Although there are many challenges ahead and the liberalisation process is still at a very early stage, the African insurance markets offer much potential. Jose Sanchez-Crespo analyses the current situation.

“Emerging markets” is a vague term frequently used these days when talking about finance in general and insurance in particular. However, there is a lack of consensus about what an “emerging market” is and often the term is used to refer to whole continents or regions such as Latin America, Eastern Europe, Asia, the Middle East and Africa. Some countries within these continents/regions have developed into emerging economies, but still a large number have remained stunted. Therefore we can attempt to narrow the definition of an “emerging market” to “countries with an underdeveloped economy and industry, in comparison with Western standards”. Having defined the first concept would make it easy to understand the real meaning of globalisation and developing economies.The global insurance industry is still clearly dominated by the industrialised countries, North America, Western Europe and Japan, which account for 88.5% of the total premium volume. Nevertheless, a large number of “emerging markets” are dynamically growing and developing their economies and therefore their insurance industries. Taking Africa as an example, we can appreciate a clear evolution. Total African premium volume has been steadily growing over the last five years reaching $26,665 million in 1997. Despite a good growth rate, Africa's share of the world's total insurance is still extremely small at 1.5% indicating a clear underdeveloped market. The share of the GDP represented by the insurance industry, otherwise understood as penetration rate, continues to be extremely low at an average of 3.3%, particularly when compared with countries such as the United States (8.5%), Switzerland (12%) and Japan (11.8%). At the same time, the average amount of money spent per capita is also low at $76.3. These figures indicate that there is scope for growth provided that the economies of these countries are really emerging. There has to be clear indications of political stability and legislative changes towards liberalisation of the market and real commitment for development.

When talking about Africa, it has to be understood that it is a large continent, with 52 countries, divided into 5 major regions: North Africa (Algeria, Egypt, Mauritania, Morocco and Tunisia), East Africa (Comoros, Djibouti, Eritrea, Ethiopia, Kenya, Madagascar, Mauritius, Seychelles, Somalia, Sudan and Uganda), Central Africa (Zaire, Chad, Central African Republic, Congo Kinshasha, Congo DR, Rwanda and Burundi), West Africa (Benin, Burkina Faso, Cameroon, Cape Verde, Côte d'Ivoire, Equatorial Guinea, Gabon, Gambia, Ghana, Guinea, Guinea Bissau, Liberia, Mali, Niger, Nigeria, Sao Tome, Senegal, Sierra Leone, and Togo) and Southern Africa (Angola, Botswana, Lesotho, Malawi, Mozambique, Namibia, South Africa, Tanzania, Zambia and Zimbabwe). Therefore, although there are some common trends, the size and stage in the development of the insurance markets in Africa varies considerably from country to country and, in fact, some countries are not developing or emerging at all. At present approximately 12 countries account for the 90% of the total current premium.

South Africa is the dominating player responsible for over three quarters of the total African premium. Restrictions on currency exchange control have been reduced for some time enabling companies to invest more easily in other countries. Life insurance represents almost 80% of the total insurance premium.Tanzania is still a very small market, already liberalised. It has recently approved a new Insurance Act after more than three decades without legislative changes. In addition, for the first time since 1967 a number of private sectors and brokers will be licensed to operate. These changes are most likely to have a positive effect on the development and growth of the insurance sector.

Kenya is one of the five top African insurance markets, particularly strong in non-life business. The market is being liberalised and the state-owned reinsurance company, the Kenyan Reinsurance Corporation, is about to be privatised. The company is expected to be listed on the stock market this year. However, the state retention of a 51% interest could deter investors. Kenya's privatisation programme is generally at a standstill, with most of the companies set for sale in 1998 still firmly in state hands.

Eritrea also has introduced a new law allowing the liberalisation of the insurance sector currently represented by one state insurer (NICE Eritrea).Sudan has always been a strong insurance market, but liberalisation is still a little far away.

Ethiopia is one of the few markets where full liberalisation has taken place, reducing the market share of The Ethiopian Insurance Corporation to around 60%.Uganda's insurance sector is a mixture of enterprising insurers matched with increasingly aggressive broker representation with a sound insurance commission. The government has been largely depleted from its right to official premiums.

Namibia has announced the formation of a new private sector reinsurance company, Harvest Re.

Congo's growing economy, after the devastating effect of the civil war in 1997, and the implementation of the post conflict programme, will create the right infrastructure to develop the insurance sector.

Zambia is showing clear signs of economic recovery with a rise in domestic and foreign investment.

Ghana's privatisation programme, initiated in 1991, is still in progress. The economy is freely open to foreign investors. Since the programme started, around 160 companies have been divested. Now the government is to start sell-offs of public companies including the state insurance company, due to be privatised this year. The government has been promoting foreign investment (the 1994 Investment Code guarantees security and free movement of capital for foreign investors).Egypt is regarded as a hybrid between an Arab and African country. The liberalisation process has started among industrial companies. Banking and the financial sectors are yet to be tackled. A number of legislative measures have been passed in recent years in order to regulate an open market for insurance. Tariffs are being abolished, but the powers of the supervisory authorities are been strengthened to avoid chaos. Restrictions on foreign investors have been lifted.

