Hyperinflation, Currency Crises & Insurance Industry Collapse

Hyperinflation destroyed Zimbabwe’s insurance sector, and decades later, it still hasn’t recovered. Currency crises in Lebanon, Argentina, and Venezuela have crippled financial institutions, showing how fragile financial systems can be when trust in money itself disappears.

A recent discussion started as a tongue-in-cheek debate: Is inflation a more efficient way to raise revenue than taxation? But it evolved into a broader debate on monetary risk, Bitcoin, inflation, and long-term economic trends—and why so many common arguments deserve scrutiny.

How Inflation Impacts Insurance

Premiums & Inflation Risk
High inflation makes level premiums unworkable, erodes the real value of cover. Optional benefit increases create adverse selection problems in life insurance. Even constant percentage increases fail under volatile inflation, and real wage stagnation worsens affordability pressures.

Monetary Instability & Insurer Solvency
Currency collapses create huge challenges for insurers trying to meet liability obligations in real terms. When inflation spikes, reserves built on past assumptions become grossly inadequate, leading to solvency concerns and even industry-wide failure.

Crypto & Smart Contracts in Insurance
Blockchain has potential for parametric insurance, automated claims processing, and fraud reduction. But much of the excitement outpaces practical application—or solves problems that were already solved while not addressing key remaining challenges.
(And let’s be real—just because a smart contract auto-executes doesn’t mean lawyers won’t find ways to argue intent and “meeting of minds.†)

My (Cautious) View on Blockchain

I spoke at the 2016 ASSA Convention on Seductions of the Blockchain, and my position remains:

• Cautiously optimistic
• Interested in opportunities
• Frustrated by the lack of rigorous debate from both fanatics and skeptics

The fanboys see blockchain as a cure-all, while the status-quo-invested skeptics dismiss it entirely. Reality, as always, is more nuanced.

Key Arguments & Concerns

1 Inflation as an ‘Efficient’ Tax?

Some argue that taxes are administratively complex, difficult to collect, and inflation acts as an “invisible tax† that transfers wealth to the state with less friction.

The Problem? Inflation isn’t a neutral mechanism:

• Distorts price signals and makes long-term contracts unreliable.
• Increases uncertainty and raises borrowing costs.
• Disproportionately harms those without inflation-protected assets—often the poorest.
• Erodes trust in government’s ability to manage financial stability.

Hyperinflation isn’t just caused by overspending—it requires excessive money printing to cover deficits. Many governments (e.g., Japan, the US, and EU countries) have run huge deficits for years without hyperinflation because they borrow responsibly instead of monetising debt.

Friedman’s famous quote:
“Inflation is always and everywhere a monetary phenomenon in the sense that it cannot occur without a more rapid increase in the quantity of money than in output.”

2 Bitcoin as a Predictable Alternative to Fiat?

Bitcoin proponents argue that a fixed supply prevents inflation and provides monetary certainty. But there’s a flip side:

The Problem? A rigid money supply is deflationary, which discourages spending and investment:

• BTC expansion (~0.9% today, falling below 0.5%) is well below global population and economic growth.
• Fixed-supply currencies have historically failed because economies need monetary flexibility to adjust to shocks.
• A deflationary currency discourages productive investment. If BTC’s price is expected to rise, why spend it? Why take out a loan?

This is why almost all mainstream economists—from Keynesians to monetarists—support some level of controlled monetary expansion.

Academic reference: Friedman advocated rules-based money supply growth, not a hard cap. Even Hayek, a proponent of free-market money, acknowledged the need for adaptable monetary systems.

A bigger issue: Some crypto coins have fixed supply, but the total universe of crypto coins is unlimited. New projects, forks, and tokens emerge constantly, meaning there is no true scarcity at a system-wide level.

3 Credit Risk & Smart Contracts – Who Pays When the Funds Aren’t There?

Smart contracts don’t solve credit risk. Traditional insurers must hold capital reserves and meet solvency requirements to ensure claims can be paid. Smart contract-based insurance lacks an equivalent safety net—yet.

Key Risks:

• No Guarantee of Payouts: If a smart contract is underfunded, it can’t issue emergency capital or negotiate claims—it just fails.
• Over-Collateralization Isn’t a Perfect Fix: Many DeFi protocols require excessive collateral to mitigate risk, but this limits scalability and locks up capital inefficiently. Actuarial approaches to capital adequacy could provide a smarter balance.
• Cascading Failures in Market Shocks: A major market downturn can cause mass liquidations, leading to systemic failures—just like traditional financial crises, but with fewer stabilizers.

