Tawanda Musarurwa
FOR years, the Government has tried to nudge local insurers into playing a bigger role in economic growth.
With their typically deep pockets, insurance companies seem like the perfect candidates to bankroll development.
But instead of revving the economic engine, the country’s insurers seem to have parked in neutral, clinging to the safety of investing in securities.
Are they being prudent stewards of policyholders’ funds, or are they missing the chance to fuel Zimbabwe’s economic growth?
Under section 26 of the Insurance Act (Chapter 24:07), local insurers are required to hold a portion of their assets in “prescribed assets” – investments deemed critical for national development.
But in the 2024 National Budget, Finance, Economic Development and Investment Promotion Minister Professor Mthuli Ncube flipped the script.
Rather than dictating where insurers should invest, he invited them to pitch their own projects.
If the ideas were solid enough, they could earn prescribed asset status.
“The Reviewed Procedure and Process Manual is envisioned to guide the assessment of the suitability of a financial instrument to be granted a prescribed asset status and ensure that the primary objective of mobilising long-term savings towards national development is met,” said Minister Ncube in the 2024 Mid-Term Budget and Economic Review statement.
It was a clever move.
Insurers have long grumbled about the ‘quality’ and ‘scope’ of availed prescribed assets, arguing that they cannot gamble with policyholders’ money.
And they are not wrong.
Insurance is, after all, a business built on trust.
Policyholders hand over their premiums expecting their claims to be paid, not to fund risky ventures.
But here is the rub: while insurers are playing it safe, the economy is stuck in first gear.
As at June 30, 2024, only six of the country’s 19 insurers were meeting the minimum prescribed asset ratio of 10 percent.
For the same period, short-term insurers reported total assets to the tune of ZWG3,24 billion, but total investments in prescribed assets amounted to just ZWG160,12 million.
Even then, their investments were hardly transformative.
Treasury Bills, corporate bonds and private equities dominated their portfolios – safe bets, sure, but not exactly the stuff of economic revolutions.
As the Insurance and Pensions Commission (IPEC) noted in its Second Quarter 2024 Short-term Insurance Sector report, the “low uptake of prescribed assets is still worrying.”
So, why the caution?
The answer lies in Zimbabwe’s tumultuous economic history.
Hyperinflation, currency instability and the lingering scars of the 2009 currency collapse have made insurers understandably risk-averse.
In such a volatile environment, corporate bonds and Treasury Bills are like financial life jackets: they may not get you far, but they will keep you afloat.
But this safety-first approach comes at a cost.
Zimbabwe needs significant funding.
With the country shut out of multilateral loans (due to international economic sanctions) and sitting on over US$18 billion in public debt, there is little fiscal space for big projects.
The road network alone, for instance, requires an estimated US$2 billion a year just for maintenance, according to the 2019 Zimbabwe Infrastructure Report by the African Development Bank.
Insurers, with their considerable capital reserves, could help fill this gap.
Zimbabwe is also still largely dependent on rain-fed farming, which is a recipe for disaster in a drought-prone region.
Insurers could invest in irrigation infrastructure, making the sector more resilient and increasing productivity.
Economist Ms Gladys Mutsopotsi-Shumbambiri recently pointed this out at the Insurance Institute of Zimbabwe’s annual conference:
“It is also evident that there is need to deepen investment in irrigation infrastructure to build resilience against the impact of droughts.”
The same applies to the mining sector, which accounts for 60 percent of the country’s export revenues.
Mineral prices have been weak during the first six months of this year.
For instance, lithium prices fell by 72 percent, nickel dropped by 20 percent and coal saw a 13 percent price decline.
Currently, Zimbabwe exports raw minerals and imports refined products at a markup.
According to the Minerals Marketing Corporation of Zimbabwe, during the first half of this year, a total of 1,9 million metric tonnes of minerals were sold, valued at US$1,5 billion.
While this marked a 25 percent increase in sales volume from the same period last year, revenue still fell short of the US$2,03 billion target by a full 26 percent.
The gap between raw mineral exports and real profits is evident here, and it points to a significant issue: Zimbabwe’s lack of beneficiation.
Investing in local mineral processing facilities could change that equation, creating more value and keeping wealth in the country.
