‘Turn to banks for premium financing’

This comes amid the ‘no premium, no cover’ promulgation, through Statutory Instrument (SI) 81 of 2023, which states that there will be no cover in respect of an insurance risk unless the premium is paid in advance.

THE Insurance and Pensions Commission (Ipec) has urged insurance companies in the country to engage banks for premium financing in relation to agricultural insurance, businessdigest reports.

This comes amid the ‘no premium, no cover’ promulgation, through Statutory Instrument (SI) 81 of 2023, which states that there will be no cover in respect of an insurance risk unless the premium is paid in advance.

According to the SI, short-term insurers and brokers are now prohibited from providing insurance coverage on credit and insurance coverage at inception or renewal of a policy shall be activated upon payment of the required premium.

But, the sector has been battling when it comes to insuring or collecting premiums, especially from tobacco farmers.

“We are asking the industry to be innovative in dealing with this challenge,” Ipec actuarial director Robson Mtangadura told businessdigest recently.

“For example, the insurance companies can make arrangements with banks for premium financing, where instead of offering cover on debt; the bank will pay the premium in advance and debit the amount to the farmers’ bank account,” he said.

“When the farmer sells his or her products, the proceeds will go through the bank account and the bank can recover the money.”

Basically, premium financing is a loan that is taken out to pay for an insurance policy, with the policy itself serving as collateral for the loan. 

The loan is paid back over time, typically with interest, and once the borrowed funds is paid off, the policyholder owns the policy outright. Mtangadura said the other option, especially for contract farming, would be for insurance companies to work with agriculture financing companies, who provide inputs and other services to farmers.

This would be to load the insurance premium in advance, pay the insurance company and recover it from the farmers later with other advanced funds.

The Ipec official said the industry needed to be innovative and collaborate with other stakeholders in the agriculture value chain.

“Otherwise, the insurance companies will run a risk where they have a significant amount in premium debtors, which may be difficult to recover,” Mtangadura said.

“So, if you know that it is mandatory for a farmer to pay premium upfront, the insurance company can possibly engage in contract farming, for the money to be paid through the bank.

“For example, if you have an arrangement with CBZ, the bank will pre-fund that insurance premium and recover from the sales. Or you go to a contractor and say, you know what, if this farmer experienced any loss, you may not recover your money.

“So, at the margin of 1% for example in terms of the total cost, pay that as a premium. If there is any loss, I will also come in and pay,” he said.

Mtangadura said the margin would be part of the advance funding from the contract.

“So, these are some of the innovations that we are asking our industry,” he said.

This is also coming at a time banks have, for a long time, battled to advance any loans to farmers on the back of 99 year leases stalemate.

The 99-year leases are an ownership arrangement that the government came up with to avoid giving title deeds for recaptured farm land.

However, the banks have been reluctant to lend unless such property is under the borrower.

“The margin to cover premium is a small percentage of the expected loss, the risk is short term and aligned with most banks' risk appetite. Hence, most banks must be in a position to take the risk and recover in the event of unexpected losses,” Mtangadura said.

The no premium, no cover came about as the issues of premium debts had become topical.

Insurance Council of Zimbabwe chairperson David Nyabadza said the policy was coming as a relief to the industry.

Premium debtors had increased from ZW$15 billion in June 2022 to ZW$180,4 billion by June 2023.

“The short-term insurance industry was providing insurance cover on credit, resulting in premium debtors increasing from ZW$15,07 billion in June 2022 to ZW$180,4 billion in June 2023. Based on the gross income written by June 2023, 20% of the premium income was held in debtors,” Nyabadza said.

“Twenty percent of the industry’s total assets and 40% of current assets were held as premium debtors according to the Ipec’s 2023 half-year report.

“To contextualise the magnitude of the matter, debtors were ranked second highest after fixed assets on the total assets held by the industry.”

The sector is expecting to have a clean debtor’s book by the end of this month.

Related Topics