According to the Insurance Council of Zimbabwe (ICZ), there is need for the Government of Zimbabwe to introduce a law compelling foreign investors to use local companies for their insurance needs.
The council asserts that the local insurance industry is being prejudiced of millions of United States dollars as foreign investors are coming in with their own cover at the expense of local providers.
For example, foreign investors in the construction, marine and mining sectors are bringing their own insurance when they set up businesses in Zimbabwe despite local insurance companies having the capacity to provide insurance. There is therefore a need for the government to introduce a law that will compel foreign firms to exhaust local capacity before considering external insurers.
This implies that whenever foreign-owned businesses want to externalise risk, they will be required to seek approval from the regulator. Approval will only be granted after having done thorough market research and ascertained that the local insurance industry has no capacity to cover the risk.
According to the Insurance and Pensions Commission (Ipec), the local insurance industry has adequate capacity to deal with several threats in the sector. The following classes of business are underwritten in the insurance industry of Zimbabwe: motor, marine, fire, health, farming, aviation, liability, accident, miscellaneous accident, hail, bonds and guarantee, engineering and hire purchase.
The insurance penetration (GWP/GDP) in Zimbabwe is estimated at 3,6% and insurance take up (% of adults with insurance) is c34%.
Another common practice that can also lead to underutilisation of the local insurance industry is fronting. A fronting policy is a risk management technique in which an insurer underwrites a policy to cover a specific risk, but then cedes the risk to a reinsurer. Because the reinsurer takes on the entire policy risk, it consequently maintains complete control over the claims process.
Fronting policies are mostly employed by large companies that conduct business across multiple regions or states. Not surprisingly, regulators have historically been sceptical of fronting policies because companies may use them to circumvent state insurance regulations. This is because the reinsurer taking on the entire risk underwritten by the fronting company is often unlicensed in a particular jurisdiction.
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In essence, the reinsurer acting as the insurer represents a regulatory loop-hole. For the primary insurance company, fronting is often used as a soft market strategy that provides income without incurring significant risk.
Why do companies choose fronting?
In business, counterparties (clients, banks, trading partners) or regulators may require a company to have locally admitted insurance protecting its risk and provide evidence of such cover.
Since it is unlikely that a company or its captive reinsurer will have the necessary licences or regulatory approval to directly insure its own risks for the specific coverages and in the specific countries where coverage is required, fronting provides an effective solution. Fronting establishes the required evidence of insurance, enables the insured to retain its targeted amount of risk, and provides a formal structure for the insured to finance the risk over a period of time.
Therefore, the principal motivation behind a fronting programme is to create a compliant insurance programme that allows an insured to assume risk while accessing the regulatory licences, policy administration, claims handling, and reporting services of a traditional insurance company.
Fronting is not new, but it is being embraced more in new markets. Financial objectives may also motivate the decision to establish a fronting programme. By participating in their own risk rather than procuring risk transfer through a more conventional insurance programme structure, insureds may:
Benefit from favourable loss experience;
Pay a lower premium than traditional insurance market pricing; and
Resolve a situation in which market conditions or underwriting capacity limit adequate risk transfer availability at acceptable premium levels.
Alternatively, fronting programmes may be driven by more strategic or operational objectives. Many companies are developing technologies or entering areas that create new or unusual exposures that are either not addressed or addressed inefficiently by traditional insurance markets.
All in all, insurers take reinsurance for various reasons including increasing capacity to write more business, diversification and accessing technical expertise.
Whilst insurers are encouraged to cede business and increase performance, there is need for a balance, particularly when foreign reinsurers are involved. Get more insights by joining a PiggyBankAdvisor WhatsApp Group (+263 78 358 4745).
- Matsika is the managing partner at Mark & Associates Consulting Group and founder of piggybankadvisor.com. — +263 78 358 4745 or [email protected]/ [email protected]