THE insurance sector says keeping the multicurrency regime till 2030 is likely to pose a challenge to liability and construction contracts.
President Emerson Mnangagwa recently extended the use of the multi-currency system by five more years to 2030 from the initial 2025 deadline. This came after the financial services sector raised concern that it could no longer write long-term business going beyond 2025.
But Tatenda Katoma, president of the Insurance Institute of Zimbabwe (IIZ), told businessdigest recently that construction and liability contracts had lengthier terms.
“The extension comes as a relief to the industry, mainly non-life, as it guarantees stability in the short-term policies, which are issued on an annual basis,” he said.
“The industry comprises life and non-life companies. With respect to the non-life business, the 2030 development is going to ensure consistency of contracts up to 2030.
“However, challenges are likely going to emanate from liability and construction contracts that usually are long tailed in nature. Three years prior to 2030, the indemnity for these contracts will need to be restructured to reflect the currency change after 2030,” Katoma said.
He said uncertainty would remain on development and long-term projects as the 2030 cap encourage short-term borrowings with high interest rates.
Katoma said this would restrict funding for long-term projects.
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“Thus, in respect of long-term insurance, there is a need for policy consistency beyond 2030 to build confidence with the policy holders,” he said.
“Thus, clarity and proactive actions will be needed on life policies to determine how the benefits for policies maturing beyond 2030, will be paid out.”
Finance and Investment Promotion deputy minister David Mnangagwa recently revealed that despite the use of the multi-currency regime being extended to 2030, the Treasury was still working on the introduction of the mono currency system. Actuarial Society of Zimbabwe (ASZ) president-elect Prosper Matiashe said the extension of the multi-currency system window to 2030 provided more certainty for players in the financial services sector, including insurance companies. But, he cautioned that insurance policies could be longer.
“For example, banks will be able to issue a seven-year mortgage in a currency of choice and the mortgage protection insurance issued will also be seven years in terms of tenure,” Matiashe said.
“Major infrastructure projects will also get funding and insurance for longer terms thus allowing more stable risk transfer mechanisms in the economy. Such infrastructure projects include property construction, mining expansion, roads, dams and energy projects.”
He further stated that: “Whether the seven years to 2030 is adequate depends on particular projects and funding mechanisms. Some projects have pay back periods that are more than 15 years.
“Hence, investors and funding providers will still be exposed to material currency risk post 2030. They will have to price the risk involved and charge an appropriate expected return accordingly.”
Matiashe said given the potential disadvantages of multi-currency systems, the government possibly arrived at the seven years in a bid to balance the advantages and disadvantages of a prolonged use of multiple currencies.
The development comes at a time the industry is facing a myriad of other challenges including taxation.
Katoma also said the sector raised concerns about the Intermediated Money Transfer Tax (IMTT), which is levied on each money transfer made.
“This tax can have implications for insurance companies in terms of providing full indemnity to policyholders or absorbing the cost themselves,” he said.
“The IMTT adds an additional financial burden to insurers as they may need to factor in this cost when calculating premiums or handling claimable amounts on behalf of policyholders.”
Katoma said this could affect the overall profitability and sustainability of insurance operations.
To address these taxation burdens, he said, it was crucial for sector representatives to engage with relevant regulatory authorities and policymakers to advocate for a tax framework that supports growth and competitiveness of the insurance players.
Katoma said this might involve discussions around potential exemptions or adjustments to the IMTT or other tax-related challenges that hinder the industry’s ability to provide effective and affordable coverage to policyholders.
He said tax exemptions and grants were indeed potential mechanisms that can assist companies in their quest to innovate.
