligations.

The nature of the insurance industry means most insurance contracts have multiple levels: from the insurance broker who is an intermediary between the client and the insurer, to the reinsurer that insures the risk of other insurers.

And the value chain can go up to retrocessionaires (reinsurers of reinsurers).

Problems in the insurance industry tend to be systemic.

So, perhaps the biggest forethought of the “no premium, no cover” policy – implemented through Statutory Instrument (SI) 81 of 2023 that was promulgated in May 2023 – is the protection of the wider industry.

According to Section 5AA (1) of SI 81 of 2023:

“The receipt of an insurance premium shall be a condition for a valid contract and there shall be no cover in respect of an insurance risk unless the premium is paid in advance.”

Ballooning premium debts have been affecting insurance companies’ capacity to meet their financial obligations, with IPEC’s 2023 second quarter report showing that premium debtors in the local short-term insurance sector spiked 1 097 percent to ZWL$180,4 billion as at June 30 2023, from ZWL$15 billion in the prior comparable period.

The extent of the sector’s premium liabilities is such that premium debtors accounted for the second largest asset class at 20 percent, after investment property (at 24 percent).

“Insurance was being issued on credit, resulting in liquidity challenges that were hindering insurers from creating adequate claim reserves,” said Insurance Council of Zimbabwe (ICZ) marketing and public relations manager Ms Ringisai Batiya.

“Insurers were therefore unable to effectively meet their main obligation, which is payment of claims.”

Beyond failure to pay out claims, the financial constraints faced by insurers, because of ballooning premium debtors, also resulted in them failing to meet other operational and statutory obligations, such as compliance to prescribed assets requirements.

In Zimbabwe, prescribed assets are a tool to unlock resources for investments that contribute to social and economic development.

According to IPEC’s second quarter report, only eight out of the 20 short-term insurers were in compliance with the minimum prescribed asset ratio of 10 percent.

Notwithstanding the direct impact of ‘insurance on credit’ to short-term insurers, the problem had also hamstrung reinsurers.

For the second quarter of 2023, premium debtors accounted for 32,08 percent of short-term reinsurers’ total assets, which limited their capacity to meet their obligations.

The problem with this is that reinsurers are an important shield for insurers, especially in cases of significant disasters.

According to the Organisation for Economic Co-operation and Development (OECD) in a 2018 paper titled ‘The Contribution of Reinsurance Markets to Managing Catastrophe Risk’:

“The use of reinsurance can also contribute to reducing disruption in the insurance market following catastrophic events. A large catastrophe event resulting in significant losses could have a number of consequences for primary insurers, including an increase in claims and combined ratios and, in the extreme, a depletion in capital.

“In response, primary insurers may increase the price for coverage with implications for the future availability and affordability of primary insurance. If a significant share of losses is covered by reinsurance, the impact on primary insurers would be expected to be lower.”

The Covid-19 pandemic tested the resilience of many insurers and reinsurers across the world.

But in Zimbabwe, these entities escaped largely unscathed, because the health pandemic was a black swan event.

Most insurance policies in the local short-term insurance sector did not cover loss of profits as a result of the Covid-19 pandemic.

But can local insurers escape predictable disasters?

The National Oceanic and Atmospheric Administration has since confirmed a strong El Niño event taking place between October 2023 and March 2024, which is expected to have adverse effects on rainfall patterns in the Southern Africa region, potentially leading to drought conditions.

Local farmers’ worst fears are slowly being confirmed.

As at December 10 2023, the wet season in Zimbabwe had yet to start in earnest.

All things being equal, the wet season typically starts between early and mid-November.

Given these developments there is a likelihood that agricultural insurance claims will spike in 2024, and insurers will require reinsurance cover.

Agriculture insurance aside, the El Niño phenomenon also brings with it threats of cyclones and flooding, which could result in a spike in property insurance, business interruption insurance, funeral insurance, motor insurance and other forms insurance.

The Southern Africa Regional Climate Outlook Forum has forecasted that at least 13 cyclones could hit Southern Africa during the 2023 – 2024 rainfall season.

In 2019, Zimbabwe was affected by Tropical Cyclone Idai, which is believed to be one of the worst tropical cyclones on record to affect Africa and the Southern Hemisphere.

The total damage caused by Tropical Cyclone Idai in Madagascar, Mozambique, Malawi, and Zimbabwe is estimated to be in the region of US$3 billion.

The World Bank estimated the cost of direct damage to Zimbabwe at around US$622 million, a figure that would have strained the country’s insurance industry.

Responsible underwriting practices will ensure a stable and sustainable insurance ecosystem.

IPEC expects insurers to clear all legacy premium debtors by December 31 2023, and to clear premium debtors by May 26 2024.

Clearance of premium debtors will ensure that both the country’s short-term insurers and reinsurers will be on a sound financial footing in the new year, thereby in a better position to deal with significant upheavals going forward.

DOWNSIDE

On the flip side, the “no premium, no cover” could negatively impact the uptake of insurance products in the country.

Motor insurance (with third party insurance compulsory in Zimbabwe) and funeral insurance aside, the uptake of insurance products in Zimbabwe is generally low.

The country’s insurance penetration ratio is estimated to be around 2,6 percent.

Industry players say ‘insurance on credit’ emerged largely as a result of ‘cash management’ issues on the part of clients, that is, their preference to pay annual contracts on a monthly or quarterly basis.

To this extent, the removal of ‘insurance on credit’ could negatively impact insurance uptake, given the lack of insurance premium financing from banks.

Realising this potential downside, the industry has said efforts are underway to boost the availability of insurance premium financing.

“The industry is in discussions with financial institutions to provide insurance premium financing. This will come in to assist those clients that cannot afford the premiums upfront,” said ICZ technical committee chairperson Mr Brian Chirema.

“Insurance premium financing does come in with a bit of a cost, but when you look at the ultimate benefits that the clients also get for paying their premiums, and what will also happen to the industry at large, we have to agree that the benefits far outweigh the initial and temporary reduction in premiums.”

Finance, investment and risk analyst Mr Malvin Chidzonga said the introduction of the “no premium, no cover” regulations could provide an impetus for insurance premium financing.

“After IPEC did away with the issue of insurance on credit, I strongly believe that this is the right time for microfinance institutions to resuscitate insurance premium financing.

“Since we in a multi-currency system, the loan product can be offered in US dollars, which takes away inflation risk,” he said.

“And since insurance premium financing is a short-term product, that limits currency risk.”

It is however important that the local banking sector offers affordable insurance premium financing, as individuals may be unwilling or unable to absorb the interest charged on the loans.

While a dip in premiums can be expected in the short-term, the “no premium, no cover” policy will ensure overall resilience of the insurance industry in the long run.