Nigeria is undergoing some fundamental changes in the political and economic environment with the successful transition to a civilian democracy. Government has announced its intention to sell off its stake in a number of companies before the end of the year, with the privatisation of the huge utilities slated for next year. About 35% of the companies operating in the country are unable to meet the capitilisation requirement of the new insurance law and are being slated for liquidation.

Undoubtedly, foreign investment is going to play a crucial role in stimulating economic growth and therefore helping to develop a healthy and profitable insurance industry. The perception of Africa as a high political risk has traditionally inhibited the flow of foreign investment to Africa. However, the recent political and economic reforms in many African countries have made the whole African economic scene, with one or two exceptions, more attractive to foreign investment owing to unrivalled growth and political stability. Countries like Ghana, South Africa, Botswana and Malawi are often regarded as tiger economies. Also many of the East African economies have been gradually and quietly reforming themselves (East Sudan, Ethiopia, Eritrea, Kenya, Uganda, Tanzania). However, the sector still faces significant challenges to compete in the 21st century:
• Infrastructure. A large number of African states suffer from poor infrastructure. The current inflow of foreign investment requires the creation of a proper infrastructure in most industrial sectors, but particularly in communications, banking and insurance.
• Liberalisation and privatisation. The relaxation on the restrictions on the flow of funds between the countries had become more relaxed, thus creating an environment for cross-border insurance to be relatively freely transacted. However, the end of state-controlled companies could lead to a flight of premium outside the continent, particularly reinsurance. Therefore, local players must be given incentives to cede domestically or regionally.
• Legislation. The legislative system is experiencing significant changes with numerous African countries passing new insurance acts, after decades of state legislation, to allow the liberalisation of insurance. Although liberalisation is viewed as positive, African governments must be aware of the risk of large insurance and reinsurance companies taking advantage and protecting rules should be introduced when drafting new insurance acts. During the early 1990s, a large number of international reinsurers abandoned the African continent leaving no alternative to the local cedants other than revert to local capacity. Repetition of this situation should be avoided.
• Restrictions on currency exchange control to enable companies to invest more easily in other countries. Although these restrictions have already been largely eased they are still present in some markets.
• Aggregation. As a result of the intense merger activity of the last decade, Western companies' premium volumes are significantly larger than the current GDP of most African countries. Therefore, African insurance companies must not only restructure, but get together to become more competitive beyond African boundaries. The penetration of foreign companies, mainly reinsurers, in the African market is forcing rates to fall to unprecedented levels, creating a very intense competition which African companies are unlikely to withstand if they do not join forces together.
• Restructuring. Companies must re-structure themselves to become competitive and adjust from public to private style. In addition, the abolition of the legal reinsurance cession, although gradual, will force companies to adopt a more flexible approach to business acquisition and to develop business acquisition techniques.
• Human resources. The majority of insurance training is done domestically, as well as regionally, with little help from some international players. This training isolation has resulted in a lack of exposure to international trends. If African companies are to successfully compete with global players, a higher degree of training and professionalism is going to be required across the industry.
• Insurance awareness among rural population. The majority of African insurance activities are oriented to the commercial sector. However, most African countries are still based on agricultural economies despite thousands of urban workers and their families being displaced as a consequence of economic liberalisation. Although initial premium volumes from rural areas will be small due to low income levels, it will gradually help to improve penetration rates.
• Technology and Data. The development of IT is absolutely essential. New companies are arriving in the market with large IT budgets as part of their establishing costs. African companies must accelerate the process of incorporating IT. Another challenge in the development of the African insurance markets is the lack of quality and consistent data collection. However, the increase in the use of technology will facilitate the collection of data and statistical information.
• New products. Economic development will bring demand for new products. In the reinsurance sector, contrary to global trends, the African treaty capacity is on the rise with not much demand for facultative business. As the market develops, a higher demand for facultative business is likely. Health and life products offer a very high potential due to changes in life style.
A significant number of African economies seem to be emerging and have managed to attract the much needed foreign investment. The involvement of international organisations such as the International Monetary Fund and the World Bank have played a crucial role in delivering confidence in the potential of these markets. There are many challenges ahead and the liberalisation process is still at a very early stage, but it is already creating a promising environment for the insurance industry. Increased competition, a fall in rates, new products, technology, training, and new legislation are some of the many changes that African companies will have to face to remain competitive within domestic boundaries and stand a chance to compete internationally in the future. Africa is a continent with vast natural resources and is likely to generate a considerable amount of insurance demand. Therefore the long-term potential for insurers and reinsurers, both national and international, seems to be very optimistic.

Jose Sanchez-Crespo, associate director, Insurance Ratings London, Standard & Poor's.