Between a Rock and a Hard Place – Insurance in a New Dispensation

Between a Rock and a Hard Place – Insurance in a New Dispensation

HARARE, Insurance companies in Zimbabwe are currently faced with two very unpalatable options.

The first option is to continue to accept insurance premiums without adjusting for inflation, but this would leave their insured customers facing a significant shortfall between their insurance payouts and the replacement costs of insured equipment, vehicles and houses.

This serves to reinforce the perception that insurance itself is wasteful and not a useful tool in mitigating against the risks of loss.  As this perception grows it undermines consumer confidence in the industry and the pool of prospective policy holders shrinks – to the detriment of all.

In terms of vehicle insurance the underinsurance option also provides unethical players in the market with a quick route to enrichment at their policy holders’ expense,  Whenever there is a claim, the under insured vehicle is written off, the policy holder paid out, and the insurer left selling the “salvage” for considerably more than the value of the pay out to the policy holder.

It is an interesting anomaly that IPEC (the Insurance and Pensions Regulatory Authority) has not investigated and regulated the web of conflicting interests and common shareholdings that exist between short term insurers and enterprises that specialize in vehicle repairs and sales in Zimbabwe.  Improving transparency and ethical business practices should surely be a priority for any regulator.

But the second option is the more ethical, but more perilous for any insurers book of business.  This would be to adjust insurance premiums for inflation (i.e. to match premiums with real replacement costs).

But with an electronic RTGS USD currency trading at 3.5 to the cash USD, this means an increase of at least 350% in premiums, which is unaffordable to many policy holders.

The fact of the matter is that very few Zimbabwean consumers have yet come to terms with the rapid and dramatic diminishment of their earnings ability to purchase just about anything at all.  So they are very unlikely to be willing or able to pay premiums based on the real value of the insured items.

In reality 100% of the insured pay premiums, but a significantly lower percentage is going to experience a claim.  So the moral hazard facing insurers is that market forces incentivise them to follow the first course of action – permit their policy holders to under insure, because then they will only face the wrath of the minority of disappointed policy holders making claims.

The majority of policy holders who will not claim, will continue to afford and pay the premiums in wilful ignorance of their plight. By Nathaniel Mundowozi. He is an Executive Director at Hucklib PVT LTD.