Business Reporter
The proposed Policyholder Protection Fund for the insurance and pension industry is a welcome development as it will help assure policyholders that they will receive compensation due to them upon the occurrence of an insured event, the Insurance and Pensions Commission (IPEC) has said.
The insurance and pension industry regulator said given the critical role played by insurance in the growth of the economy, it is critical that the market is stable against any market shocks or failure.
IPEC’s remarks come as Treasury plans to establish a Policyholder Protection Fund (PPF), administered by an Independent Board of Trustees meant to create a pool of resources similar to the Deposit Protection Fund.
Membership is mandatory by law for all deposit-taking institutions registered under the Banking Act (Chapter 24:20), Building Societies Act (Chapter 24:02), People’s Own Savings Bank (POSB) Act (Chapter 24:22), Infrastructure Development Bank of Zimbabwe (IDBZ) Act (Chapter 24:14) and Micro-finance Act (Chapter 24:29).
The deposit protection scheme for banks contributes to financial stability and prevent bank runs if depositors have confidence that they will have access to their funds quickly when a bank
fails. The fund will be modelled along the same fashion.
In his 2019 National Budget Statement, Finance and Economic Development Minister Professor Mthuli Ncube, said the PPF is meant to protect clients in the insurance and pension industry.
“In order to create a pool of resources similar to the Deposit Protection Fund, a Policy Holder Protection Fund is being established and administered by an Independent Board of Trustees.
“The Fund, which is meant to protect clients in the insurance and pension industry, will be made up of proceeds from the Guardian Fund, complemented by other contributions from insurance and pensions industry,” said Prof Ncube.
IPEC’s Acting Head Insurance and Micro-insurance Mr Nhau Chivingira, said given the critical role played by insurance in the growth of the economy, the development of a Policyholder Protection Fund is critical.
“While sound prudential regulation is a major component in ensuring that the industry operates in a sustainable and sound manner; at the heart of the development of this sector is the confidence consumers have that they will receive the compensation due to them upon the occurrence of an insured event.
“Once consumer confidence is lost, its effects can have ripple effects throughout the financial system,” said Mr Chivingira.
He said while sound regulation is important for promoting the stability of financial institutions, these institutions will, from time to time, fail in a market-based economy.
“Accordingly, there is a strong case to ensure appropriate and timely protection for customers. Policyholder Protection Funds are one way to protect policyholders against loss if an insurer is placed under judicial management, liquidation or ceases to be a going concern,” Mr Chivingira said.
International Financial Institutions such as the International Association of Insurance Supervisors (IAIS), the World Bank and the Organisation for Economic Co-operation and Development (OECD) among others recognise the role of Policyholder Protection Funds in maintaining consumer confidence in the insurance sector especially during the post-financial crisis.
Experiences from countries where such schemes have already been tested support initiatives to establish and strengthen policyholder protection.
Mr Chivingira said the development of sound regulatory and supervisory frameworks to reduce the risk of harm to consumers are incomplete without the protection of the interests of policyholders.
He said the fundamental objective of a PPF is to guarantee, partially or in full, payments made pursuant to insurance contracts in the event that an insurer fails or its licence is revoked.
“In so doing, a PPF provides important financial security to policyholders, particularly the economically vulnerable and for insurance lines or products containing an element of social protection. In this vein, the PPF seeks to ensure confidence in the insurance sector and thus foster the stability of the sector.
The proposal to establish a PPF comes at a time pensioner and policyholders who lost on their investments after the country’s economy was ravaged by hyperinflation.
Government has since adopted of the Justice Smith-led inquiry into the conversion of insurance and pension values, and has mandated IPEC to implement the necessary reforms to improve governance of insurance and pension entities, as well as supervise implementation of the compensation framework.
This is to ensure that prejudiced members of the insurance and pension schemes get their benefits without compromising stability and confidence in the industry. Mr Chivingira, however, said a PPF alone will not be adequate without sound prudential regulations.
“While a PPF is important in ensuring confidence and the stability of the insurance industry, sound prudential regulation is a major component in ensuring that the industry operates in a sustainable and sound manner.”
Commenting on whether the industry has the capacity to fund the proposed PPF which seems to come as an additional cost to players, Mr Chivingira said while the PPF has cost implications on the insurance industry, its funding framework is an integral component of an effective safely net, that enhances financial inclusion.