Thin capital market threatens insurance industry

Brian Benza
Staff Writer | Friday June 21, 2013 00:00

 

The warning came from the country's top life insurer, Botswana Life Insurance Limited (BLIL), which said the shallow capital market threatened the industry.In its 2012 annual report, BLIL says insurance industry players could soon be forced to stop underwriting life annuity business due to a dire shortage of Pula matching longer dated investment instruments on the capital market.  BLIL is a subsidiary of listed BIHL and the country's largest life insurance company with an estimated 80 percent market share. As at the end of 2012, BIHL was holding about P13 billion in policyholder funds from both insurance and investment contracts.

The funds are collected from life insurance premiums as well as pensioners funds that are paid out monthly payments through annuity products. 'Botswana Life - and its competitors - is facing a serious challenge, one that could undermine the entire life assurance industry in Botswana. There is an acute shortage of long term matching assets for the annuity liabilities. This is not a new issue for the industry, but it is becoming increasingly acute. There is a real danger that we get to the point where we are unable to underwrite annuities because we do not have sufficient matching assets,' reads the report. According to the insurance giant, what is needed are long-dated government bonds in which the companies can invest the policyholder funds and be able to pay out. 

As a result the company says that in concert with fellow members of the life assurance industry they will be lobbying the government on this very urgent issue. 'In the meantime, we will continue to structure corporate bonds to match our liability. However, corporate bonds, unlike government bonds, come with credit risk.Issuing corporate bonds requires us to put aside additional capital, that we one day may not have. That is why it is very important that we have access to government bonds,' reads the report.At the end of the 2012/13 financial year, government had six outstanding bonds amounting to about P4.7 billion with tenure ranging from 2-15 years.Reading the 2013/14 budget speech early this year, Finance Minister Kenneth Matambo said government continues to develop initiatives such as issuance of more treasury bills and government bonds to promote growth of the capital market and reduce reliance on Bank of Botswana Certificates.

The Botswana debt market has been slowly opening up significantly in the past few years, as it was generally illiquid and inactive despite an insatiable investor appetite.The 'illiquidity' is largely due to lack of diversity in products and depth of the market. Analysts say Botswana needs to develop its debt market as a matter of urgency so that it may tap into the excess liquidity in the local market in order to cover the budget deficit in this difficult economic period.