THE losses which hit the world insurance market due to natural disasters are set to push the cost of insurance or reinsurance by at least 5% next year, an insurance expert has said.
Jephita Gwatipedza, ZEP-Re regional manager told Standardbusiness the increase was necessitated by the world insurance players' need to recover its costs after the natural disasters.
"We believe that given these losses and the fact that reinsurance purchasing for Zimbabwe reinsurers comes from the overseas markets, the cost of reinsurance/insurance will go up by between 5-10% in 2013," Gwatipedza said.
According to estimates, natural disasters can be costly; Hurricane Sandy in the US had an economic cost of over US$30 billion. Insurance costs are estimated at over US$10 billion.
Local companies are insured by local reinsurers. Through retrocession, the local reinsurers engage foreign companies to partly underwrite its risk portfolio and limit potential losses as a result of a catastrophe.
Gwatipedza said as a result of the losses that hit the world insurance markets and those on the local front in agriculture and retail would present a challenge to Zimbabwe's insurance landscape.
"Major losses which included a major retailer's loss of US$2,6 million, energy (US$2 million), mining (US$1,7 million) and losses in tobacco of over US$4,5 million would impact on insurance/reinsurance renewals in 2013," he said.
Gwatipedza said using the worldwide average combined ratio, a measure of whether an insurer is making money or not where less than 100% shows profitability, the statistics were showing a worsening trend for Zimbabwe.
Last year, the ratio was 106% from 102% in 2010.
Despite the setbacks, Gwatipedza said the industry had potential to hit the US$1 billion mark in four years buoyed by political and economic stability.
Total short-term insurance market closed at US$158 million in 2011 and is expected to hit US$200 million this year. The first six months recorded an income of US$109 million.
Zimbabwe, which used to be among the top five insurance markets in Africa has now disappeared from the African Insurance landscape.
With incomes of US$600 million in 1996, the country now accounts for US$158 million out of Africa's total short-term insurance income of US$19 billion.
Gwatipedza said with demand for insurance/reinsurance being derived demand, any change in economic activity will have an impact on demand for insurance/reinsurance.
"Growth in insurance generally follows economic growth," he said.
Zimbabwe also suffers from low penetration rates which Gwatipedza said is a phenomenon experienced by most developing countries.
With a Gross Domestic Product of US$10 billion, the country's short-term insurance penetration ratio stands at a meagre 1,6%. Gwatipedza said the penetration rate is below Africa's average insurance penetration ratio of 3,62% (short term 1,2% and life 2,46%).
"Zimbabwe therefore needs to grow its economy to the 1990s level because slowdown in economic activity undermines demand for insurance," Gwatipedza said.
He applauded the regulator, the Insurance and Pensions Commission (Ipec) for raising the minimum capital thresholds for players to help build the underwriting capacity.
In September Ipec announced an increase in minimum capital requirements to US$3 million and US$2 million for reinsurers and insurers respectively from US$300 000.
Gwatipedza said reinsurers need to have sufficient capital "because some insurers use reinsurance as part of their capital management".
He said as a result of low capitalisation, there would be high demand for reinsurance next year as insurers continue to use it as capital management strategy.
Cheaper premiums a setback for insurers
The local insurance market has been hit by rate under-cutting with companies charging low premiums to attract clients but failing to honour obligations in the event of mishaps.
Jephita Gwatipedza said such a situation was a result of the high number of companies competing for a small piece of cake.
"In 1996, there were not more than 12 companies with a premium market of US$600 million for short term. At the moment, there are 24 companies and this means in order to survive companies have to make insurance cheaper but unable to meet claims," he said.