Future Opportunity:

• As DeFi regulation increases, some form of capital adequacy requirements (like Solvency II for insurers) may emerge.
• Actuaries and insurance risk experts could play a role in designing smarter DeFi risk models.

Final Thought: Smart Contracts Are an Exciting Tool—but They Need More Work

Smart contracts introduce new efficiencies, but they also introduce new risks:
They remove intermediaries—but also eliminate safety nets.
They change fraud risk—but introduce oracle manipulation risk.
They enable fast, automated transactions—but don’t guarantee funds will always be there when needed.

For insurance, finance, and risk management, blind reliance on smart contracts is dangerous. But recent advancements show promise:

• Regulators are starting to provide legal clarity.
• Hybrid smart contracts (automated + human oversight) are emerging.
• Decentralized oracles & improved collateral models are evolving.

The real opportunity? Combining smart contract automation with actuarial risk management principles to build more resilient decentralized insurance solutions.

Would love to discuss with those working in insurance, risk management, DeFi, and blockchain regulation.

#Inflation #Blockchain #BTC #ETH #DeFi #DistributedLedger #MonetaryPolicy #FinancialRisk #Insurance #RiskManagement #Actuary #Economics #LegalRisk #ParametricInsurance

Even for a leanly capitalised (re)insurer (SCR cover 1.2x) this implies a CQS of 8, better than the largest, most conservatively capitalised insurers in South Africa.

No externally rated insurer or reinsurer in South Africa has a CQS of better than 11 or 12. The table in 10.9 ignores sovereign or country risk in the default risk assessment. Therefore, it significantly understates spread and default risk.

The question here is not whether there is an absolute sovereign cap that no South African entity can be rated above. The issue is that applying this table almost certainly understates the risk and CQS relative to rated entities because it ignores sovereign risk.

In terms of the sovereign cap, the risk of exposure to South Africa is (and should be) factored into the rating for entities with significant exposure (asset, operations, profit sources, regulatory risk, inflation, appropriation et al) in South Africa. This usually results in predominantly South African businesses not having a credit rating better than the sovereign.

There is more to reinsurance optimisation that interpreting the FSIs. The application of the sovereign cap is also mostly a distraction from the choices of reinsurer and reinsurance programme to manage risk and capital.

#capitalmanagement #reinsurance #CQS #optimisation #sovereigncap #creditrisk

Business Rescue precludes creditors from applying for liquidation of the business. This is the removal of an existing right of lenders: “a temporary moratorium on the rights of claimants against the company or in respect of property in its possession”

From what I gather it’s not clear that this formally counts as default – might depend on specific loan or bond terms and how credit rating agencies respond to this.

How one “feels” about this is less relevant than the legal interpretation for cross-default provisions. It certainly feels like default to me.

For SAA, it’s also a step which means the government is no longer prepared to keep putting in money. That’s certainly a message about how likely any implicit (rather than explicit) governmental guarantees are for other entities.

Short aside on government debt and balance sheets

It’s not really so much that this is bad news, but rather this is the long-overdue recognition of how bad the news is around SOEs and their total contribution to the true Debt/GDP and their zero or negative contribution to the less-publicised Asset/GDP ratio. As I’ve mentioned before, another useful ratio would be (Debt-Assets)/GDP, which if measured carefully can be a more useful measure of the true financial position of a country and a better guide for decisions on whether to privatise an existing SOE.

A full balance sheet approach and one that considers return on capital (as well as also-important social-development, second-order, longer-term and positive externality items) should form a greater part of policy decisions.

Insurers, unlikely retirement funds, have to hold risk-based capital against the risks inherent in their investments. This makes it more difficult to underestimate the risks and services as a deterrent to large allocations.

Infrastructure assets can play a part in linked funds for life insurers, where the investment risk is passed straight back to the policyholders and no market risk capital is held by the insurer.

Under this policy construction, the risks can be similar to a defined benefit retirement fund. These include the practical challenges of pricing and valuation, and conduct and fairness issues of managing investment and divestment prices, liquidity with large withdrawals and transparency of pricing.

These liquidity constraints also make this a poor investment for non-life insurers or smaller life insurers, especially where they primarily write risk business.

Where are alternative assets used in insurance?

The three areas where infrastructure assets have a meaningful place to play in insurance are:

1. As a part of a portfolio of assets for long-dated, predictable and illiquid annuity liabilities.

2. Part of a with-profits portfolio, whether this is accumulation phase or with profit annuities in payment.

3. Part of large, well-capitalised insurer’s shareholder portfolio, subject to risk appetite constraints.

How are infrastructure assets treated for insurers for regulatory purposes

In 2014, EIOPA started to consider whether the Solvency II regulations would discourage insurers to invest in infrastructure assets. It was carefully phrased as “removing disincentives† but the line between that and deliberate incentives for insurers to invest in infrastructure assets is invisible.