On another note, insurers can help fund emerging businesses in the country.
In fact, Minister Ncube’s appeal to insurers to initiate their own projects for prescribed asset status consideration was specifically based on the need to increase funding for small-to-medium enterprises.
By funding SMEs, insurers can contribute to the country’s structural transformation.
Sustainable Development Goal (SDG) 9 emphasises the transition from low to high productivity.
To the extent that local insurance companies operate optimally, they can have the capacity to contribute to Zimbabwe’s structural transformation.
Yet, for now, they seem content to collect interest from the sidelines.
A self-defeating strategy
It is a self-defeating strategy.
A thriving economy creates jobs, raises incomes and boosts demand for insurance products.
By shying away from productive investments, insurers may be undermining their own long-term prospects.
Part of the problem could be the sector’s regulatory framework.
Strict capital adequacy requirements may be pushing insurers toward safer assets.
However, the regulator is revamping its solvency regime through the implementation of the Zimbabwe Integrating Capital and Risk Programme (ZiCARP), which links the capital requirements of insurers to their risk profile.
Nonetheless, regulation for the insurance sector is unavoidable.
“Market failures such as economic crises justify regulation,” says IPEC director of insurance and microinsurance Mrs Sibongile Siwela.
“Many insurance companies were closed post-dollarisation in Zimbabwe in the period 2009 to 2017.”
Meanwhile, the country’s limited capital markets offer few alternatives to bonds and private equities.
Zimbabwe’s capital markets consist of three registered exchanges – the Zimbabwe Stock Exchange (ZSE), the Victoria Falls Stock Exchange (VFEX) and the Southern Africa Mercantile Exchange, which was licensed in 2023 and is yet to operate.
The country currently has two real estate investment trusts (REITs) — Terrace Africa’s Tigere Property Fund, which was listed on the ZSE in November 2022; and the Revitus Property Opportunities REIT Fund, which was listed in December 2023.
And there are five exchange traded funds (ETFs), namely the Old Mutual Top 10 ETF (which was the country’s first ETF, listed on the ZSE in January 2021); the Morgan & Co Multi-Sector ETF (January 2022); the DatVest Modified Consumer Staples ETF (March 2022); the Morgan & Co Made in Zimbabwe ETF (June 2022); and the Cass Saddle Agricultural ETF (July 2022).
There is one commodity fund – the Zimbabwe Mercantile Exchange – which is operated by the Financial Securities Exchange (Private) Limited.
And in the fixed-income space, there is the Karo Bond on the VFEX.
But there are glimmers of hope.
Some private players are beginning to explore infrastructure bonds and venture capital funds – for example, Datvest-Coutic Investments’ US$3,5 million issue for the development of a specialist hospital and New Glovers (Pvt) Limited’s US$8,3 million solar energy project in Kwekwe (both granted prescribed asset status); signalling a shift toward more proactive investment strategies.
Policymakers, too, are waking up to the problem.
Efforts to deepen capital markets and improve the business environment could encourage insurers to take on more risk in exchange for higher returns.
For instance, last year the VFEX engaged international brokerage firm, VCG Markets to introduce contract for difference (CFD) trading on the bourse.
But CFDs, however, may not be the best option for insurers because they are highly speculative financial derivatives.
While the investing path will always be fraught with challenges, opportunities abound.
Zimbabwe’s insurers must strike a delicate balance: safeguarding policyholders’ interests, while embracing their role as engines of economic growth.
The local insurance sector has significant scope to expand its role in the economy.
According to World Bank data, insurance company assets to gross domestic product in South Africa was reported at 60,14 percent in 2020.
The United Kingdom’s total insurers’ investment portfolio was equivalent to 74,4 percent of the country’s GDP during the same period.
After all, isn’t insurance about managing risk?
It is time for Zimbabwe’s insurers to practice what they preach – and start investing in the country’s future.
A little more ambition could go a long way.
With the right investments, insurers might just find that the safest bet is on Zimbabwe itself.
ORIGINALLY PUBLISHED IN THE SUNDAY MAIL – https://www.heraldonline.co.zw/are-local-insurers-playing-it-too-safe/