Piggy’s Trading & Investing Tips: How life insurance can transform an economy

Stability in life insurance markets requires large-scale firms. These have deep capital bases and diversification benefits derived from risk pooling.

A LOOK at Africa’s insurance sector reveals that limited disposable income amongst the majority is a major cause of low life insurance uptake. Insurance penetration levels in Zimbabwe of around 4,1% remain low when compared to the developed world. Except for South Africa, insurance markets in Africa are very small. Among the largest life markets in Africa, Ghana, Kenya and Morocco have enjoyed very strong insurance premium growth over the past few years.

It can thus be argued that the low penetration levels present a significant opportunity for insurance companies. New product developments in life insurance coupled with a growing middle class, may in the long-term help increase insurance penetration levels.

Importance of life insurance sector

It is a fact that Sub-Saharan Africa (SSA) needs private finance for economic development. International finance is available but is costly and creates vulnerability to financial instability. Domestic savings offer a cheaper and more stable source of funds.

However, this requires savings levels to be increased, and savings to be retained within host economies. Life insurance is, therefore, an important part of the financing agenda.

This is because as economies deepen, life insurance penetration increases, raising savings levels by providing contractual savings for households.

Life insurance also helps to stabilise household welfare and complements public welfare provision.

Policy approaches

It is of paramount importance to put in place policies that assist in accelerating the development of life insurance markets.

Those countries with active policy have seen markets develop at a faster pace than would be expected relative to their gross domestic product (GDP).

The most important area for active policy is to promote a liberalised, well-regulated private sector that includes large scale firms.

Such large-scale firms are most commonly those with regional or global businesses.

They include domestic businesses that are active in expanding regionally and foreign participants. Specific benefits of large-scale firms include the following;

Contributing to scale and stability in the sector

Stability in life insurance markets requires large-scale firms. These have deep capital bases and diversification benefits derived from risk pooling.

Accelerating the building of distribution networks

Large-scale firms bring experience in building and managing agency networks and joint ventures with local firms. They disseminate appropriate standards of customer protection and service. This accelerates life insurance market development through rapid expansion of high-quality distribution networks.

Driving knowledge

Large-scale firms introduce global ‘best practice’ in terms of risk management, accounting, actuarial work, legal, compliance and corporate governance.

They also bring best practice in relation to supervision and customer relations.

This enables knowledge and technology transfer including to national employees and regulatory bodies. Life insurance has the potential to both mobilise domestic savings and investment and to create employment and enhance household welfare, thereby helping to drive economic growth and development at a crucial time in Sub-Saharan Africa.

Supervisors such as the Insurance and Pensions Commission of Zimbabwe (Ipec) can also take a leading role through advocacy as well as financial awareness campaigns on life insurance.  Ipec has in the past conducted financial literacy programmes on insurance and pensions with a view to enhancing consumer confidence, insurance penetration and the pension coverage ratio.

The financial awareness initiatives include training of journalists on insurance and pensions to enhance coverage about the industry, issuance of bi-annual consumer education newsletters, trustees training workshops, road shows, television and radio interviews, news, publishing of various newspaper articles, brochures, digital and social media.

In conclusion, there is an urgent need to encourage long term investments even within a weak economy. Government, regulators, pension funds and related institutions need to encourage and support investing at all levels of the economy. There is also a need to create new assets and investment vehicles while also driving the financial inclusion agenda.

Investing and saving is also critical for a developing economy like Zimbabwe given that it promotes capital formation, creates employment opportunities and controls excess liquidity. It is against such a background that there is a need to create effective mechanisms for long term investments.

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