Right towards the end of the development of South Africa’s Solvency Assessment and Management (SAM) regulatory overhaul, Task Groups of the SAM project were asked whether any adjustments were recommended.

Technical Provisions adjustments for infrastructure assets

The answer from the Technical Provisions Task Group was “no†. Technical Provisions were intended to be market consistent and, with possible exceptions for illiquidity premium / matching adjustments (already a part of the regulations) returns on assets should not, in general, affect the measurement of liabilities.

The illiquidity premium is still very much relevant. Up to 50bps can be added to the risk-free yield curve for discounting life annuity cash flows, provided the backing assets are a good cash flow match and are managed separately from the rest of the portfolio. The illiquidity premium is calculated as 50% of the spread achieved on the matching assets.

In South Africa, most of the available corporate paper available to generate spreads has a term of five years or less. This greatly reduces the effective average spread that can be applied. Longer-term (20 or 40 year) infrastructure debt-based investments are very welcome in this scenario.

This allowance is not specific to infrastructure assets, but is important as part of the overall capital assessment of infrastructure assets.

It’s worth mentioning that the European Solvency II “matching adjustment† is far more generous. I regularly experience actuaries or consultants from the UK talking up great plans for assets in a SAM environment, assuming that the rules are the same in South Africa as they are across Europe.

(The volatility adjustment in theory also has a place in this discussion, but that’s a bigger topic and typically a smaller impact in any case.)

Solvency Capital Requirement (SCR) adjustment for infrastructure assets

The Capital Requirements Task Group followed the European lead and allowed reductions in the equity shock and spread shock that would be applied to qualifying, high quality, infrastructure investments.

• 33% shock for equity (which is 77% of the “SA equity† shock, or about 70% of “Other Equities† shock, which I’d argue would be the most typical classification in the absence of an infrastructure asset class)
• Symmetric adjustment = 77% of SA equity
• 70% of spread shock for debt
• 65% illiquidity premium shock

The 65% shock to the illiquidity premium is not specific to infrastructure. It’s also complete irrational and greatly reduces the benefit of the very limited illiquidity premium in the first place.

• The stated risk here is a narrowing of the illiquidity premium, but this could only be realized through an increase in the relevant asset prices, matched with an increase in liabilities with no net impact. Since the shock is defined as “A 65% fall in the value of the illiquidity premium used in the valuation of technical Provisions† there is no offset for the asset of this calculation.
• The actual risk, if there were one, would be an increase in illiquidity premiums in the market, resulting in a decrease in asset values, only partially offset by a decrease in liability values due to the 50bps cap.) 

Impact of SCR relief

The impact of lower SCR on after cost-of-capital investment returns needs to be calculated for the specific portfolio and how it interacts with other risks within the business. One might expect a 1% to 2% increase in penalized returns.

Qualifying criteria

To qualify as an “infrastructure asset† and benefit from the lower capital charges, a fairly lengthy set of criteria must be met. For insurers already intended to invest in only high quality (and therefore lower return) infrastructure assets, these criteria may overlap with existing due diligence and investment analysis processes.

Non risk-based criteria

Risk-based criteria

The Infrastructure project entity can meet its financial obligations under sustained stresses that are relevant to the risk of the project.

• Must be externally rated (in theory it doesn’t have to be, but in practice it really should be and questions would be asked by the Prudential Authority if it weren’t.)
• The off-taker must be either the South African government, or there must be a large number of, ideally independent, diversified customers.

• The Infrastructure assets and Infrastructure project entity are governed by a contractual framework that provides debt providers and equity investors with a high degree of protection
• For bond investments, significant additional covenants are required
• The cash flows that the Infrastructure project entity generates for debt providers and equity investors are predictable. This must be demonstrated through one of the following:
  • Availability based revenues
  • Rate of return regulation covering revenues
  • Take or pay contract
  • Output or usage and price imply low risk

Should insurers invest in infrastructure?

It’s unhelpful to say “it depends†, but of course it does. However, with appropriate due diligence and consideration of the financial and capital implications, life insurers with large with profits or annuity books can benefit shareholders and policyholders, as well as potentially the country as a whole, by investing judiciously in infrastructure assets.

The risk is that they are outbid by retirement funds with less risk sensitivity to the investments.

The question as to whether the benefit payable under a credit life policy can or should include arrears payments.

