Dollar woes – Insurance sector struggling with Mozambique’s foreign currency squeeze

Africa’s emerging market appeal might have cooled slightly but the region still offers attractive growth for insurers willing to enter the fray. The allure is in part due to low levels of insurance penetration in Sub Saharan Africa (with the notable exception of South Africa and Namibia). Markets where insurance premiums account for less than 1% of GDP are significantly underperforming the benchmark set by the global emerging market at 2.7% (2014). Mozambique is among a long list of African economies with the potential to grow from a low base. Measured in 2014, the country accounted for 2% of the non-life insurance premium and 1% of life insurance premium reported on the continent, excluding South Africa. Both sectors have grown significantly in the past few years, with an increasing number of registrations for brokers and agents. Mid-year 2016, the Mozambican Insurance Supervision Institute reported 18 insurers and more than 64 insurance brokers plying their trade in the country. But challenges remain. “We are still very lean on skills, largely due to a lack of courses available locally and the language issue, which hinders our ability to send staff to neighbouring countries for training,” says Jeannette McHardy, managing director at Nacional Brokers Group. South Africa remains one of the major ‘educators’ in Sub Saharan Africa, thanks to efforts by the Insurance Institute of South Africa and the Institute of Risk Managers South Africa. hide The skills shortage contributes to constraints in the local market. In its Africa Insurance Barometer 2016, the African Insurance Organisation (AIO) notes that given their need for specialist risk management capabilities and high quality security, large and complex risks are still ceded to foreign insurance markets. It adds that many of Africa’s insurance executives are concerned about the continued flight of premiums and perceive it as a threat to the viability of domestic insurance industries. There has also been a marked increase in the number of Sub Saharan economies struggling with currency liquidity and volatility. Mozambique is a case in point. “The weakening of the local currency and the shortage of foreign currency results in a slowdown both in new investment and the placement of major insurance risks – insurers experience difficulties purchasing currency to meet their reinsurance commitments while clients are unable to pay premiums in foreign currency,” says Ms McHardy. Ironically, the biggest regulatory threat to Mozambican insurers is not insurer- or distribution-specific legislation; but rather the banking legislation regarding foreign currency. “Any foreign currency received from abroad into an insurer’s or insurance broker’s bank account is subject to 50% of the value being converted into meticais,” she says. Insurance brokers feel the pinch because they are immediately subject to currency devaluations on inward premium remittances, with the result that premiums are often short paid. The currency squeeze is not unique to Mozambique and also exhibits in countries such as Nigeria, Angola and Ethiopia, where their respective currencies have suffered significant devaluations against the US dollar of late. According to the AIO, by restricting access to hard currencies these countries are seeking to protect shrinking reserves, defend national currencies and reduce the risk of hyperinflation. Tough foreign currency controls contribute to another challenge to the broader insurance sector; namely the offshore placement of insurance cover. “The legislation probably resulted in many clients paying premium directly to reinsurers and only paying local costs and premiums to local insurers – while in metical terms it will not affect the premium statistics, in real terms it will have affected the gross premium income of some of the insurers,” says Ms McHardy. She adds that many multinationals continue to place cover directly offshore, leaving the local market with no opportunity to participate in major projects or large portfolios. There is also a trend towards non-admitted insurers dealing directly with Mozambican insurers. From a broking perspective, there has been an increase in the number of large international brokers placing risks and then appointing local brokers to service policyholders on a limited fee basis. The local insurance broker faces a double-edged sword of reduced premium income and increased exposure to litigation should a claim not be resolved locally. Africa has lost some of its investment allure in recent years, due to frequent downward revisions to GDP growth forecasts. Mozambique is no different and most of the country’s current growth is confined to the central and northern provinces, where it is directly linked to the pending liquefied natural gas project, mining and railway and port infrastructure developments. As always, there are numerous satellite businesses that benefit from servicing large projects and bring welcome premium to insurers and insurance brokers alike. Ms McHardy observes that while there are many projects currently underway, there are just as many that have been put on hold for economic or political reasons. Aside from soft growth forecasts, the economy is experiencing somewhat of a financial crisis, the extent and duration of which is difficult to judge. Mozambique, like many of its Sub Saharan peers, has benefited from a surge in both life and health insurance business. The Africa Insurance Barometer 2016 notes that the Democratic Republic of Congo, Malawi and Mozambique have experienced rapid growth in non-life premiums during the past five years. And the trend is confirmed by brokers on the ground in Mozambique. “The local market has seen an increase in the requirement for these covers, partly due to the international minimum standards of the multinationals doing business here and partly due to the increase in local awareness of the importance of such benefits to the workforce,” agrees Ms McHardy. Nacional Brokers was among the first insurance brokerages in that country and has an extensive knowledge of the domestic market. There is also a growing appetite for specialist insurance cover, particularly in the liability market. Insurance brokers have, for example, noticed a significant spike in requests to place specialist risks on cover, with an emphasis on liability placements and credit risk guarantees rather than other classes (standard placements). These risks were previously not placed in the local market or not considered at all. One of the best ways to grow local insurance business would be for local insurers to consider co-insurance arrangements, which would increase overall capacity and reduce the level of reinsurance placement needed. Unfortunately, according to Ms McHardy, the sector faces a ‘Catch-22’ because capacity can only be built on experience, as well as having access to both the market to place risks in and the risks to place on cover. She believes that some local insurers have sufficient capacity to take small lines and should be encouraged to do so in order to grow the market. What does the future hold for Mozambican insurance? “There are always rumours of new competitors in both the broking and insurance market; this year has not been different but the economic climate may cause some of the bigger investors to wait for an improvement toward the end of 2017. The situation in the banking industry and the shortage of foreign currency will certainly have an impact on the investment in our industry over the short term,” concludes Ms McHardy.

Dollar woes – Insurance sector struggling with Mozambique’s foreign currency squeeze

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