Insurance policyholder protection fund on cards

HARARE - Government is pushing for a legislative framework which will  pave way for the establishment of a policyholder protection fund for the insurance industry in a bid to enhance consumers’ protection, the insurance and pensions regulator disclosed last week.

It aims to protect the interest of policyholders in the event of bankruptcy of an insurance company.

The fund is expected to serve as the final safety net for policyholders when insolvency of an insurance company occurs. In fact a protection fund allows for a smooth exit mechanism for incompetent insurers from the industry.

The absence of a policyholder protection mechanism in the insurance sector in Zimbabwe has exposed policyholders. The failure of an insurance company affects policyholders significantly.

They would suddenly face risks they thought had been transferred to a third party.

A policyholder protection fund, however, can alleviate significantly the difficulties that policyholders might face in the event of an insurance company closing down.

Insurance and Pensions Commission (Ipec) spokesperson Lloyd Gumbo last week said plans to set up a policyholder protection fund are contained in the proposed insurance Bill which seeks to amend the current Insurance Act.

“Currently, there is no policyholder protection fund for the insurance industry (in Zimbabwe),” Gumbo told The Financial Gazette last week.

“However, the current Insurance Bill, which is earmarked to amend the Insurance Act, provides for the establishment of a policyholder protection fund.

“The Bill also provides for the establishment of a security deposit, wherein, a certain portion of every registered insurer’s capital shall be kept in a ring-fenced fund to cater for ‘rainy’ days,” added Gumbo.

The world over, the insurance sector, is built on the public’s confidence in the business, a situation which makes the sector vulnerable.

This means the policyholder protection fund can help maintain public’s confidence.

There are strong arguments in favour of policyholder protection fund.

Gibson Munyoro, a Harare-based insurance policyholder told The Financial Gazette: “At the moment, policyholders face potential financial losses as their claims may not be fully met in the event that an insurance company becomes insolvent because there is no protection fund in place.

“It is, therefore, important that a fund to compensate policyholders’ losses is established where companies in the industry can contribute towards the fund, through levies or contributions.”

Another policyholder, Graham Smith, also based in Harare agreed with Munyoro.

“A protection fund makes it possible to deal with bankruptcy cases of insurance firms without exposing policyholders to risks of severe losses,” Smith said.

“If the industry has such a safety net, Ipec, may let a financially impaired insurer close without taking measures  that often disturb the efficient functioning of the sector. This means the policyholder protection funds can help develop a dynamic and competitive insurance sector.”

In the absence of policyholder protection fund, Gumbo said Ipec has put in place other more stringent regulations to minimise failure in the industry.

“In the absence of a policyholder protection fund and the security deposit, the protection safeguards already in place are the minimum capital requirements, which were increased through Statutory Instrument 95 of 2017 and effective prudential supervision of insurers to ensure that they remain safe and sound to meet policyholder
obligations as they fall due.

“Furthermore, most insurance companies have reinsurance arrangements with reinsurance companies, local and abroad.

“Such mechanisms are meant to ensure that there is another layer of protection should the primary insurer have limited capacity to meet risks.”

Gumbo said Ipec is in discussion with government over the establishment of an office of the Ombudsman, which will be chargedwith handling policyholder complaints.

“In order to ensure that consumers of insurance products have recourse to a dedicated grievance handling institution, we are engaging government with a view to establish an office of the Ombudsman, which will be charged with handling policyholder complaints free of charge” Gumbo said.

— The Financial Gazette


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