REINSURANCE is not understood by many, particularly the key role it plays in the insurance and pensions industry.
This week, our reporter Ronald Muchenje (RM) interviewed Jeph Gwatipedza (JG), the chief operating officer of ZEP-Re, a specialised institution of the Common Market for Eastern and Southern Africa (Comesa) created under charter. The reinsurance company is headquartered in Nairobi, Kenya.
Below are excerpts of the interview:
RM: For decades, reinsurance has been the backbone of the insurance sector, but people do not quite understand its importance. Can you take us through this?
JG: Insurance companies provide cover to the insuring public and this protection is given for small, medium to large size risks like power stations and airlines. The balance sheets of most insurance companies are quite small to take over these risks on their own, for example, airlines buy a minimum of US$500 million in insurance liability cover, power stations buy insurance for their property or power stations covering billions of dollars in assets.
This always means insurers need the big brother to cover them in the event of claims and this big brother is the reinsurer. So reinsurers insure insurance companies.
Reinsurance can be regarded as the shock absorber of an insurance company and, therefore the industry, and without reinsurance many companies will face solvency strains.
I would briefly summarise the importance of reinsurance as follows:
• With reinsurance, the insurer ensures that its balance sheet is protected from major losses. In Zimbabwe, one of the biggest losses was the fire at one of the largest hotels in Victoria Falls in early 2000 and this loss was US$14 million. The insurer’s net loss was less than 5% and the rest was recovered from reinsurers.
• Provides surplus relief
• With reinsurance, the insurance companies’ earnings are protected against volatility arising from increased claims frequency caused by too many small to medium size losses. Reinsurance helps in stabilising earnings.
• Reinsurance allows insurers to take risks bigger than what their capital can sustain. They are writing power stations and airlines because the big brother is behind.
• With reinsurance, insurers can venture into other lines of business. Reinsurers always have the capacity to take on unusual risks like tourism liability insurance.
RM: Your organisation operates in several countries. What have been the key takeaways in these spots?
JG: Yes, you are correct. Our territorial scope extends beyond our motherland Africa, going as far as India, Nepal, Middle East and Asia.
The company currently trades with 62 countries in Africa, Asia, and the Indian sub continental. ZEP-Re has been one of Africa’s success stories and currently we are the second biggest indigenous African reinsurer in Africa.
The company’s main base remains Comesa and this is historic in the sense that when the company was set up in 1993 by heads of state of the Comesa countries, its mandate was to provide reinsurance and technical development capacity to the insurance and reinsurance industries within the member state countries.
We have now even gone beyond that and there are quite several achievements made which include, inter-alia:
The company has managed to help start and build strong local institutions in various Comesa member states of Uganda, Tanzania. We have even gone further and supported some institutions as far as Sierra Leon. These companies continue to do well, and we are proud of that.
Supporting regulators in various key Comesa markets and successes have been recorded in Kenya, Uganda, Tanzania, Rwanda, Democratic Republic of Congo, Burundi and Zambia, to mention but a few.
These technical assistance programmes have helped to strengthen the regulatory environments in those countries, and we will continue to do more.
The company continues to make headlines in performing its development mandate in the various Comesa countries and you will be surprised that in 2020 alone, despite the impact of the Covid-19 pandemic, the company through its flagship training division, the ZEP-Re Academy, managed to train through various webinars close to 3 000 insurance and reinsurance professionals in various technical insurance areas of engineering, property, marine, bonds and guarantees, enterprise risk management (ERM) and financial lines.
The training attracted professionals from over 25 countries in Africa and some selected markets of Asia and India.
The company has contributed a lot in infrastructure development programmes in various countries and its investment portfolio is over US$300 million.
We have built some recent iconic office block buildings in Zambia – the US$33 million Zambia Business Park.
RM: Coming back to Zimbabwe, what can you say about the reinsurance market in this country?
JG: The Zimbabwe reinsurance market is a mature market but there are a few challenges facing the insurance and reinsurance markets in Zimbabwe and these have been compounded by the effects of the Covid-19 pandemic which has also affected most of our key markets.
The Zimbabwe market is unique in the sense that it was trying to get itself out of the already bad situation then came Covid-19. We are sanguine that the economy will improve and also the insurance industry will pick up in 2021.
The demand for reinsurance is derived demand and obviously if the economic fundamentals are not right then the insurance industry will also suffer.
According to Bloomberg-Standard Bank Research, the Zimbabwe economy shrank by 10.4% in 2020 and this is after having shrank again by 6.5% in 2019.
Inflation remains a headache closing at 628% in 2020 but we are happy to hear the Reserve Bank of Zimbabwe governor Dr (John) Mangudya assuring us that with the expected bumper harvest, coupled with the stabilisation of the currency, inflation will come under control in 2021.
This is very important for the sustainability of the industry.
More so, the commissioner of insurance has been very proactive in working with the government in ensuring that confidence and stability in the insurance industry is maintained.
The industry sells a promise that should you lose your assets through fire, theft etc, we will put you in the same position you were before the loss.
But now under the current environment, how do you ensure that when there is high inflation and unstable currency?
So the move by the Commissioner to allow US dollar-denominated policies in certain classes is clearly visionary thinking and a wellcome move.
The companies remain weak in terms of capitalisation because of the policy changes which saw their US dollar capital being converted into Zimbabwean dollars and now they are trying to cover US dollar exposures.
I noticed that recently the Zimbabwe government has just signed the African Continental Free Trade Area (AfCFTA), which is good as it seeks to embrace the spirit of ubuntu by doing away with trade barriers.
Without going into the nitty gritties, this obviously opens the industry to new entrants. My take is that the Zimbabwe insurance industry needs time, otherwise the whole industry will be decimated, considering that this industry has literally been closed since 1980.
