5 December 2012

Zambia: Insurers Can Benefit From U.S. $750Million Euro Bond


THIS week, I continue looking at how the insurance industry can benefit from the Eurobond.

In case you missed last week's edition, our captioned topic stems from the acquisition of the US$750 million Eurobond by the Government.

To have a better comprehension of the topic, I will quote the fundamental portion from last week's article.

The Minister of Finance Minister Alexander Chikwanda proposed in the 2013 Budget on how the Government plans to utilise the proceeds of the Eurobond funds.

He proposed to apply $430 million or 57.3 per cent of the proceeds towards road and rail transport projects

and $255 million or 34 per cent on energy generation and transmission projects.

The minister further proposed that the balance of $65 million goes to fund central hospitals, SMEs and transportation and funding costs".

Having looked at how insurers can benefit from the road and rail transport last week, in this article, I will endeavour to explain how the insurance industry can benefit from the rest of the proceeds.

On the $255 million or 34 per cent going to energy and transmission projects, a lot of activity is expected, especially in the energy sector.

The Government has clearly stated in the 2013 Budget that it will work with the private sector to develop the Itezhi-tezhi, Kafue Gorge lower power stations and completion of the extension of Kariba North Bank Power station among others.

This will probably reduce the frequent disruptions of power supply.

The key benefit from the reduced power disruptions is reduction in frequency and severity of claims from electronic equipments resulting from power surge.

Then talk about the assets that will require insurance. Currently the assets of Zesco alone run into billions of kwacha in premiums.

Lastly, the balance of $65 million will go to fund central hospitals and SMEs.

Better health services in any country generally translate into increased life expectance.

In Zambia we have witnessed an influx of people seeking medical services from abroad with the main destination being South Africa.

This usually leaves me with a big question on the quality of the doctors we produce from the University of Zambia and other institutions; are they not capable to do what South African doctors are doing?

Well, I am alive to the fact that capability needs to be supported with equipment as Martin Luther King Jr said 'give us the tools and we will do the job...'

The health sector requires proper investment with modern equipment if the quality has to reach greater heights.

With this allocation, it is assumed that the much-needed resource injection will be pumped in to curb the vice of lacking modern and advanced medical equipment.

The benefit to the industry starts with the fact that the mortality rate which stands at about 12.4 per cent will reduce. This will then reduce the payout ratio on Life Assurance companies specifically on Funeral and Group Life policies.

The life companies will further save on evacuation expenses on conditions which would have not otherwise been handled in Zambia.

General insurance companies will also benefit on Personal Accident payout ratio as those who might be injured from accidents will more likely be adequately treated locally and more likely survive deadly injuries.

For your own information, Zambia records about 1,200 road traffic accidents annually and 50 per cent of those involve pedestrians.

General insurers will further benefit by providing insurance to the equipment that will be bought in the central hospitals.

Coming to SMEs, these are key drivers of the economy and are a target of most insurers to ensure medium to long term sustainability.

If say a huge mining company with premiums worth billions of kwacha pulls out or an insurer loses that account, there will be huge impact on the gross premiums of the insurer involved.

Moreover, most of the mega risks from big companies like mining firms are heavily reinsured.

This means huge premiums go outside the country, for example in 2011, of the K800 billion plus gross premium in general insurance, about half of that was paid to reinsurance companies.

Reinsurance has a direct impact on the profitability of a company, the more you reinsure, the less you remain with.

The huge outflows of more than K400 billion in 2010 alone caught the attention of Government and Mr Chikwanda highlighted the concern of Government during the official opening of Prima House belonging to Prima Reinsurance Plc.

By focusing on SMEs, insurers are able to take risks that are within their capacity to handle. It is not clear how these funds will be disbursed to SMEs but once disbursed, a number of jobs will be created, let alone assets that will be bought.

This will mean those employed will need some insurance protection. Not long ago, an SME was contracted to demolish some structure in Ndola and one of the requirements in the contract was insurance for the workers.

The management of this SME had no choice but to buy Group Personal Accident and whereas this cover brought protection to employees, it also added to the growth of the industry.

If these funds will be given in form of loans then the insurance industry will be called upon to provide some insurance for the same so that in case the borrower fails to pay back by eventualities such as death or bankruptcy, then the lender can still recoup the loan proceeds from the insurers.

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