eBusiness Weekly
Tawanda Musarurwa
Sometimes an insurance firm thinks that its expense ratio is so low, that they can easily undercut premiums…
It’s the basis of thinking of this anonymous (for obvious reasons) local insurance player:
“Each company has its own philosophy and strategy that it adopts. If underwriting at 2 percent can make an insurance business go under, then it should be so. But if underwriting brings more money to the table then why should a regulator prohibit it?”
And the problem is that this line of thought has increasingly become more common in Zimbabwe’s insurance sector as economic challenges have made competition in the sector an extremely cut-throat one.
This comes as the level of mistrust of insurance in the country is sky high, largely due to macroeconomic factors that are not the fault of the individual insurance players themselves.
In February this year, Zimbabwe’s monetary authorities responded to calls for a free floating exchange rate system and set up the foreign currency interbank market.
And in June the Government effectively ended the long-standing multicurrency system and re-introduced the Zimbabwe dollar through Statutory Instrument 142 of 2019.
Between February and October 2019, the local currency (RTGS dollar, then later Zimbabwe dollar) has moved from trading at a rate of 2,5 to the United States dollar, to around 15 to the US dollar on the interbank market.
But a perhaps unexpected (or expected) consequence has been the drastic depreciation of the Zimbabwe dollar against the US dollar.
Although most sectors of the economy have been affected, the insurance sector – with a present penetration rate of 2,7 percent according to data from the Insurance and Pensions Commission (IPEC) – has been especially hit hard.
It’s the second round of value loss that the economy and the sector in particular has had to deal with within a span of a decade.
And with 23 insurance firms chasing the few that still have faith in insurance, stiff competition and consequently some unethical business practices have become the order of the day.
Now, with the local insurance sector now extremely competitive, when one insurer undercuts the rates that are being charged, others tend to try and remain competitive by reducing their prices as well, and the long-term consequences can be dire.
Said Dr Elizabeth Wyns-Dogbe, managing director of Ghanaian insurer SIC Life Company Limited and vice president of the Association of Insurers and Reinsurers of Developing Countries (AIRDC) in a recent visit to Zimbabwe:
“Whether it is due to lack of technical skills to calculate risks and reserves or just turning a blind eye, it has become a habit of underwriters to employ such uncompetitive strategies, unfortunately for short-term gains.
“What have these perceived competitive strategy done to the market? Insurance operations are struggling to stay viable due to compromised solvencies, delays or even failure to pay claims is evident in some firms.”
Notwithstanding the damage undercutting insurers do to themselves, the real pain is felt by the ‘apparently insured’ individual who gets to claim nothing at experiencing some kind of loss.
Competition seems to lie at the heart of the undercutting problem. A 2016 research paper titled ‘Factors Influencing Price Undercutting in the Insurance Sector in Nakuru County, Kenya’ showed that stiff competition as far back as 2008 was a major cause of price undercutting.
The paper stated that collection of revenue under optimum levels resulted not just in reduced revenue but also mergers of insurance firms and the collapse of several firms.
But what other factors have been driving the undercutting problem in Zimbabwe?
An industry player who chose to remain anonymous said:
“It’s tricky. Insurance is a niche of business, initially we were in a monopoly kind of situation but the sector has been deregulated. Now you end up with two kinds of players – the ones who are owned by Government, who are not necessarily there for profit but exist to promote the business. Whereas on the other hand they are private players who are in it for the profit, so they will come up with these rates, which are much lower because profit is not necessarily the motive, because for example they might say their goal is to ensure that exports are covered or goods that are being sold on credit are insured.
“The other type of player will be saying no, business has to be profitable and that’s where the dilemma comes in. We are saying to move from such a scenario there has to be some minimum rates, whether one is into making profits or one wants to promote business.
“When you see customers moving from insurer to the other within a short period of time, it is because of undercutting of premiums, but if its standardized there won’t be any problems.”
Zimbabwe’s insurance sector regulator says the issue of undercutting is being dealt with on a company-to-company basis, at association level.
“There are no undercutting complaints that have been received by the regulator. Undercutting should be reported by the aggrieved party, in this particular instance it will be one player against the other,” said IPEC Commissioner Dr Grace Muradzikwa.
“The various (insurance) associations have been trying to self-regulate, and this is where if a player has got a complaint they tend to report it there and is able to deal with it in-house. So those kind of complaints have not been coming to IPEC, but they different associations have been handling them.”
It seems though that undercutting remains a daunting problem for local insurers, but Zimbabwe can draw lessons from how other countries in Sub Saharan Africa have dealt with the problem.
“In Ghana we resisted an arrangement where the regulator would have imposed a tariff on us. We sat as players in the industry, determined a tariff and approached the regulator with a recommended tariff.
“Because as players sometimes we forget the other important stakeholder (the customers), we had to get buy-in of the insuring public on the tariff,” says Dr Wyns-Dogbe.
“Undercutting will not work for you. I’m sure you use mortality tables (in determining a tariff) and if this is the case I’m sure there is a basic rate that you will need to charge so that you will be able to pay claims.
“There must be that rate that you cannot go below because if you go below that rate everybody will know that you cannot generate enough money and will have to resort to dipping into shareholder funds.”
