Africa is a $67bn insurance market but still lacks re/insurance penetration relative to the continent’s vast risk transfer potential. Q&A in association with Afro-Asian Insurance Services, speaking with the broker’s managing director, Udai Patel
Which approaches to closing Africa’s protection gap do you regard as helpful, and which do you regard as unhelpful?
There is undoubtedly a massive disparity between the insurable risks and the insured risks in Africa. As expected, the bottom line is that this disparity is greatest in countries with the lowest income per capita, and least in economies with the highest income per capita.
If you are a resident of, say, Dar-es-Salaam in Tanzania earning roughly TSh 4,000,000 per month (which is a good middle management salary), equivalent to about $1,400 per month, you are unlikely to put a high priority on insurance for your personal assets or life. Your primary concern will be to ensure that you provide food on the table and good education for your children. God help you if you have a medical emergency, because you are unlikely to have the extra resources to tide you over.
The solution for local insurers is to sell smarter. Extensive research and profiling need to be done on the target customer base including age, gender, tribal affiliations, occupancy, cultural sensibilities etc. This will allow the local insurer to tailor the products offered to their customer profiles, which will undoubtedly help in closing the protection gap.
They also need to use more efficient insurance distribution media so that the insurance “message” is spread to the furthest reaches in the country at the least cost. Mobile phones are extensively used all over Africa, and telephony is the most logical distribution medium for insurance products in terms of efficiency and cost.
The young adult is waking up to a culture driven by Amazon, Social media such as Facebook and Twitter, bitcoins, and Apple Power Sharing. Their philosophy and outlook is different to previous generations, whereby they value positive environmental and ethical products, and do not want long term financial commitments. Hence, “disruptive” insurance products such as usage based insurance and pay-as-you-drive insurance appeal to this market segment.
These innovations and ideas are being put into practice in the more developed economies. However, some regulators in Africa are preferring to close their insurance markets to international free trade, especially in economies where foreign exchange is short and local insurers are not well capitalised.
Whilst such protectionist measures are due to good intention on their part, it does not enable the necessary transfer of innovative ideas, business practices and technology as already mentioned. Hence, there is a mismatch of local products not suiting the changing customer profile, and therefore the customers only buy the insurance they are legally obliged to, thereby maintaining the protection gap in Africa.
What examples of new products have you helped local insurers develop, and is that through a combination of offering expertise and offering reinsurance capacity?
Afro-Asian Insurance Services has been very successful in redefining its value in the insurance chain. We have achieved immense success in promoting political violence and terrorism (PVT) reinsurance in Africa using both English and French contract wordings. Our reputation was made following the Westgate terror attack in Kenya in 2013, when in conjunction with the local insurer and the Lloyd’s reinsurers, we were able to make the first significant claims settlement to the original insured in 30 days. This gained us all significant positive publicity in the local press.
We have subsequently successfully promoted various financial lines products such as bankers blanket bond (BBB) and computer crime reinsurance in countries where traditionally banks used to buy piecemeal covers. The same banks now buy BBB covers following target marketing through our local insurance business partners.
The one nut we have failed to crack in Africa is the high request for “on demand” bonds and financial guarantee reinsurance. We receive many unsolicited requests from local insurers, which we cannot accept, as we have been very cautious about the reputational consequences of non-settlement and default on claims. We have not successfully identified any international market writing such business that has passed our security criteria in terms of credit checks and net worth. We also believe that a robust solution for such business has to be a financial (rather than a reinsurance) product that involves cooperation between the insurance and banking sectors.
There is a growing demand for life science products in Africa, as companies carry out clinical trials, and local pharmaceutical and medical instrument manufacturers face increasing liability exposures both in their own markets and in export markets. We promote our expertise on such products with the assistance of specialist underwriters in Lloyd’s and the London company markets.
We have been known not to turn away any enquiries, however intriguing. We have for example, successfully arranged a reinsurance contract for an Indian Ocean insurer who was liable to pay a substantial amount of prize money if at a local competition, a Marlin in excess 200kgs. was caught. Recently we arranged a contingency reinsurance cover for a Tunisian insurer that had issued a policy to a local insured running a promotion on televisions.
The promotion was that if Tunisia wins the African Nations Cup in 2019, then all TV sales up to that date for the year of contract were to be given away free of charge. The insured bought contingency insurance protection in case Tunisia wins the African Nations Cup (which it has not done since 2004). At the time of writing, Tunisia was in the semi-finals against Senegal. [Senegal beat Tunisia 1-0, then lost the final to Algeria.]
How do you expect alternative risk transfer (ART) and insurance linked securities (ILS) to develop in Africa, and how is this linked to primary insurance products and buying behaviours?
