'Funeral insurers overcharge clients'

Zimbabwe's funeral insurance players may be overcharging clients, the latest sector report from the Insurance and Pensions Commission suggests. The regulator has noted significant incongruity between the players' assets and liabilities in the year to December 2020.

There was a noted increase in the sector's premiums and assets during the year, but technical liabilities did not follow suit.

"Increase in technical liabilities has been low as compared to the increase in premiums and assets during the period under review. This is indicative of continued mismatch in the asset-liability profiling of funeral assurers' balance sheet.

"This may imply that policyholders are being overcharged given that policyholder benefits have not been tracking premium increases during the period under review," said IPEC.

"This anomaly can be addressed by the adoption of local mortality tables that are currently under development to improve the accuracy of reserves, as well as appropriately price the products. Policyholders will hence not be prejudiced and the industry will guard against reputational risk that is detrimental in the long-term."

According to the report, total technical liabilities for the funeral assurance sector increased by 2,13 percent from $217,28 million from the prior quarter to $221,92 million. The regulator said future policyholder benefits were the major component constituting 99,7 percent of technical liabilities.

The balance (0,3 percent) was composed of unearned premium reserve, incurred but not reported losses and gross outstanding claims. The increase in liabilities per se has the potential of further constraining local funeral insurers' capacity to meet their obligations as it reduces the level of eligible own funds. The sector's assets are already heavily invested in immovable property at 89,6 percent.

"The Commission continues to implore sector players to be more cautious and hold assets that match their liability profiles in view of the policies with cash benefit components," said IPEC.

"Asset classes such as equities, cash and money market investments were held in very small proportions relative to the overall asset portfolio."

But although equities and cash are still good assets to hold in an environment that faces some inflationary pressures, the local money markets have generally underperformed, especially as authorities keep a tight leash on interest rates.

Money market basically refers to the market where all short-term financial instruments that relate to interest rates are traded. But due to sub-inflation interest rates, money market assets in the country have generally lost value over time.

The Reserve Bank of Zimbabwe (RBZ) has maintained the bank policy and medium-term lending rates at 35 and 25 percent, respectively. For the year under review, the funeral assurance industry's inflation adjusted gross premium written (GPW) increased by 76,81 percent from $34,56 million $61,11 million.

Profit before tax for the funeral assurance industry increased in absolute terms by 830 percent from $5,04 million for the year-ended December 31, 2019 to $46,88 million. But in real terms the profit before tax increased by 107 percent from $5,04 million for the year-ended December 31, 2019 to $10,45 million.

And as at the close of the year, just three out of the eight funeral assurers reported capital positions that were compliant with the regulatory minimum capital requirement of $62,5 million.