Are Foreign Reinsurers Reaping Off Locals

THE outflow of huge sums of money in form of reinsurance premiums has continued to hit the insurance industry in Zambia.

This has raised a lot of concern to a lot of stakeholders and the Government through Finance Minister Alexander Chikwanda expressed concern over the development last year.

Officiating at the official opening of the Prima House owned by Prima Reinsurance PLC which is a local reinsurer, the minister revealed that in 2010 alone the industry paid over K400 billion (before rebasing) to foreign reinsurers representing about 49 per cent of the total written gross premiums by the industry in that year.

Surely this is a huge ratio which warrants some careful analysis and discussion to see whether something can be done about it.

A notable development that came as a result of this situation was a directive by Government to the Pensions and Insurance Authority through the minister to include in the draft Insurance Bill a provision for the players to exhaust the local capacity before a risk could be reinsured outside the country.

At this point let me explain what reinsurance is. According to Robert Kiln ‘it is insuring of insurers while R L Carter defines it as ‘the insurance of contractual liabilities to pay claims incurred under contract of direct insurance or reinsurance.’

If the insurer feels that the liability they have taken is beyond their capacity, they may call another insurer to bear a specified portion of the liability. This is a system where the insurer lays off a part of his risk to another insurer or reinsurer.

It is the insurance of insurance. This arrangement is usually not known to the client although there are some clients who would like to know the reinsurance programme of the insurer especially on mega risks.

In other words an insurer cannot take more than it can handle. What the insurer can handle depends on their financial muscle known as capital.

Insurance being a promise to pay for an unfortunate future event requires that should the unfortunate event occur then the insurer must have money readily available to pay for the loss, for example, if the capital of an insurer is K100 million it means the liabilities which this insurer should take must literally be K100 million.

Otherwise if the insurer accepts more liabilities say up to K200 million then in the worst case scenario where the insured events occur then the entire fund will be wiped up.

It is clear that when a client is buying insurance such information may not be availed but in order to protect policy holders the regulator (PIA) puts in place measures to ensure that insurers are solvent with an acceptable ratio.

Simply put solvency means assets exceeding liabilities.

The current minimum capital required for an insurance company to start running is about KR1 million.

This means that the liabilities that can be accepted by an insurer with this capital should not exceed KR1 million or in other words this is the capacity of that given insurer. Given this explanation without reinsurance the insurer can actually exhaust the capacity by insuring one big client.

Think of the assets owned by mines which are worth millions if not billions of Kwacha. These amounts are just too big for the local insurers to take using their capacities hence the engagement of reinsurers and unfortunately local reinsurers are very few though I cannot confirm their capacity.

This is how insurance premiums are ‘lost’ out to big foreign reinsurers with huge muscles to take on mega risks. Local players will only take a portion of the risk say 5 percent and cede the rest to reinsurers.

Suffice to state that even reinsurers are limited by their financial capacities and they may also go into the capital markets to share the risk.

This is a glimpse of the sophisticated mec.

WEBSTER TEMBO

Posted by Editor on January 23, 2013. Filed under BUSINESS. You can follow any responses to this entry through the RSS 2.0. You can leave a response or trackback to this entry