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

🔬 PFAS linked to health risks

⚖️ Regulatory scrutiny increasing

💼 D&O and liability cover at risk

🌍 Exposure is everywhere

💰 Costs could be astronomical

Liability insurers have a growing emerging risk relating to the potential wave of lawsuits related to PFAS (per- and polyfluoroalkyl substances, or “forever chemicals”) which have been linked to serious health problems and are now the subject of increased regulatory scrutiny and legal action.

Recent developments, such as the US EPA’s decision to regulate PFAS in drinking water and designate two PFAS chemicals as hazardous substances, are expected to trigger a surge in litigation. Water utilities, local communities, and others may seek compensation for cleanup costs, shifting the financial burden to the polluters.

https://www.nytimes.com/2024/05/28/climate/pfas-forever-chemicals-industry-lawsuits.html

The scope of potential liability is vast, with some experts comparing the scale of PFAS litigation to that of tobacco, asbestos, and MTBE combined. Unlike those cases, however, PFAS exposure is widespread, affecting nearly every person in the US and developed markets, and quite likely in South Africa too.

But the risks extend beyond product liability. As we’ve seen with tobacco and the growing litigation risk from climate change, PFAS could also significantly impact D&O cover. Directors and officers of companies that use or produce PFAS could face claims alleging failure to disclose risks, mismanagement of PFAS-related issues, or even derivative lawsuits from shareholders arguing that their actions (or inaction) have harmed the company’s reputation, financial performance, or legal standing.

Pretty much every one of us is walking around with PFAS in our bodies. And we’re being exposed without our knowledge or consent, often by industries that knew how dangerous the chemicals were, and failed to disclose that.

Insurers should proactively assess their exposure, review policy language, and engage with policyholders to mitigate risks where possible.

While the full extent of PFAS litigation remains to be seen, it’s clear that the potential costs could be substantial.

Climate and cyber aren’t the only emerging risks.

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.

In this post I want to discuss substitute policies again, talk about cover for self-employed persons and definitions of waiting periods.

What is a substitute policy

Substitute policies are one of the few drivers of real potential competition and therefore competitive markets for credit life in South Africa. That’s probably not the definition you were expecting but nevertheless it is true.

With some exceptions, credit life is not sold in a competitive or symmetrical environment and customers have little or no bargaining power.

A substitute policy is a policy from another insurer (not connected to the lender) that covers the same or similar benefits and legally must be accepted as a substitute for the cover required by the lender under the terms of the loan.

Historically, the rate of substitute policies was tiny. Often less than 1%. Lenders and their associated insurers weren’t exactly incentivised to make it an easy process. For smaller loans and therefore smaller policies, the incremental acquisition costs can be prohibitive.

Substitute policies are gaining momentum

I am aware of several players specifically targeting existing credit life customers and aiming to switch these customers to their own products.

This has been enabled through:

• standardising of credit life policies
• bulking of many different small credit life policies into a larger one that is more cost effective to acquire and administer
• technology (digital / online especially but also call centres) that can moderate costs
• the growing awareness of how profitable these policies often are for a standalone insurer, even at the various caps imposed.

Lenders may need to supplement revenue on high risk customers because interest rate caps apply, but the stand alone insurer is focussed on a reasonable underwriting result, not the level necessary to offset costs elsewhere.

What counts as a substitute policy / minimum prescribed benefits

A substitute policy simply needs to cover the minimum benefits from section 3 of the credit life regulations. This covers death, permanent disability, temporary disability and unemployment or loss of income.

These regulations can be difficult to interpret, but ultimately are clear:

• You must pay the total outstanding balance on death or permanent disability
• You must pay the shorter or 12 months’ installments, all the remaining contractual installments, or until the policyholder returns to work in the case of temporary disability, retrenchment, or the inability to earn an income.
• you may not charge for unemployment or loss of income if the person is not employed, except that if they are self-employed then you can charge and must provide the benefit or “loss of ability to earn an income”.
• You may not charge for disability for someone who is a pensioner.
• The cost must be based on the risk, and you must be able to demonstrate that to the regulator.
• While you may not charge more than the cap, anybody who increases premiums to the cap will likely have to explain how the risks suddenly increased. (It is possible that the benefits required are richer than previously offered, so this isn’t an automatic problem.)

All of this makes complete sense to me, although the provision of loss of employment benefits to the self-employed does pose risks of anti-selection, moral hazard and outright fraud.  There is no prohibition on sensible anti-fraud measures.

Some have interpreted this to say a substitute policy must offer the same benefits as the original insurer. This is not correct. Only the minimums under section 3 need to be met. Any richer benefits, under section 5 or elsewhere, are irrelevant to the substitution of the policy.

Confusion possibility on cover for self-employed persons

I have heard that one financial services provider is insisting that cover for self-employed people either may not be offered or must not be offered. If so, this is likely due to an incomplete reading of the regulations.

3 (3) says:

Subject to sub -regulation (5), where a consumer is not employed on the date that the credit life insurance policy is entered into, no cost relating to the risk of becoming unemployed or being unable to earn an income may be included in the cost of the credit life insurance.

3(5) says:

Where a consumer is self – employed in the formal or informal sector, or employed in the informal sector on the date the credit life insurance policy is entered into, the credit life insurance policy may include the cost relating to the risk of the consumer being unable to earn an incarne other than as a result of retrenchment or occupational disability.

Last piece of the puzzle is 3(2) (c)

in the event of the consumer becoming unemployed or unable to earn an income

So, in other words, unemployment OR loss of income must be covered. And the prohibition of charging for that benefit where the person is unemployed (for obvious reasons) is relaxed if the person is self-employed (for similar obvious reasons and consistency).

Loss of income cover for self-employed persons must be provided.

