Over the past decade, pension fund assets grew more than twofold on the back of strong offshore investment, records from the Non-Bank Financial Institutions Regulatory Authority (NBFIRA) show.
The report highlights the dominance of equity in offshore investments from 2013 to 2022. Additionally, it notes the diversification of the onshore investment portfolio into property and unlisted equities, while the offshore portfolio expanded to include alternative investments over the last five years.
On average, offshore investments constituted approximately 60 percent, with the remaining 40 percent allocated to onshore investments.
The report indicates a notable increase in pension assets from P59 billion in 2013 to P117 billion in the past year. Concurrently, pension funds’ income witnessed substantial growth, rising from approximately P7 billion to P12 billion during the same period. The income experienced a sharp increase between 2020 and 2021, attributed to the profitable disposal of offshore investments, followed by a decline between 2021 and 2022 due to decreased investment income. Despite these fluctuations, benefits payments remained below P6 billion over the past 10 years, indicating that the pension funds industry maintained sufficient liquidity during the observed period.
The report indicates a 6.5 percent increase in gross contributions for medical aid funds during the reviewed period, rising from approximately P2.1 billion in 2021 to P2.3 billion. Additionally, total claims paid by the medical aid funds experienced a 12.9 percent growth, reaching P2.1 billion in both 2021 and 2022. Consequently, there was a 5.6 percent rise in the claims ratio, reaching 95 percent in 2022 compared to 90 percent in the preceding year. The surge in claims is attributed to various factors, including the lingering effects of the COVID-19 pandemic and associated health costs, as well as an increase in non-communicable diseases, as highlighted by NBFIRA. The regulator emphasizes that the impact of the pandemic on non-communicable diseases was largely overlooked amid the international focus on disease variants, infection control management, and healthcare systems.
The report anticipates that the impact will become more apparent in the future. Additionally, non-health expenditure witnessed a 16.5 percent increase, rising from P278 million in 2021 to P324 million in 2022.
“The increase in claims and to non-health expenditure led to an aggregated industry net loss of P101 million in 2022 compared to a loss of P18 million in 2021. On an individual basis, three of the five medical aid funds registered losses for the 2022 financial year. Each medical aid fund needs to factor into their strategies going forward on ensuring sustainability beyond adjusting contributions,” the report says.
It states that the medical aid industry’s gap between contributions and claims has significantly reduced over the past five years. However, this reduction is also mainly due to inflation. “Thus the medical aids industry should develop resilient mechanisms to withstand future health pandemics and macro-imbalances,” the report says.
The report notes that the level of the insurance industry’s development in the past 10 years, as demonstrated by the penetration rate (growth written premiums as a share of real GDP), has been steady at about 3 percent. “The value of life insurance premiums (penetration ratio) accounted for about two percent of GDP compared to general insurance penetration of one percent,” it says. Generally, the report says, inflation is observed to have a long-term negative relationship with insurance penetration ratios, and the same is observed in Botswana. Therefore, it is necessary for the insurance industry to hedge against heightened inflation.
A growth in total gross written premiums was recorded in the year under review for life and general insurers at P6.2 billion, having increased by 3.4 percent from the prior year. Including reinsurers, total assets for the insurance industry increased marginally from P21.7 billion in the prior year to P22.4 billion in 2022, representing an increase of 3.4 percent. Similarly, total liabilities for the industry increased by 3.2 percent, from P17.6 billion in 2021 to P18.2 billion in 2022.
In the reporting period, the report shows that Non-banking financial institution (NBFI) sector assets increased by five percent from P153 billion in 2021 to P161 billion in 2022. The sector’s assets-to-real GDP ratio was 81 percent in 2022, compared to 82 percent in 2021, implying that real GDP grew more than the NBFI’s total assets. The growth in the total sector was largely attributable to the retirement funds industry, which grew by 6.5 percent from about P110 billion in 2021 to P116.6 billion in 2022. The next largest NBFI sector is insurance, which constitutes 15.2 percent and has grown by 3.4 percent from P23.7 billion in 2021 to P24.5 billion in 2022.
Overall, the domestic financial market system continues to be sound, stable, and resilient to diverse shocks. “In the presence of strong macro-financial linkages in Botswana’s financial system, some of the risks that NBFIs are exposed to include currency risk, credit risk, interest rate risk, concentration, and cybercrime. Currency risk is most likely to be experienced by the market through offshore investment price and exchange rate volatility,” the report says. For instance, the report notes that more than 50 percent of the pension funds are currently invested in offshore markets.
Of the 823 NBFIs in Botswana, 27 are high-impact entities that own more than 90 percent of the total sector assets, giving rise to concentration risk. “The top two pension funds account for 78 percent of the total pension assets. The two top life insurers account for 87 percent of the sub-sector’s assets while in the lending activities, 92 percent of the assets belong to the five micro-lenders,” the report says. Nonetheless, it further notes that these risks remain contained owing to an effective risk-based regulatory and supervisory approach applied by the regulatory authority.