Insurance Business in Zimbabwe – How to guard against a recession
Staff Reporter
HARARE, Insurance industry take its cue from the fortunes of the financial sector and is directly affected by the movements at the macro-economic level. Economic growth spurs insurance activities and a recession creates manifold problems for the insurance industry. Economic agents who needs to buy insurance for themselves or entrepreneurs who want to start an insurance business should familiarize themselves with economic cycles (i.e. the downward and upward movement of GDP around its long-term growth trend which include expansion, peak, recession, depression, trough, and recovery). Knowing the specific vulnerabilities and opportunities that insurance companies face can help all agents to make better decisions for your business.
In Zimbabwe most of the economic indicators are reflecting an economic recession or contraction. Zimbabwe capacity utilization declined from 48.2% in 2018 to 36.4% in 2019 and is projected at 27% in 2020. According CZI report headwinds are stronger as 78% of firms project that the economy will be in recession in 2020. CZI report further reveals that local demand is falling as private consumption declined. Private consumption is estimated at 59.0% in 2019 and 55.4% in 2020. IMF has revised downwards Zimbabwe’s economic outlook projecting it grow marginally by 0.8% from the initial projection of 3.3%. The economy faces strong headwinds which include drought, rising inflation, shortages of foreign currency, electricity and fuel.
Businesses in every industry feel the effects of a recession, particularly when the downturn is severe or long-lasting. Fortunately, insurance companies can take steps now to preserve their strengths, shore up weaknesses and perform more effectively during periods of consumer and economic uncertainty.
In a recession, life insurance business is likely to see even bigger erosion in volumes and profits. Employee benefit schemes, workmen’s Compensation, Medical insurance, Group life and Personal accident insurance, etc. are likely to take maximum hit. With the investment portfolio almost gone, most unit-linked policies, pension funds and other investment backed insurance products shall show negative NAV (Net Asset Value) and consumer confidence shall further plummet. Policy holders are already requesting cancellation of their policies in order to preserve value for money in this moment of crisis. All this doesn’t bode well for the insurance sector.
Retail insurance sector has similar problems. Low consumer confidence and stringent lending norms for retail customers by banks have led to reduced demand for products and services. Ongoing foreign currency shortages to import vehicles and spare parts is directly affecting the motor insurance premium due to a dearth in the demand of the service. Reduced sale of property is resulting in reduced premium income on mortgage insurance and householders’ insurance.
In order so to survive in the insurance industry customer relationships remain one of the most important assets for companies that seek to weather a recession. To thrive in any economic climate, it is imperative for insurers to identify their most loyal and highest-margin customers and to protect their company’s relationships with them. In the event of a dearth in business, rather than cutting costs across the board, insurers should be ready to shift resources to retain their high-margin customers. One way to strengthen customer relationships now is to focus on aligning internal culture with external branding.
Other ways to protect an insurance business in a recession includes: Provide all customers with a free financial review (not only will your clients appreciate you taking the time to provide this extra service, you may help clients uncover strategies that open up cash flow); Review the products that give people comfort in a bad economy (i.e. discovering what your clients are concerned about and look for a solutions that fits their needs); Provide free insurance and financial seminars for the community that address financial issues related to the recession (partnering with mortgage officers, financial planners and tax advisers to create more value for your clients); Look to provide clients with adequate coverage that is flexible in design (i.e. showing clients how investing in products like a universal life policy which can cover both death and retirement); Find ways to reduce premiums for clients( this may likely take a knock on premiums but it also gives clients a reason to stay with you and refer your product to friends and family.
