Zimbabwe loses US$40m through policy cover externalisation

Zimbabwean insurers and reinsurers should strengthen their capital positions in real terms to reduce cover policy externalisation which has cost the country an estimated US$40 million in 2018 alone in externalised premiums, insurance experts have said.

Should local companies be well capitalised, the country would be making huge savings in US dollar terms.
The amount of externalised funds in 2018 could have hit US$115 million had the local companies not assumed the risk.

Externalisation normally occurs when reinsurance brokers and reinsurers have exhausted local capacity. The business placed through this is estimated at between 15%-20% of the total externalised premiums.

Another form of externalisation occurs when reinsurers buy their reinsurance from the overseas markets. This is also called retrocession.

The law requires that before any risk is externalised, the local market capacity must be fully utilised. This is done by circulating a market slip where all insurers and reinsurers are given the opportunity to partake on the risk.

ZEP-RE (PTA Reinsurance Company) regional director - Southern Africa Hub Jeph Gwatipedza says in 2017 only US$40 million was used to buy reinsurance locally while US$41 million was used in FY 18.

Gwatipedza says on average Zimbabwe reinsurers place 31% of their gross written premiums on the external market a figure quite high compared to international benchmarks which peg this ratio at around 25%.

"The reason for this is that our local reinsurers use these retrocession arrangements as part of their capital management strategy. This ratio has been static .Without local reinsurers Zimbabwean insurers could have sourced their reinsurance capacity from the external market and in 2017 and 2018 this could have cost the country a combined US$210 million in foreign currency. However buying reinsurance locally only US$40 million was used in 2017 and US$41 million in 2018," he said.

Insurance Council of Zimbabwe technical administration officer Nicholas Sayi projects the externalisation going deeper in the current year to 2020 should big corporates fail to capacitate their balance sheets.

However, he says the insurance sector is poised for growth each substantial year if they should they build their capacity to enable them to cover mega risks.

"The appetite for externalisation is low. Right now we are dealing with problem of capacity. Ordinarily strengthening balance sheets could spell growth prospects," she said.

Insurance and Pensions regulator (Ipec) said Insurers and reinsurers in the country have not been showing much appetite to retain risks denominated in foreign currency because of their weakening balance sheets with the number of forex-denominated risks coming up for externalisation has been on an upward trend.

Ipec director for insurance and micro-insurance department Sibongile Siwela said the regulator did not have a database of the externalisation record, she said potential claims costs could reach into millions of dollars in some of the cases.

"We do not have a database as yet of this record, so it will need more time to compile the figures as we would have to go through all the files and tabulate figures over the years. Possible solutions would be for Insurers/reinsures to strengthen their capital positions in foreign currency denominated terms, by holding assets, which will create enough reserves to accommodate future US dollar claims. Potential claims costs can reach into millions of dollars in some of the cases. Improved capacity will therefore, help insurers to retain more of the risks," she said.

There have been calls government to continue to protect the local industry to reduce the externalisation of premiums causing a further drain to the already depleted forex reserves.