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 28th, 2024
Minister of Finance, Honorable Simplex Chithyola Banda, delivered his maiden national budget in parliament in Lilongwe on Friday, 23 February 2024. Economic and political think-tanks have presented mixed comments about the K5.98 trillion government revenue and expenditure plan for 2024/2025 fiscal year. But one point that is clear is that it is an expansive budget - aimed at recovering, developing and protecting the economy. Five areas of budget allocation that should delight insurance fraternity are construction, agriculture, mining, pensions and gratuity. Huge allocation of resources have been channeled toward superstructure and infrastructure development in respect of road construction, creation of mega farms, exploration and mining of mineral resources, among other sectors. Through multiplier effect, insurance stands to gain massively from the above-mentioned economic activities. However, there can be no gain for the insurance industry unless insurers as service providers and insured as consumers are conversant with economics of insurance – which is a topic for today.
Insurance is a facility that is used to protect against uncertainty. It is a risk transfer mechanism where a number of people with different types of risks come together to form a pool. The losses of the few are met by the contributions of the many.
The logic is that the insured also known as policyholder pays money called premium to the insurer in exchange for a risk. The money is used to compensate policyholders upon them suffering financial loss resulting from an insured peril. However, not all risks are insurable. There is a limit to the type and size of financial risks that one can take insurance for. Given sufficient income, one can insure almost everything in one’s possession. We are reminded of a certain football fan who took out a one million Dollar insurance against trauma in the event that the team that he supported, was knocked out of the Champions League. This is out of the ordinary. Does insurance cover anything under the sun? The answer is no.
From the supply side, insurers restrict scope of coverage through exceptions, exclusions and memoranda which include excesses. Similarly, from the demand side, owing to scarcity of financial resources, the insured aims to attain certain goals before and after procuring insurance solutions.
When buying insurance, there are a number of goals that the insured party wants to fulfill, namely - unlimited access to the facility, affordable costs in terms of lower premium, high quality service in respect of cover responsiveness, relevance and reliability, inter alia.
In economics, we learn that the basic economic problem is that human wants are unlimited but resources required to fulfill the wants are limited. Therefore, decision of what, how and for whom to produce have to be made by service providers and consumers. Each and every decision that is made has an opportunity cost. In other words, scarcity necessitates trade-offs among wants or goals set to be fulfilled. It is practically impossible to have simultaneous improvement in the entire dimension of high quality of service, unlimited insurance access, lower costs, et cetera. For instance - increased insurance access is accompanied by either more resource allocation in Kwacha terms or consumption of poor quality of insurance service. The trade-offs are higher monetary cost – premium - and lower quality of insurance offering.
The other point to remember is that institutional arrangements influence allocation of our income for insurance. In Malawi, for example, pension and life insurance are tax free while general insurance is levied for value added tax at sixteen and half percent. The logic is clear. General insurance consumption is taken as an expense while pension and life insurance are treated as economic vehicles for creating wealth through savings. It will be paradoxical to levy tax on savings. Ask any economics guru and they will perhaps tell you that taxes have a tendency to reduce marginal propensity to save. The less the savings or investment, ceteris paribus, the slower the economic growth, the smaller the new business created, the drier the insurance market in terms of risk portfolio. Tax is a resilient element that an insured considers and consequently influences not only his purchase but also the desired type of insurance. For that reason, hats off to authorities for not taxing pension and life insurance products.
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