adminMartin Tarusenga Business Correspondent
Readers of this series of articles on pensions/insurance matters and members of pensioner organisations have sought explanations on what ‘demutualisation’ really is. The explanations have been sought with specific concerns on how demutualisations of insurance companies in Zimbabwe affected demutualisation proceeds reflecting on demutualisation certificates that they received from insurance companies. The insurance companies, in typical obstructive/outlaw conduct, obviously did not do a good job of explaining ‘demutalisation’ to their clients, if at all they bothered.
Demutualisation is a process of converting the ownership of an insurance company owned solely by its policyholders, to the ownership of a few shareholders. Insurance companies owned solely by their policyholders are Mutual Societies, while those owned by the shareholders are the ordinary proprietary companies.
Demutualisations became fashionable in developed economies when it became empirically evident that Mutual Society appointed management, charged with the responsibility of ensuring that the Societies met full rightful benefits due under policies, hijacked these Mutual Society objectives into self-interests — a problem known as an ‘agency problem’. Such obligations to meet policy benefits are technically referred as Society liabilities to its members. The Mutual Societies then figured out that the agency problems could significantly be reduced if they transferred (or sold) the liability to another party, an expert investor, under exacting contractual conditions. The expert investor would seek to efficiently manage the liabilities to meet the obligations as they fall due, and the assets backing same, to make a profit for themselves.
In sum, transactions would require the liabilities of the Society at demutualisation date to be summed up over all society members and compared to the assets of the Society at the same date. Typically the value of the assets tended to be greater than the liabilities owing to the traditional conservative management approach applied to Mutual Societies — that is there would be a surplus of assets over the amounts required to meet policy benefits. Naturally the societies would distribute the surpluses among members taking into account several factors including the period of membership, amounts contributed as a member, type of policy, among others.
Members then had the option, for some policies, to cash out the surplus or use the surplus to buy shares into the evolving proprietary company. Other policy types such as pension types of policies allowed redemption of the surplus on policy maturation. With regards to this surplus attribution, policyholders of insurance companies in Zimbabwe that demutualised in the late 1990s and the early 2000s will recall cashing out on these surpluses, or purchasing shares into the emerging proprietary companies, or receiving pension scheme demutualisation certificates, as the case may have been. The assets that remained purely to support the liabilities are known as policyholder funds, or sometimes reserves.
Once there was concurrence on the quantum of liabilities, the asset values, the surplus distribution, between the Mutual Society and the proposing shareholders, there would be further agreement on the charges per policy to be levied by shareholder in order to deliver on the said obligations. Thereafter the shareholder would be required to deposit an amount to serve as security and commitment, in the event of default by same. Such an amount, referred to as shareholder funds or capital requirements, would be calculated to reflect the extent to which the shareholders may default on the liabilities, and therefore include risk factors such as the adverse impact of inflation on benefits to be paid, the expenses of managing the portfolio of policies, the likelihood of policyholders surviving to certain dates, the real value of benefits payable under the policy, among other factors.
Almost always the operation of both the Mutual Society and the demutualised society would be subject to the watchful/competent eye of a regulator serving primarily to protect the typically policyholder. Regulators among other stipulations, prescribe the methods of evaluating the said policyholder/shareholder funds, the permissible assets in which the policyholder and shareholder funds can be maintained, the proportion of the funds that can be maintained in each asset class, this in the bid to protect the policyholders.
This outline of regulating pension/insurance services in fact embodies best practices engaged by regulatory regimes such as Solvency II, IOPS, among others. These regimes have been very successful in protecting their policyholders, hence their thriving pension/insurance industries, as driven by consumer confidence in the industries.
In Zimbabwe, while the offer of cash to policyholders may have been enticing back in the days of demutualisations, the cash offers hardly look enough to constitute full rightful benefits under the policies, especially considering the certificates distributed by insurance companies are now worthless, and the companies are now paying paltry benefits if at all.
Now, it is apparent that policyholders of insurance companies that demutualised in Zimbabwe were subjected to rather opaque demutualising procedures where they did not have real choices, except to consent to the demutualisations. Without any education on such matters, and with regulators of the day equally uneducated on the matters, domestic investments in pension/insurance vehicles for very many years were meddled with — to say the very least. The reports from some insurance company insiders that demutualisations in Southern Africa were plans to misappropriate and externalise value in response to political developments becomes plausible.
The value of the pension/insurance industry which is known to have attained around $3 billion in the early 1990s, with annual insurance premiums, and pension contributions flowing into the industries at the rate of hundreds of millions of US dollars over these years, in Zimbabwe the industries are hardly worth $2 billion, when estimations expect the industries to be worth upwards of $12 billion.
Instead of rising up to protect the policyholders, the regulators have openly and strangely been protecting insurance companies. There is now the national outcry against pension/insurance benefits entitled by insurance companies. Demutualisations were essentially a zero sum game for policyholders in Zimbabwe, and Government needs to act immediately to investigate demutualisations, among wrong doings in a bid to protect policyholders.
Martin Tarusenga is General Manager of Zimbabwe Pensions & Insurance Rights, email, [email protected] <mailto:[email protected]>; telephone; +263 (0)4 883057; Mobile; +263 (0)772 889 716. Opinions expressed herein are those of the author and do not represent those of the organisations that the author represent
Online Reporter