Africa today is evolving and we believe there is a new and refreshing maturity in the way in which risk is being tackled. As in every developed country, there are organisations that pursue traditional risk transfer and mitigation solutions, and those that seek innovative solutions because the traditional markets can no longer satisfy their demands. Climate change is also impacting countries in Africa more frequently, escalating the cost of catastrophe and weather impacted crop insurance in the traditional markets. This only serves to exacerbate the insurance gap, as companies trim the insurance and reinsurance limits that they purchase to fit their budgets.
We are already seeing demand in Africa for alternative reinsurance solutions. Some regulators in Africa have legislated that local companies maintain risk based capital and others are considering implementing this in their local jurisdictions. The dilemma faced by insurers and reinsurers in these regulated regimes is that the dual pressure of competition and return to the company’s risk capital providers, obliges them to either underwrite very aggressively to win business, or (in the case of reinsurers), accept business from nontraditional regions which by its very nature is either distressed or lacking capacity due to the contract terms, before it reaches them.
We believe that as more jurisdictions require maintenance of risk based capital, companies will begin to look for external capital to balance their risk portfolios. With bank rates in Africa varying between 2.25% in Morocco to 18% in Malawi, the cost of raising capital on the open market can become prohibitive. Existing shareholders cannot always take up calls made on them.
We therefore believe that there is emerging demand for structured finite solutions to manage liquidity and/or strengthen a company’s capital base. Naturally, the management of companies that require such solutions will themselves need to get a deeper understanding of products such as loss portfolio transfers (LPTs), retrospective aggregate loss covers (RALs), adverse development covers (ADCs), finite quota share (FQSs) and spread loss treaties (SLTs). There is a cost to buying such protection, but the alternative in countries with very high bank rates is likely to be more expensive.
The recent impact of Cyclones Idai and Kenneth on the Southern African countries of Malawi, Mozambique and Zimbabwe has demonstrated the need for market-wide nat cat protection against losses of this nature. Regrettably, most of the economic losses were uninsured and therefore the burden of restitution fell on the respective Governments that were already financially stretched.
This is where ILS can play their part through catastrophe bonds, which are reinsured with specialist reinsurers, thereby alleviating the financial burden on governments. The availability of such alternative financing means that valuable resources can be diverted to social and economic local projects which benefit the populace and improve living standards; thereby hopefully providing the necessary disposable income to spend on insurance and therefore reduce the insurance gap.
How can governments and regulators help this process? Have there been any good examples already, and in what countries or lines of business do you anticipate this?
As already touched upon in this article, governments and regulators can play their part as catalysts in increasing insurance penetration by allowing market forces to rule. An open economy such as Botswana, with its policies and machinery in place to encourage foreign investment and regional trade without financial barriers, is benefiting in terms of high GDP per capita ($7,018 in 2018), very low inflation rate (2.8%), and consequently the Fitch Ratings has assigned it a very positive future growth rate in the insurance sector.
Governments and regulators can ensure that laws and regulations are in place to encourage the locally established insurance players to strengthen their capital base, and to entice foreign credible players to set up local insurance operations, bringing in new products and business practices. However, Regulators especially need to understand the mechanism and benefits of alternative and structured finite solutions. Otherwise, however progressive the local operator is trying to be, the efforts will be negated by the uninformed regulator disallowing its execution.
There is no point in a local insurer or reinsurer buying, for example, loss portfolio reserve reinsurance which would ultimately have the benefit of strengthening the company’s balance sheet, if the Regulator has not put into place the regulations that would recognise and allow such alternative solutions. The drivers of acceptance of such products from an institutional point of view, should be the training of regulatory and government personnel in the variety of alternative products available on the international markets, their practical applicability to insurance and reinsurance, and putting in force the legal and compliance framework which would prevent misuse of such products.
The South African regulator has implemented the SAM framework which broadly follows Solvency II; i.e. principle-based regulation, an economic balance sheet, the regulatory capital requirements calculated according to an insurer’s underlying risks supported by robust governance and risk management requirements. This has led to some local insurers de-risking their balance sheet, restructuring their operations, and in some cases, seeking additional funding to meet the new requirements. In circumstances such as these, we believe there to be an opportunity for risk based capital structure solutions as already mentioned.
Afro-Asian Insurance Services Limited is a boutique broker at Lloyd’s of London, exclusively specialising in reinsurance business from Africa. It is organising and hosting a unique event in the Old Library in Lloyd’s on 8th August 2019, bringing together approximately 30 CEOs of various African Insurance and Reinsurance Companies and 150 Lloyd’s and London market underwriters in a networking evening, where the theme is “Opportunities in Africa – Closing the Protection Gap”.