Africa’s reinsurers bullish about the future of $8.3bn market

Based on an abundance of natural resources, the need for infrastructure investments, the emergence of an expanding middle class and a still young and growing population, Africa’s GDP is expected to increase by roughly 4% per annum from 2016 – 2020, ahead of the global average growth rate of 3.6% for the period. Africa’s low insurance penetration of 2.9%, as a share of insurance premiums to GDP, indicates the enormous potential of the continent in catching up with the global average of 6.23% for 2015. The Africa Reinsurance Pulse, an annual survey launched in Dakar and conducted by Dr Schanz, Alms & Company, looking at Africa’s $8.3bn reinsurance market found the fundamental strengths of the African reinsurance markets remain intact, despite the recent economic slump. New, larger and more complex risks have arisen, requiring insurance protection, while the broader African middle class is eager to protect its assets and make provisions for the future. Abundant resources, a juvenile and growing population and the need for investments in infrastructure, energy, health and educational facilities drive the demand for insurance protection and reinsurance cessions.hideHowever, access to local expertise, reliable data and statistics are regarded as weaknesses of the market. “More than 90% of Africa’s insurance companies have only been created in the past 40 years,” says Corneille Karekezi, group managing director and chief executive officer of Africa Re, and sponsor of the survey. “As a result, our industry still has to build the awareness for the benefits of protecting and enabling economic progress.” In addition, frequent foreign exchange trading restrictions and the vulnerability of fragmented and relatively small markets to sudden swings in export demand, commodity prices and exchange rate fluctuations may result in unwanted volatility. Also, political instability is still the biggest threat to the region’s insurance and reinsurance markets and strongly affects growth expectations. Furthermore, there is concern that protectionism in the form of priority or compulsory cessions will harm the domestic markets, although it may also limit the impact from global excess capacity. The majority of the interviewees feel that current reinsurance rates are below the average of the past three years. Risks are still far more adequately priced, but competition is mounting as regional and international players fight for market share. However, on a global scale, markets are still perceived as profitable due to stable loss ratios and the region’s limited exposure to natural catastrophes. However, profitability is coming under pressure as new capacity enters the market and international reinsurers deploy additional capacity to established markets, or to new ones where they intend to expand. In defending their turf and supported by regulatory provisions, domestic capacity is expected to outgrow international capacity in the near term. Overall, exposure is expected to outpace the region’s GDP as values and risks increase in scope, scale and complexity. However, since rates may decline, 57% of executives polled expect premiums to grow slower than GDP, implying that reinsurers will take on risk at a lower price. Finally, the introduction of compulsory cessions is one of the more controversial regulatory developments, whereby domestic (re)insurers are required to keep a portion of premiums and profits within the country and thereby reduce the outflow of hard currency. While critics point out that retaining the risk within the country reduces the ability to efficiently diversify exposures, its advocates emphasise the need to shelter Africa’s young and small (re)insurance markets from excess capacity. This would strengthen domestic markets by encouraging global players to go local and invest part of their risk-bearing assets in the national markets.

Africa’s reinsurers bullish about the future of $8.3bn market

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