Insurance is less complicated than it sounds, being basically a way of sharing risk.
But it does rely on some good data, good calculations and a big enough group sharing the risk.
To take one simple example, vehicle insurance. Everyone knows that a certain percentage of vehicles will be involved in accidents next year, say 10 percent. But no one knows which vehicles will constitute the 10 percent. Insurance means that if everyone pays 10 percent of the average cost of repairing or replacing a vehicle, then there will be enough money in the pool to do the repairs.
Of course, there is need for administration costs, commissions for sales people and the like. But the basic idea is there. While statistics can give an insurer a good idea of the risk, calculating the needed size of the cash pool is now very difficult in Zimbabwe.
If you ask a score of thoughtful educated people how much a car repair will cost in September next year, you will get a score of widely differing answers, because no one really knows until we do get full monetary stability to back our growing fiscal stability.
So, that is one serious problem facing both insurers and the insured.
Insurers may not have enough cash to pay out the claim if they got their sums wrong, or the insured person may find that the payout is far below what is needed because the initial sums were wrong.
We have seen this frequently in recent months, with the rather pathetic limits on third party vehicle insurance, limits that usually cover only a minute fraction of the actual cost theoretically borne by the person to blame for the accident.
That has the side-effect of meaning a higher cost for the comprehensive insurer of the innocent party, as the claim effectively moves from the insurer of the perpetrator to that of the victim, mucking up everyone’s sums.
Then there is the intense competition in the insurance industry.
This is not just the usual business battle for market share and profit. Insurers need a big pool if the statistics are going to work. So the double pressure to add to numbers is intense.
And this has resulted in undercutting, insurers paring their margins to the bone and perhaps taking some over-optimistic views of how exchange rates, costs and the like are going to move in the next 12 months.
So, we have insurance firms struggling to stay viable due to the compromised solvencies, and delays or even failure to pay claims has been evident.
An insurance firm may at some point feel that its expense ratio is adequately low that they can easily undercut premiums.
And the practice may continue “unpunished” for years, but normally there is always a breaking point.
Despite the harm undercutting insurers do to themselves, the real pain is felt by the “apparently insured” individual who gets nothing at experiencing some kind of loss.
With the Zimbabwe’s insurance sector being as competitive as it is — 23 firms chasing few clients (official figures show that the country’s insurance penetration currently stands at just 2,7 percent) — the impact can have systemic consequences.
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.
Monetary reforms this year, setting up the interbank market and then ending the multi-currency system have put a great deal of pressure on insurers who did their sums in December last year and are now expected to pay out in December this year.
And because one insurer undercuts its premiums, others try to remain competitive by reducing their prices as well, and the long-term consequences are, therefore, felt sector-wide and economy-wide.
In view of the huge negative impact of such unethical behaviour, it is critical that not only the insurance firms do what is right, but the regulator — the Insurance and Pensions Commission) — plays its role to ensure that the industry adheres to the regulations on premiums because undercutting results in both the loss of the premium and the expected outcomes.
There is need for constant policy reviews by the regulator to ensure beneficiaries do not continue to lose insurance value.
There are sad cases of people who are now withdrawing from insurance services because of mistrust and confidence issues, a serious issue that needs to be addressed.