adminTapiwa Maswera Correspondent
When I was young, handsome and new to the financial services industry, my mentor made a telling observation.
Although still very handsome, I am now neither young nor new to the industry. It’s time to pass on the wisdom. The worst misery in life, my mentor opined, is not dying, but being old and poor. Every Zimbabwean seems to have a funeral policy these days but almost no one has a life insurance policy or a retirement plan.
If my mentor is right, and I personally believe he is, then the need for insurance and retirement products should be much more than the need for funeral insurance.
That no one seems to have a life insurance policy or retirement plan when there is a demonstrable need, speaks in part to the inability of the industry to create value. Value in this case as defined, not by insurance and finance executives, who seem to live in another world, but by customers who are willing to buy more products and services at a premium.
Golden Premiums, Valueless Benefits
The contractual savings (insurance and pensions) industry plays the very important role of facilitating the smooth transfer of wealth between generations within the economy.
At individual level, the insurance industry assists citizens in managing mortality and financial risk while the retirement industry assists them to plan consumption over their lifetimes.
In one of Aesop’s fables, an old miser had buried his gold in a secret place. Every day he goes to the spot, digs up the treasure and counts it piece by piece. A man, who had been observing him, guesses what it is the miser had hidden, he quietly digs up the treasure takes out the gold and replaces it with a valueless stone of similar shape, mass and size.
The miser being old and almost blind does not realize what has happened. Many years later when he discovers his loss, he is overcome with grief and despair. Needless to say, he died, old, poor and miserable.
A hollowed out future
The story of the old miser may help explain what happens when the contractual savings (insurance and pensions) operates in an inflationary environment. In the allocation of value, old valuable dollars are mindlessly mixed and exchanged for new less valuable versions of themselves.
Customers’ valuable golden premiums are routinely exchanged for worthless stones in benefits. When benefits fail to meet expectations, disappointed customers lose confidence in a system which cannot re-connect them with the value locked in their old dollars.
The implications for our national economy are dire — a hollowed out future and an economy that leaps from disaster to disaster — an economy that has neither the capacity to manage risk nor plan for its future. The ability to post resources into the future is totally lost.
Treating Customers Fairly
Ensuring fair and equitable treatment of financial services customers is a critical building block in repairing the damage. According to the Smith Commission hyperinflation caused loss of value to both premiums and benefits.
But because premiums are paid before benefits, the loss to benefits was bigger than the loss to premiums. In order for the industry to thrive, customers must know, feel and trust that they will get the benefits promised.
The industry will only thrive, if it can convince customers that the value of benefits will always be more than the value of the premiums paid — and be seen to be delivering on this promise.
Otherwise there is no point taking the policy in the first place. It is not only that our industry failed to deliver on this basic — common sense understanding of value.
But also that it is hopelessly failing to explain what happened. This loss of value by customers, together with the continued inability by the industry to create value has damaged the credibility of the industry.
Re-starting the cycle of sustainable wealth creation and prosperity
The industry cannot continue taking gold from customers and exchanging it for valueless stones and still hope to build viable businesses. It is time to accept that this highly technical and specialized industry has unfortunately derailed. It has to be put back on the rails.
To get back on its feet, it has to start creating a new generation of happy and satisfied — policyholders and pensioners who when they get old will not be poor and miserable. This requires vision.
Tapiwa Maswera is an actuary, researcher, valuator of pension funds, a former member of the Justice Smith Commission of Inquiry into the Loss of Values in the Insurance and Pensions Industry. He can be contacted at [email protected]
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