In an exciting collaboration between Minet Malawi, Britam, and The Daily Times - Malawi's leading newspaper - we are thrilled to introduce a groundbreaking initiative that will redefine your Wednesdays. Welcome to the Insurance Insights Column – a weekly rendezvous with the world of insurance and contemporary issues that matter. Every article aims to illuminate the intricate landscape of insurance products and relevant topics that impact us all. The articles will be educative at all levels, catering to both practitioners and non-practitioners.
As published in The Daily Times (Malawi) on February 14th, 2024
In Malawi, provision of annuities, pensions and retirement plans are guided and regulated by the Pension Act of 2023. The Act, which came into force in April 2023, replaced the Pension Act of 2011. The new Pension Act has been touted by many insurance gurus as a game changer due to the sweeping changes that it made to the old law in respect of employee benefits and retirement plans. Insurance and pension are like Siamese twins – joined at the head and belly. You cannot talk about one without making reference to the other.
Traditionally, insurance provides security to uncertainties surrounding the future of our life or inability to generate income or loss of personal property. It also gives certainty to an enterprise regarding its assets and earning capacity.
For non-life insurance, this point is clear. Suffice to say that non-life insurers keep on introducing differentiated solutions to suit emerging market risks. For instance - under fire insurance, losses resulting from electrical cause are excluded by standard policy wording. However, same can be brought back as an insured risk through deletion of electrical clause. Similarly, compulsory excess is made ineffective by excess buy-back.
This is no exception in the world of life insurance. It has been said that life insurers do not insure life itself but death. We are certain that one day we shall die. Insurance covers uncertainty and not certainty. One school of thought has responded that it is not death that is insured but its timing and this forms the subject matter of life insurance.
In addition to insuring the timing of death, life insurers offer other insurance-related products, such as, insuring pension funds which provides income at retirement. Life insurers also write term assurance, endowment assurance, assurance for children and many other products. The highest common factor of these insurance products is that they ensure availability of income of one form or another.
Life insurance contracts that are issued on a permanent basis - such as endowment assurance - have cash values that may be used to provide retirement income. Sometimes, specially-designed contracts called annuities may be arranged to cater for retirement purposes. These contracts have no pure insurance protection element. The country’s law makers and regulators in Lilongwe do not refer to them as life insurance. The point is that one may combine life insurance protection with a saving plan for one’s retirement. Alternatively, one may simply save by a method that contains no element of death protection in the form of annuities.
An annuity is commonly defined as a series of equal payments made at equal intervals of time by an insurance company to a contracting person known as an annuitant. You don’t need to be a salaried retiree to put in place an annuity. Annuities are often arranged by affluent individuals who want to provide a steady flow of income after retirement or some other time in the future.
Strictly speaking, annuities are not life insurance. In conventional insurance, you do not know when the benefit will be collected whilst in annuities you know in advance that after making so much in payment to the life insurer, the insurer will in return pay you the agreed amount after the agreed period has elapsed.
Annuities depend very much on present value calculations. The present value of an annuity is the amount of money that the life insurer must have now - at policy inception - to enable the insurer pay the promised amount after the term of the annuity. Therefore, due to the interest factor, the present value is apparently smaller than the sum of all the promised payments. This speaks volume why life insurers do not like low interest rate economic regimes.
A life annuity, guaranteeing that you cannot outlive the income, is the inverse of life insurance contract. The risk is not how long a person lives to receive the income but whether death will occur before the policy matures. There is a joke that circulates among Malawi insurance fraternity that life insurance is insurance against ‘dying too soon’ whilst annuities are contracts against ‘living too long.’
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