The economy needs to be stable and functioning well first before the industry is fully liberalised.
RM: What have been the key milestones you have achieved versus the challenges you have faced in Zimbabwe?
JG: The company has been in Zimbabwe since 2011 December 1. I started the office after spending close to nine years in South Africa.
Hope Murera, the managing director and chief executive officer of ZEP-Re saw an opportunity in Zimbabwe when everyone else was shunning Zimbabwe and had the guts to say “let me open an office in Zimbabwe” – this was obviously against all odds.
When Hope offered me an opportunity to join ZEP-Re, I told myself, let me return to my motherland and make a difference, so I started working in Zimbabwe on December 1, 2011.
The Head office in Kenya was and has been very supportive and the office has done very well, moving from a country office to a regional office within 5 years.
That is a huge milestone. I had worked here since leaving college in 1991 and most of the CEOs in Zimbabwe have been close to me since 1992 and I had always maintained contact.
This is a relationship business so that helped me a lot in settling down.
Zimbabwe is now ZEP-Re’s third largest country market out of the 62 countries we deal with. That is a great achievement.
The support from His Excellency President in signing the ZEP-Re Bill into law and relevant government ministries, from the ministry of Finance, Industry and International Trade, Foreign Affairs and Home Affairs, have also been excellent.
The office now writes US$20 million and contributes close to 10% of the company’s US$210 million gross written premium.
We have invested in real estate, but we want to do more.
We had been allocated some land in the Borrowdale (Harare) area by the government and we were ready to build a multi-million office park there.
Discussions are continuing with the relevant government ministry of Local Government in this regard.
In terms of challenges, it’s not a secret that the operating conditions are a bit tougher, but we have weathered the storm.
We remain sanguine that the Zimbabwe economy will turnaround soon and we are ready to do more.
RM: Are there any regulatory issues that need to be addressed to ensure the market is a level playing ground?
JG: Like I have said before, the commissioner of insurance has done a fantastic job given the current turbulent business environment.
It is a blessing that we have a commissioner of insurance who is a former MD of a listed insurance giant and she had been an insurance practitioner, so she understands the needs of the industry very well.
I have known madame commissioner Grace Muradzikwa since 1992 – she is a shrewd business operator, and I am sure working with the industry can only lead to a better and vibrant insurance market .
Of course, there are areas of improvement in terms of legislation and I am saying this from my experience with various other markets and these could include:
• Rate undercutting, if not checked, can lead to the insolvency of some companies. What I have seen in other markets like Uganda, Tanzania, and Rwanda is that the regulator has come in and introduced minimum rates and these have ensured industry sustainability.
• Debtors have been a problem in many markets, and we have seen regulators in Tanzania, Uganda and Rwanda coming in strongly to tame this vice and introduced cash and carry legislation. This has improved claims settlements turnaround mainly because of better premium collections.
• Implementation of the risk-based capital regime. There is need to accelerate this, but I am happy that the regulator has now employed a high-calibre actuarial resource.
• Strengthening of governance issues in terms of approving senior management appointments for insurance and reinsurance companies. East Africa has done very well in this area because the regulators approve all senior management and board appointments.
RM: What can you say about reinsurance uptake in Zimbabwe and abroad?
JG: Like I said, Zimbabwe is a mature industry but because of the economic challenges the reinsurance companies in Zimbabwe remain weak compared to their counterparts in the region, making it difficult for reinsurers in Zimbabwe to do cross-border business.
Insurance companies, because of weak balance sheets, are buying too much reinsurance. If you compare with South Africa, reinsurance cessions average 27%, meaning that insurers retain over 73% of the business they write.
In Ethiopia, insurance companies retain over 80% and now in Zimbabwe most insurers retain less than 40% and reinsurers over 60% of the business.
Now, with dollarisation, insurers are only retaining less than 20% of the US dollar policies. This is a challenge because insurers need to build their reserves from retained earnings but now with high cessions this is a challenge.
Worldwide reinsurance markets are there to take care of catastrophe and large losses and help insurers in stabilisation of results but in Zimbabwe reinsurers end up being involved in some medium risks and losses because of the current situation.
We have a huge talent pool in Zimbabwe and what is needed is to ensure that shareholders inject capital in the business and by this I mean US dollar capital.
RM: What has been the impact of policy inconsistencies (especially around currency) in Zimbabwe on your operations?
JG: I have covered this subject and I believe the recent measures by the commissioner of insurance have gone a long way in stabilising the industry but for how long we do not know.
Obviously with policy inconsistencies it’s difficult to plan, especially for ZEP-Re because our reporting currency is US dollars so, yes, there is a challenge.
Like I have said, the support from the government, the ministry of Finance, the commissioner of insurance and the central bank has been very good.
RM: What is your long-term plan for your Zimbabwean operation?
JG: We are in Zimbabwe for the long run. Like I said, our MD Hope Murera, when she made the decision to start up the operation, she had a long-term vision and I believe we have seen the worst, so we remain optimistic about the future.
We want to do more in Zimbabwe and once the Government of Zimbabwe finds us alternative land then we will consider building a multi-million-dollar office park here.
We believe in Comesa – that is our home – and we must have confidence.
RM: What plans do you have to grow your footprint!?
JG: That is a tricky question. Like I said, we are currently doing business with 62 countries in Africa and Asia.
We have now done a major strategic review of our business strategy and resolved to implement some key market segmentation so that we expend or focus our energy on some key territories which we call “Double Down Markets” We are reducing our territorial scope to 47 countries in 2021 and our objective is to bring these to around 45 in the next year or two.
Comesa remains our flagship territory and it contributes over 75% of our business.
We have the mandate to develop the Comesa markets and I believe we have done very well.