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Insurance sector faces liquidity, credit risks

The insurance sector performance continues to be burdened as players face credit and liquidity vulnerabilities due to high insurance receivables despite being adequately capitalised, solvent and profitable.

The situation, which industry insiders have linked to the harsh economic environment induced by the Covid-19 pandemic, has been outlined by the Reserve Bank of Malawi (RBM) in its 2021 Financial Institutions Supervision report published on Tuesday.

Hassam: It was affected by Covid-19

The RBM said the claims ratio in the general insurance sector increased to 60.3 percent in 2021 from 55.1 percent in 2020 where claims ratio for miscellaneous classes of business increased to 62.5 percent while all the remaining classes registered a decline.

Total gross claims incurred by the sector increased by 23.8 percent to K33.8 billion, according to the report.

Reads the report in part: “The sector continued to experience insufficient liquidity in 2021 and closed the year with a liquidity ratio of 85.8 percent, which was below the recommended prudential minimum limit of 100 percent.

“This notwithstanding, the ratio was an improvement from 81.8 percent reported in 2020. The continued tight liquidity resulted from high insurance receivables as evidenced by a high insurance debt ratio of 67.9 percent against recommended maximum limit of 50 percent.”

Speaking in an earlier interview, Gaffar Hassam, board chairperson of Nico Holdings plc, whose firms has interest in the insurance sector, said insurance segment was affected by Covid-19 related deaths, resulting in the rise in claims.

He, however, said regardless of the growth in claims, the company managed to pay off its claims.

Hassam said: “The year 2021 was the peak of the pandemic and disrupted the way we conduct business.

“On the other hand, because of the number of deaths we experienced, we had to pay a lot of claims amounting to K5.5 billion and our subsidiary Nico General reported an underwriting loss during the year.”

Insurance Association of Malawi vice-president Abdul Mageed Dyton was yet to respond to an e-mailed questionnaire, but earlier indicated that its clients operated below their capacity.

He said: “In view of the tough economic environment, insurers were left with uncollected debts which affected their liquidity ratios. On the other hand, our investment income was reduced as such the money collected could be invested to earn more income.

“We have also had a challenge with operational costs, which have increased as we have to employ debt collection services to collect outstanding premiums.”

Dyton assured their clients that local insurance companies have sufficient capacity to meet their insurance contract obligation.

“We are, however, upbeat with an outlook which looks promising for the insurance sector as the economy is rebounding from Covid-19 shocks.

“Clients have now started to pay their premiums and the liquidity ratios will improve,” he said.

During the year under review, the registrar of financial institutions conducted two virtual examinations of general insurance companies and four compliance on-site examinations of insurance brokers, which revealed failure to pay claims on time.

The RBM, however, indicated that remedial measures were taken to address the observed shortfalls.

Meanwhile, in view of the subdued performance, RBM Governor Wilson Banda, who is the registrar of financial institutions, said he will continue the multi-pronged engagement with the sector to address existing and emerging risk.

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