The insurance and pensions industry promotes economic growth through various channels.
The premiums paid by policyholders and contributions remitted by pension fund members generate savings that feed into the wider economy. The transmission mechanism is through investments in the capital market and other sectors of the economy.
The industry directly impacts the economy through the following:
Investing in prescribed assets (PAs)
Prescribed asset investments in long-term government projects of national interest foster socio-economic development and contribute towards attaining a middle-income economy objective by 2030.
The scope of prescribed assets investments covers housing delivery, agricultural production, and energy among other areas.
The trend for total prescribed assets investment by the industry in nominal terms has been positive, since 2019.
The industry's total investments in prescribed assets increased from $14.7 billion to $25.3 billion between 2019 and 2021(Insurance and Pensions Commission, 2021).
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Investment in prescribed assets is expected to continue contributing positively to economic growth since it adds to the stock of capital available to an economy, which is a crucial determinant of productivity.
Energy sector
The industry is contributing to economic growth through investment in energy production.
The participation of National Railways of Zimbabwe Contributory Pension Fund in the Kariba hydroelectricity power expansion project, and Hwange thermal power station increased the power production capacity of the country.
This reduces the import bill for electricity and saves the country's foreign currency.
Infrastructure
The pension funds and insurance companies directly assist the government in raising funds for capital projects.
Investing in projects with a prescribed asset status such as Sumben Housing Project, ZimCampus student accommodation project, and Arlington Estates for industrial development among others is a catalyst for economic growth and development.
Investing in equities
Investment in quoted equities contributes towards stock market development by improving the liquidity of various intermediaries.
Stock market development increases real output since it is a positive function of real income and wealth.
The insurance and pensions industry are heavily invested in equities, which enables it to hedge against inflation and preserve the value of policyholders' funds.
Investments in equities in the insurance sector increased from $4.69 billion as at December 31, 2019 to $10.47 billion as at December 31, 2021, and equities investments in the pensions sector also increased from $7.16 billion to $169.22 billion in the same period (IPEC, 2021).
Investing in money markets
The money market contributes to the economic stability and development of a country by providing short-term liquidity to governments, commercial banks, and other units of the economy, such as agriculture and small-scale industries.
Thus, it provides financing to local and international traders who are in urgent need of short-term funds to pay for goods and services.
Total money market investments from the insurance sector increased from $324.09 million as at December 31 2019 to $2.49 billion as at December 31, 2021 while in the pensions sector the investments increased from $582.01 million to $2. 81billion in the same period (IPEC, 2021).
Investing in property
Property investment is one of the asset classes used by investors to diversify risks.
The property value-addition activities such as the extension of buildings, and renovations stimulate the economy through the purchase of goods and services to be used for value addition purposes.
For pension funds, investment in the property asset class as at December 31, 2021 was $96.7 billion, up by 544.09% from $8.8 billion registered in the corresponding period in 2019 (IPEC, 2021).
In nominal terms, the insurance sector property and operational investments grew by 626.9% between December 31, 2019 and 31 December 20214.
However, it is imperative to note that the growth in property values is also driven by revaluation gains as opposed to new capital expenditures or new purchases.
Social protection
The insurance and pensions industry provides an efficient way to support the Government in the provision of pensions, healthcare, and social security.
Pension products contribute significantly to guaranteeing a stable and lifelong level of revenue limiting the impact of demographic change on the state budget.
In addition, the payment of monthly pensions reduces the level of income inequality, which is a key constraint to economic growth.
The insurers are also managing other fields of social security such as compensation and rehabilitation following accidents at work.
These products have a double economic impact, protecting workers from the economic consequences of accidents, and encouraging a healthy working population.
Microinsurance and micro-pensions are social protection tools that transform the economy by providing access to financial services, which can unlock new opportunities and increase the economic participation of previously marginalised population groups.
The micro-insurance and micro-pension schemes close the gap in the overall set of social protection systems that primarily affects the informally employed.
Thus, the schemes safeguard population groups not covered by statutory social security; and provide security against risks not usually covered such as drought, animal diseases, earthquakes, and flood disasters.
Mobilisation of foreign currency
Insurance companies pool resources through underwriting business in foreign currency. Premiums are also received from entities or individuals authorised to trade in foreign currency.
The funds mobilised are channeled to the corporate and public sector.
The foreign investments by Pension Funds generate foreign currency for the country through dividends repatriations from foreign corporations.
The foreign currency can be used to finance capital projects locally, pay foreign-based pensioners and settle local obligations.
Recent amendments to legislation and issued investment guidelines are making it possible for pension funds to invest offshore; the level of foreign investments is therefore expected to improve.
Provision of risk mitigation products
Entities in the insurance sector develop unit-linked investment products which help individuals in building capital that can be deployed towards the productive sector.
Insurance companies also provide guarantees to financial institutions such as banks and microfinance institutions, to enable them to extend loans to micro small to medium enterprises that do not have collateral security thereby promoting financial inclusion.
For instance, Export Credit Guarantee Corporation of Zimbabwe (ECGC) provides financial guarantees to financial institutions to enable companies to access loans for working capital and capital expenditure without the issue of collateral security being a limiting factor.
Whilst efforts of both micro and conventional insurance companies in designing inclusive products are evident, the country’s insurance penetration rate remains relatively low at 3.6% as of December 2020.
The low penetration rate is partly a result of the historical insurance model in Zimbabwe, which is concentrated in urban areas mainly focusing on the formally employed.
Thus, the rural and informally employed population is excluded.
However, the public lacks trust in the insurance industry, due to its susceptibility to government policy shifts which affects the value of their policies.
An example is the concern from industry stakeholders over the US dollar insurance policies and pension fund products on offer in the market, as to whether the benefits will be redeemable in US dollars in the long term given the functional currency changes that took place in 2019.
In conclusion, insurance and pensions industry contribute to sustainable economic growth through mobilising resources that are invested in different classes of assets. Furthermore, the industry also creates both direct and indirect jobs in the economy.
*Ronald Zvendiya is an independent economic analyst.
Contact details: rzvendiya@gmail.com,
These weekly articles are coordinated by Lovemore Kadenge, an independent consultant, managing consultant of Zawale Consultants (Private) Limited, past president of the Zimbabwe Economics Society and past president of the Chartered Governance & Accountancy Institute in Zimbabwe. Email — kadenge.zes@gmail.com and mobile No.+263 772 382 852.
