Every Kwacha that goes out of the country without a corresponding inflow potentially leaves the local currency weaker. In insurance it is difficult to stop this trend without building local capacity in terms of capital.
The principle of insurance demands that for each risk taken or retained, there must be financial capacity to pay the potential loss, should it occur.
There are colossal sums insured for properties and other liabilities in Zambia that require a corresponding mega capital base.
In order to increase capacity, Finance Minister Alexander Chikwanda on October 2, 2015, signed Statutory Instrument 71 of 2015, which saw the revision of minimum capital requirements in the industry.
The implementation of this new law will be spread over two years, according to the news bulleting on the website for the Pensions and Insurance Authority, PIA. Come October 2, 2017 all entities must be compliant.
Insurance companies’ minimum capital increased from K1 million to K10 million for Short Term Insurers, while for Long Term insurers it was revised from K1 million to K12 million.
That of reinsurers increased from K1 million to K20 million, while for Brokers, minimum capital increased from K40, 000 to K100, 000.
With the current exchange rate, the new minimum capital is about US$900,000 and $1 million for Short Term and Long Term insurers respectively. While those for reinsurers and brokers come to about $1.8 million and $9,000 respectively.
This is a step in the right direction for the industry. At regional level, these minimum capital requirements are competitive against the likes of Kenya and South Africa.
As at March last year, I wrote an article where I quoted their capital requirements standing at $450,000 and $560,000 in Kenya and South Africa respectively.
Well, are we going to see some entities winding down or merging, or takeovers?
All these are possible options, depending on the financial muscle of entities concerned.
It will be interesting to see how players will respond to this development.
Those chancers, who would work up without much thought and preparation to start a broking firm or an insurance company on the basis of experiment, will theoretically be deterred by these stringent requirements. One will need to seriously think through before deciding on setting up such a company.
In my opinion, I would suggest that we have fewer credible players than too many, who are not credible. At the end of the day, it is the name of the industry at stake.
In this day and age, it is unacceptable for insurers or reinsurers to accept premium at the speed of lightning, but pay claims at the speed of a chameleon. If they cannot pay, then they should not underwrite in the first place.
Therefore, all stakeholders should commend PIA and Government for this move.
Further, the retention of funds within the economy will increase. What has been happening is that about 50 per cent of the gross written premiums have been paid abroad in form of reinsurance premiums because of inadequate local capacity.
An insurance company that takes risks more than its capacity, risks being insolvent if there are claims. This technical limitation is an unavoidable one.
In as much as we would love the premiums to be retained locally, the question is, do we have the capacity?