Hopes for regional insurance deal in Sub Saharan Africa increasingly remote

Last summer South African President Jacob Zuma raised hopes among local and international risk managers that operate in the region for more consistency in the rules that govern insurance as he called for more political and economic cooperation in the area. It was hoped that this could spark an initiative along the same lines as the CIMA Code that has set a consistent insurance regulatory framework for the French-speaking nations of west and central Africa. But research carried out for Commercial Risk Europe’s first of three regional reports focused on South Africa and the wider Sub-Saharan region published next week suggests that last summer’s hopes were overly optimistic.hideRisk managers, brokers and insurers that operate in the region will have to struggle with the patchwork quilt of largely protectionist and often vague rules that exist currently for some time yet, the experts agree. Michael Duncan, Executive Leader Alexander Forbes’ Global Practice, now part of Marsh, told CRE that the relevant African leaders have certainly committed themselves to the principle of an African Free Trade Zone. But he added that the ‘devil is always in the detail’ and it is likely that there will be inevitable delays as a result of bureaucracy and self-interest. “So the end result may be a watered-down version of what is currently envisaged,” said Mr Duncan who is a vigorous exponent of the regional insurance concept. “It is entirely possible that each country will remain free to determine their own insurance regulations,” he added. “Hopefully, any such regional regulations will be sustainable and not subject to the frequent changes we currently experience,” continued Mr Duncan. “Of course, regulations differ from country to country but the trend is for more, not less, restrictions, which is both reducing choice and adding to the cost of arranging cover for multinational insureds,” he said. Gert Cruywagen, Director of Risk of the Tsogo Sun Group, the leading South African hotel and casino group, said that regulators in Africa unfortunately have ‘woken up’ to the whole concept of insurance, premium taxes and the potential for revenue over the last three to four years. This, he said, has ‘significantly’ raised the cost of administration and he sees little chance of more regional regulatory cooperation to overcome the problem for risk and insurance managers. “In the past you could write a policy in South Africa that covered your risks in the rest of Africa but now that is no longer possible. You need locally fronted paper and this makes it very expensive. Often the underlying assets are so small the administration costs are a multiple of the premium,” said Mr Cruywagen. According to Mr Cruywagen, one of the biggest problems for the insurers and risk managers active in the region are the local regulations that require a local retention. He pointed out, for example, that the Seychelles has a minimum retention with a local insurer of only 2–3%. But the cost of administering the policy is greater than the actual cost of the policy. This leaves risk managers with little room for manoeuvre, said Mr Cruywagen. “You just have to do it. We have all heard of companies that go the non-admitted route and when they are found out they are fined going back 15 years. It is simply not worth the risk of non-compliance. Things like D&O particularly carry a high administration cost that is way more than the actual premium. But the potential consequences of not doing it are not worth it,” explained Mr Cruywagen. Antonella da Cunha, Group Risk Manager at Capespan, said that companies that plan to expand in Africa definitely face a ‘stumbling block’ in the form of compliance and local regulations. “This is prohibitive and a challenge to a conglomerate which seeks uniform insurance cover, no difference in conditions and single risk carriers,” she said. “Ideally one needs alignment between governments to include insurance on trade agreements. Current agreements are silent on risk transfer and, when analysed, it opposes trade agreements as it is prohibitive and uneconomic. Current solutions add cost to risk transfer transaction, are mechanistic and tick box method,” she said. Ms Da Cunha said that, if risk managers are able to negotiate when trade agreements are being concluded, then they may achieve a different solution. But she added that her personal experience in Namibia and Mozambique is that the government barriers make business and insurance very difficult cross-border. “Legislation typically prohibits a global approach to risk transfer. For example in Mozambique you have to use fronting companies to transfer the risk,” she said. “As an international company you have to ensure that your risks are covered and that you comply with the local rules but it does mean that you are leaking funds and this can be quite challenging,” continued Ms Da Cunha. Lester Botha of Marsh South Africa pointed out that there is currently no overarching regional trade agreement. In his view therefore there is also very little chance of a having a regional insurance agreement in place in the near future that could make cross-border insurance placement easier in southern and eastern Africa. “They are all fighting for more slices of the same cake,” he said. Seamus Casserly of First Equity, the local joint venture broking firm with Lockton in South Africa, said that the regulatory landscape is ‘very, very fragmented’ and generally the legislation is dominated by the mantra: ‘Thou shall issue locally’. This, he said, is the case despite the lack of capacity and the need to rely on fronting companies and pay the fees for the service. Mr Casserly said that the companies that offer this kind of service are growing in number but not the indigenous capacity. “Each territory has an indigenous requirement and there is frankly very little sophistication and capacity. So you have to do a deal with an international player and front the business out,” said the broker. Vis Govender of First Equity noted that the Southern Africa Development Region (SADC) region is trying to ‘get organised’ and the environment is ready for change. But, for now, the cards are generally stacked against the global programme manager. “We had a claim in Tanzania recently and the regulator came to visit the site. It [the regulator] was told the risk was insured by the South African head office and the claim was doubled! There will be more action to reduce the outflow of premium and create job opportunities. There are also exchange controls. Regulation now prevents global programmes,” said Mr Govender. Scott Pickering, CEO, Willis South Africa and Regional CEO, Willis Middle East & Africa, said there would not be an overnight solution to help create a more unified approach to insurance regulation in the region. “Obviously it would be beneficial to foster a more unified approach to regulation in Africa but this could take a very long time given the various political interests involved. My understanding is that any effort to try and build a more coherent regional approach is presently being primarily driven by the insurers rather than the regulators,” he said. “Whatever happens, we are all in support of consistency of regulation because it gives a certain sense of predictability to us and our clients,” he added. Delphine Maidou, who joins as Regional CEO of Allianz Global Corporate & Speciality (AGCS) based in South Africa on September 1, doubts the regional regulatory agreement will happen soon. “It’s a great concept in principle but realistically the market is too fragmented and diverse as it currently stands. I wouldn’t like to forecast when this might be possible given local interests and existing regulations. After all, in Europe this is a concept which was a long time in the planning, and that’s in a relatively homogenised environment.” Terence Sander, CEO of AGCS South Africa, agreed. “We have seen more regional coordination of late but I really do not think you will see a single market for insurance here in the foreseeable future. The regulators are obliged to protect their internal markets and the national interests are too strong. The current regulatory environment is complex and needs careful navigation. Great care must be taken in this regard”. Christian Kraut, Chief Executive for Middle East/Africa at Munich Re said he believes that a more unified approach to regulation would clearly be a big help for customers and their insurers and said that the CIMA Code is a good example of how it could work. But he is not overly confident either. “We must bear in mind the specifics that may not be applicable elsewhere, such as history, common currency and same central bank for the two main sub-regions—central and west Africa,” said Mr Kraut. The reinsurer pointed out that the success of the CIMA code has only come after many years of hard work, monitoring trends, addressing issues and problems, adapting to changing local requirements and the like. ‘All of which is never easy to achieve,” he concluded. - The full version of this report plus wider analysis of the state of risk and insurance management in the South African and wider Sub-Saharan region will be published as a special 16 page report in the September issue of Commercial Risk Europe next week. This is the first of a three part series on international risks and global programmes, sponsored by Zurich, that is followed by Brazil and Latin America in October and the GCC and wider MENA region in November. To secure your personal copies, hard copy or PDF, please contact Hugo Foster at HFoster@commercialriskeurope.com.

Hopes for regional insurance deal in Sub Saharan Africa increasingly remote

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