The purpose of a credit life policy is to protect the policyholder, the lender, and the policyholder’s estate (not necessarily in that order) against death, disability or retrenchment. This is only effectively achieved if the entire amount owing under the credit agreement is paid off by the policy.

So as a starting point, it would make sense for arrears to be included. All the stakeholders in the arrangement want this.

Back to the legal stuff

What do the credit life regulations say?

for death cover: the outstanding balance of the consumer’s total obligations under the credit agreement;

While the term “total obligations” is not defined in the credit life regulations, I challenge anyone to argue with a straight face that this would not include arrears payments.

The National Credit Act itself says:

A credit provider may require a consumer to maintain during the term of their credit agreement—

(a) credit life insurance not exceeding, at any time during the life of the credit agreement, the total of the consumer’s outstanding obligations to the credit provider in terms of their agreement;

Again, I don’t see how the arrears payments don’t count as an obligation.

Is there something else here?

Arrears from when, might be the question.  For a third party insurer, one can understand the trepidation in paying the full outstanding balance plus arrears all accumulated at the contractual interest rate.

A lender could be quite happy to delay finding out about deaths and delay further in reporting them, safe in the knowledge that they are earning high interest rates with the credit risk of the insurer, rather than the original borrower, standing behind them.

This feels like a separate issue though. Agreeing to make payment as at date of claim or end of waiting period is one thing. An outright restriction on including arrears in the benefit is not correct.

What about for credit life insurance within a group?

Where the benefit is paid by one part of a group (the insurer) to another part of the group (the lender) there should be even less cause for concern about timing of claims and payments. Games can be played with claim ratios and profit recognised within the insurer vs the lender, and value for money measures being affected. Again though, that’s a separate issue all on its own.

There have been plenty of debate around the regulations, in part because of the dramatic financial and operational impact they will have, and partly because of how imperfectly worded they are and the scope for interpretation.

I’ll be posting about this more in the coming days.

Basing the premium on initial or outstanding balance

First, a real anomaly is the ability for insurers  to charge the capped premium rate either on initial loan balance or on the declining outstanding balance.

There are good practical reasons to want to charge a single, known amount to policyholders. It is easier to administer and policyholders have greater clarity on what they are paying.

The actual premium charged over the lifetime of a loan can be substantially higher where it is based on the initial balance rather than the declining balance, particularly for longer term loans. How a cap designed to moderate profits and improve value for money can allow such disparity is bizarre.

There is an interesting quirk here, which I hope is exploited to drive value for money and increased competition in the market. The credit life regulations require lenders to permit substitute policies where the policy meets the minimum regulatory required benefits. Where an insurer (or in practical terms, usually the lender) is charging a premium based on the initial loan balance, it becomes easier for a third party insurance company to offer a substitute policy at a cheaper rate, based on the lower actual sum assured partway through the loan or policy term.

I am not a fan of outright caps, although I recognise there are times when it might be the least bad regulatory intervention. The holy grail is a competitive market where consumers have access to information and providers compete for the business.  This will drive profit margins down to reasonable returns for the risk and capital required, and drive business into the arms of the operational cost (and distribution cost) competitive providers.

Those entities still charging on initial balance will actually help to drive this competitive market.

As much as I believe in the right of businesses to make money and make good money, value for money will be driven by competition and more of it is still needed.

European five year inflation expectations

It really does seem that UK / US policies are, more slowly than necessary, coming right and the economies are slowly shrugging off the GFC and are moving forwards.  The rest of Europe is not.

Messages? This time isn’t different, sovereign debt crises happen all the time, ignore currency risk at your peril and there are many reasons governments can default on their debt.

In South Africa, we’ve had incredibly few corporate bond defaults and most market participants don’t even know that the South African government “restructured” some of its debt in 1984 and so has, in fact, defaulted on contractual bond obligations.

In a recent credit risk and capital workshop, I raised the issue of Russia defaulting on Ruble-denominated debt in 1998, a big part of what led to the collapse of LTCM. Again, these events are often figured as “exceptionally unlikely” and not even worth holding capital.

Well, in the news, Argentina is about to default. Again. They have been one of the most regular defaulters on sovereign debt in the last couple of centuries. They’re also an example I often use of “currency pegs” doing precious little to mitigate currency risk except on a day to day basis.

More on that in another post (yes, I’m hoping to post a little more regularly in the coming months.)

House of Debt (a newish blog, seems interesting) has a post covering some of these risks to the Chinese and therefore global economy, with charts! I may post on these issues from time to time as it’s beginning to feel more and more relevant.