INSURANCE INSIGHTS - Multiplier Effects of Scarcity of Economic Essentials

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 are educative at all levels, catering to both practitioners and non-practitioners. 

As published in The Daily Times (Malawi) on October 23rd, 2024

A certain local musician did a composition titled ‘moyo wa mtauni ndi okhalira kulimba’ [life in town is tough].  All along, I have been taking this song for granted. The scarcity of economic essentials of foreign currency [forex] and fuel that the country is reeling through, has forced me to rethink my stand. I now agree with the singer.    

For some weeks now, motorists that use petrol are finding it hard to refuel. The precious commodity is scarce. The painful truth of the matter is that the scarcity is, in one way or another, paralyzing smooth operations of certain sectors of the economy, including insurance. 

The non-availability of forex and fuel has forced some companies to scale down operations. Workers compensation insurers are the first to be hit, as they will incur reduction of declaration of annual earnings by insured employers at the end of policy periods.

For motor insurers, the scarcity of fuel is a blessing in disguise. Some motorists, especially those driving petrol cars, have had to park the cars. This, in turn, reduces vehicle population on the country’s roads, consequently reducing the number of road traffic accidents and registered claims. 

With this, I expect motor insurers to make a big saving on technical claim reserves. I have come across two rational motor policyholders, who have reduced cover of their vehicles from comprehensive to fire and theft, simply because the vehicles are grounded.

 

Unlike their motor counterparts, fire insurers are now exposed. Some people are buying fuel in jerry cans and keeping it in their houses. Fuel is a deadly hazard, insofar as fire inception and propagation is concerned. The tragic incident that happened at Mtandire in Lilongwe, a year ago, where petrol blast killed two people and injuring others, is a case in point. Petrol is a highly flammable liquid. It sparks even at low temperature.  

The shortage of forex is affecting insurance to a larger degree. When an insurance company insures property, say a multi-storey building at MK40 billion, it does not keep the whole amount to its net account. It shares the risk [MK40 billion] with other risk takers, called reinsurance companies. Reinsurance companies are in business. They expect to be paid their share of premium on time. Regrettably, Malawi’s reinsurance market is foreign-based. The local market needs forex to pay these foreign-domiciled reinsurers. Treaty reinsurance premiums are payable quarterly in advance. Any delay in remitting reinsurance premium attracts interest. 

Timely remittance of reinsurance premium is good for the industry as a whole. It has a bearing on renewal terms of the reinsurance treaty. If the industry defaults in reinsurance premium remittance, it can be subjected to stringent terms at renewal.

 

For the past ten years, we have witnessed an increased number of local insurance companies subjecting themselves to claim paying ability rating. The rating process takes into account both endogenous and exogenous economic factors, such as forex availability and access. 

Marine insurers have been hit hard by forex shortage. Marine insurance business is, everywhere and always, a function of people’s marginal propensity to import and export. The more you and I import or export, the more business marine insurers underwrite. I would not expect marine insurers to grow the account when importers are not shipping cargo into the country. Would you? 

The forex issue has evidently seen scaling down of foreign traveling by the public, a development that affects travel insurance. 

Similarly, some motor repairers are failing to import spares. Insurers are feeling the pinch through increased third-party loss of use claims.

I also expect goods-in-transit insurers to record low declarations of annual carryings, due to scaling down of fleet by freight forwarding firms and other transporters. 

Views from the top are that the scarcity of economic essentials of fuel and forex will, in the long run, if left unchecked, slow down the growth of certain insurance accounts. Talk to us. We are here to guide and serve.