Confusion possibility on waiting periods

Waiting periods are permitted on disability benefits for longer terms loans, although waiting period is not defined.  It is fairly standard in South Africa to use waiting period differently in different contexts, which doesn’t help

• a “waiting period” on non underwritten death cover (like funeral) that starts from policy inception before the policyholder is eligible for natural cause death benefits. Typically only accidental deaths are paid within the first 3 to 6 months.
• a “waiting period” on a disability policy which is the time from a claim even until the benefit is paid.  This is also called a deferred period.  For example, you might need to be disabled for 4 or 8 weeks before benefits would then be paid.  Different providers would back-pay to the start of claim or pay from the end of the deferred period. This is to decrease small claims and the associated expenses and to be sure that you really are disabled and not just “sick”.

My reading of this, including the fact that it only applies to disability benefits and that ASISA standard definitions use the second definition, is that the second definition rather than the first is the one to apply.

What does this all mean for substitute policies

Substitute policies must provide cover for the self-employed, can apply the right sort of waiting period (even if it is less generous than the original policy), and may not provide the wrong sort of waiting period.

There are clear incentives for providers of substitute policies to focus on low cost, minimum benefits to attract customers. The insurer associated with the lender similarly has incentive to design richer products. This isn’t great for comparison or competition.

Expect to see investigations and fines and findings on these topics in future. I imagine there will be tale-telling by competitors on one another to deviations from the law will be spotted quickly.

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.

It’s a good piece of legislation, even if at times some aspects of it may result in greater costs than benefits.

TimesLive has a story about the alleged noncompliance of medical schemes with the CPA.

Some of the issues may have merit, but this struck me as particularly troubling:

According to the act, it is unfair when a consumer is discriminated against on the grounds of age.

Our constitution explicitly allows discrimination on actuarially sound rating factors that have both a statistical and causal link. This is how insurance is South Africa still uses underwriting to select homogenous groups of risks and to limit anti-selection by policyholders. If widespread anti-selection were to occur, then life insurance would not be viable.

Medical Schemes in South Africa have only very limited underwriting options in order to provide as many citizens as possible with fair health coverage. “Late joiners” are charged a premium since they haven’t contributed to the societal risk pool since they were most healthy and therefore haven’t paid “their fair share”. This has to do with a specifically identified risk rather than general discrimination based on age. These restrictions are important to maintain the solvency and viability of medical schemes.

Some schemes prevent women who fall pregnant within nine months of joining the scheme from claiming for the pregnancy even though they pay full premiums

This point is more tricky, but it does again reflect a misunderstanding. “Full premiums” on an actuarial sound basis have probably not been paid, since the fair premium for a member who joins just to get pregnancy benefits and hasn’t contributed at other times would be much higher than the premium that is charged. This one is a little more grey and while I feel the rules are entirely fair, they may not be viewed that way by a particular judge on a particular day.

Some schemes require that members give three months’ notice when terminating their membership, whereas the act deems 20 business days to be reasonable

This might reflect the desire to not have members leave a scheme immediately after having utilized the maximum benefit available to them before joining another scheme. I don’t know how much of this behavior would ever happen, so this might also ultimately be changed.

Many schemes don’t enforce the allowed waiting periods for members joining. If some of these other changes were to be made, I would expect these provisions would be more regularly used. Of course, that is another of the problems cited with medical schemes arising from the CPA.

All in all, we may see some changes, but by and large these comments reflect a lack of appreciation for the actuarial realities of managing a health scheme with community rating.

That is until I heard about Skype’s apparent shenanigans. Not only does it appear they may have fired several executives prior to the purchase by Microsoft (allegedly to escape paying on unvested options as part of typical corporate takeover provisions in Employee Share Option agreements), but if you read this article about Skype employees who left and received no value for in-the-money, vested options, you start to wonder whether anyone will ever work for or with Silver Lake again.

The original blog post from Yee Lee outlines his take on the situation at Skype and more generally how private equity deals are sometimes structured to the disadvantage of the very people who create the value. It doesn’t sound healthy. Then again, this is from someone who left so naturally his perspective may be different from those happy Skypers who have stayed with the company.

Zurich Financial Services has just been fined £2.3m for a data loss event incurred in 2008 in South Africa.

Zurich joins HSBC, Nationwide and Norwich Union in the club of companies fined by the FSA now.

In fairness, the fine wasn’t so much for losing the data, but rather for:

• losing
• unencrypted data
• and not having monitoring and controls in place
• so that it was only discovered and reported to regulators a year later

The South African perspective

The FSA’s seriousness about these issues is mirrored in our looming Protection of Personal Information Bill. This is not the same as the disturbing proposals for a Protection of Information Bill which covers public or government information.

The Protection of Personal Information (POPI) Bill seeks to effect provisions in our constitution for rights to privacy. As more and more private and confidential information about each of us is stored, processed, transmitted and mined by institutions, there is a clear need for controls around what can done with this information and what controls and safeguards are required.

Operational or legal risk?

The fines and penalties associated with data and privacy laws create additional risks for any enterprise with customer data on file.  Operational risk is often (although not uniquely) defined as the failure of people, processes or systems giving rise to a loss. Legal or compliance risk is the risk of falling afoul of the law through non-compliance with laws and regulations.

Yes, this risk should be covered by your risk management system

It’s not particularly important how your organisation classifies the risk, but it is critical to identify, measure, manage and monitor the risks as part of an enterprise-wide risk management system.

As with all risks, it’s often the allocation of specific responsibility for risks, the listing of risks in a risk register and the regular reporting on these risks that slowly changes and organisations attitude to it more than anything else. Whether or not you model the risk in detail or attempt some sort of quantitative analysis is decidedly secondary.