HomeOpinion & AnalysisNew perspectives: Extending social insurance to cover informal sector

New perspectives: Extending social insurance to cover informal sector

BY RONALD ZVENDIYA

Social security systems in Zimbabwe are organised around labour-based social insurance and they do not cover informal economy workers who face high levels of risks of poverty.

The informal worker’s lack of social protection is associated with their lack of coverage through contributory mechanisms.

The government of Zimbabwe embraced commitment towards ensuring social protection for all, as enshrined in the National Development Strategy 1, 2021 to 2025, which seeks to expand social insurance and social security coverage to cover the informal sector.

Guided by the National Social Protection Policy Framework (NSPPF), the government seeks to expand social insurance and social security coverage to cover the informal sector, with a target to raise social insurance coverage to 67% by 2025.

In 2019, about 2,2 million of the 2,9 million people employed were in informal employment (Zimstat, 2019).

Although the informal sector employs the majority of workers (76%), it remains inadequately covered by social insurance programmes such as unemployment insurance, social security, and disability insurance.

Extending social insurance to the informal economy is a major step towards reducing poverty.

However, the informal economy has a heterogeneous set of workers with different terms of income (level, regularity, and seasonality), status in employment (employees, employers, and own-account workers), and sector of activities (trade, agriculture, manufacturing, and services).

So, extending coverage to such a varied set of workers requires the implementation of several coordinated instruments adapted to the specific characteristics of the different groups.

Social insurance can be extended to cover the informal through a formalisation process by targeting workers who are close to the formal economy and have some contributory capacity.

The formalisation process requires the adoption of measures which reduce administrative obstacles to contributions.

In some cases, legislation should be amended to enable previously uncovered groups such as domestic workers; farmworkers, and self-employed workers to participate in social insurance schemes.

In the Insurance space, the transition process towards formalisation can target informal insurance providers such as cooperatives, mutual societies, and burial societies not registered as microinsurers but self-insuring their members.

Learning from the formalisation process followed by the Philippines, these informal insurance providers may be requested to follow the following formalisation options:

l they can partner with a licensed underwriter i.e. become an agent;

l they can form an insurance entity and register as microinsurance; and they can have their members join an existing authorised cooperative insurance society or microinsurance entity.

Social Insurance can also be extended by dedicated micro-insurance entities.

Micro-insurance is designed to reach groups excluded from statutory social insurance, such as workers in the informal economy and rural workers.

Although micro-insurance initiatives may increase insurance coverage, the number of lapsable policies is likely to be very high given the fact that incomes for policyholders in the informal sector are both low and irregular.

The high lapse ratio may also be attributed to a general decline in the consumers’ disposable incomes because of Covid-19 induced restrictions.

Therefore, a support measure such as an extension of premium payments grace period for informal sector players to avoid policy lapses may be appropriate.

Another possible option might be amending the Insurance Act  to include a clause where the lapsable policies of informal sector players have higher grace periods than the ones held by formal sector players.

Zimbabwe can also adopt the Monotributors approach, which involves creating an administrative alliance between the tax authority and the social security institution to ensure that companies that usually pay taxes, but are outside of the social security system contribute to the system.

The Monotributors approach was adopted by countries such as Uruguay, Argentina, and Colombia.

In these countries, the scheme coexists with other simplified regimes for covering domestic service and agricultural workers.

The Monotributors approach was introduced in Colombia as an alternative to the simplified value-added tax regime for small firms who are already paying tax and is optional.

After paying the Monotributor, one automatically acquires the right to join a Family Compensation Fund; and register for a voluntary savings program for the protection of the aging population.

The Monotributor approach can be applied in Zimbabwe by ensuring that there is a collaboration between Zimbabwe Revenue Authority (Zimra) and National Social Security Authority (NSSA) in the implementation process.

Zimra will share a register of all micro, small and medium enterprises paying taxes with NSSA so that NSSA will verify if all the entities are contributing towards social security.

In case, some are not contributing towards social security then they have to be registered with NSSA.

The Monotax will be collected by Zimra and a fraction is transferred to NSSA to finance the social security coverage.

This Monotax approach may only apply to entities with a Monotributor status i.e. one-person businesses, de facto non-family companies formed by a maximum of two partners with no employees, enterprises formed exclusively by family members, and companies with no salaried workers, under the condition of having a small income.

However, one of the challenges which may arise in the application of the Monotributors approach is the lack of legislation that allows taxes and social contributions of certain groups of economic units to be combined into one contribution i.e. the Monotax.

Zimbabwe can also increase social insurance coverage by introducing the Unemployment Insurance Fund for domestic workers learning from the path taken by South Africa.

In South Africa, the Unemployment Insurance Contribution Act, No. 4 of 2002 included a new provision that as from 1 April 2003, domestic workers and their employers had to make Unemployment Insurance Fund contributions.

In the Unemployment Insurance Contribution Act, both a domestic worker and the employer each contribute 1% of the employee’s monthly salary to the Unemployment Insurance Fund.

The benefits packages are Unemployment insurance and maternity benefits.

In terms of compliance enforcement, the Unemployment Insurance Contributions Act imposes strict enforcement and compliance measures, which are intended to ensure severe penalties to those employers who deliberately contravene the provisions of the law.

However, if the government decides to introduce the Unemployment Insurance Fund for domestic workers, enforcing compliance may be a challenge since, in the National Social Security Authority Act [Chapter 17:04], employers of domestic workers are exempted from making contributions towards the NSSA social security schemes.

Thus, for purposes of ensuring compliance, the NSSA Act may be amended to include a provision that ensures that employers of domestic workers contribute towards the NSSA social security scheme.

Since the traditional insurance model in Zimbabwe is typically concentrated in urban areas, the government can be better placed to support the introduction of risk management solutions for people in the rural and remote areas who have been excluded by private insurance companies.

This is more likely to increase insurance coverage by subsidising agricultural, livestock, and funeral insurance.

Therefore, Public-Private Partnerships in the provision of insurance services can be a way of overcoming supply and demand-side inefficiencies, and increasing social insurance coverage.

In conclusion, the effectiveness of the initiatives to expand social insurance coverage hinges on support from the government, and private sector players.

A clear regulatory framework that creates a win-win situation between policyholders and regulated entities is imperative for social insurance expansion.

  • Ronald Zvendiya is an independent economist. Contact details: rzvendiya@gmail.com
  • *These articles are coordinated by Lovemore Kadenge an independent consultant, past president of the Zimbabwe Economics Society and past president of the Chartered Governance & Accountancy Institute in Zimbabwe (CGI Zimbabwe). Email: kadenge.zes@gmail.com and Mobile No. +263 772 382 852

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