Deep in a disease pandemic that has crippled the business ecosystem through supply disruptions and social distancing protocols through a partial lockdown, the Pensions and Insurance Authority (PIA) in Africa’s second largest copper hot spot has provided guidelines to safeguard the industry. It is evident that COVID has brought with it unique credit and liquidity risks that require urgent intervention to ensure the credit quality of underwriters remains robust. The pandemic has by most Zambian regulators been underestimated due to an array of reasons ranging from lack of clear cut understanding of the importance and understanding the role insurance and pension funds play in an economy from a liquidity perspective in a suppressed growth environment to lack of foresight through adopting forward looking views of managing risk.
Zambia’s macroeconomic landscape faces rising unemployment threatening purchasing power and appetite for insurance and pension products which could impact liquidity pools which ultimately could constrict activity in the bond markets. Key regulatory interventions so far in response to COVID pandemic effects include monetary stimulus provided by the central bank through a K10billion life line in Medium Term Lending Facility (MTLF) while marginal fiscal intervention was provided through basic tax cut pronouncements.
The PIA prescribed to Insurers the following interventions to curb COVID19 effects in the insurance industry:
- Book Resilience. That stress testing should be conducted to test the liquidity, capital adequacy and solvency of insurers whose results are to be provided by 15 May. This will allow for a resilience test of financial metrics which will provide assurance to the industry of the financial strength of the insurers as they realize the role the play in the financial system beyond just providing insurance cover but as liquidity drivers.
- Digitization of Payments. Digitized channels of selling, paying and collecting premiums. This will provide for less use of physical cash to curb spread of the deadly virus. This aligns to the central bank directive prescribing for the use of electronic money after retail and corporate limits were between doubled to quintupled.
- Flexible Premiums. The regulator also prescribed for insurers to permit for premiums to be paid in instalments and where necessary premium holidays to be allowed for stressed clients.
- Policy Awareness. That sensitization of what the policy covers and excludes should be done to mitigate asymmetries that could exacerbate legal suits and disadvantage policy holders that purchase insurance products. This will ensure that policy holders are treated fairly.
- Agents and Brokers Support. Develop measures that will assist brokers and agents in these COVID turbulent times.
Analysis. It is about a dry point of construction that COVID19 related credit and liquidity risks will haunt insurers and this could impact their ability to meet claims by policy holders. Much as the disease pandemic has caused a macroeconomic shakeup, COVID reveals the need for the non-bank financial sector to start to conduct global best practice such as stress testing and embracing digitization for payments and as selling channels. These are measures that did not require disease pandemic but should be undertaken if forward looking views are embraced (i.e. for stress testing) and digital selling for competitiveness. It is about time that Insurance and Pension Funds started to realize the role they are expected to play beyond just paying claim obligation but as liquidity pools. A more proactive than reactive approach is cardinal in the industry. Much as the measures are necessary, they come in a little too late.
The Kwacha Arbitrageur