Lack of ERM stalling Africa’s reinsurers’ growth potential

A lack of overarching risk management and accountability is driving AM Best’s assessment of African reinsurers, in which it found Sub Saharan African reinsurers continue to be challenged by a difficult operating environment, with competitive pressures on underwriting activities further exacerbated by economic and political concerns. In recent years, much of the region has faced high inflation, currency devaluation and electoral disputes that have caused instability in some economies. AM Best stresses that many companies do have good risk management practices at a departmental level, but then adds that their strategic risk functions are not so good. Nevertheless, in its annual report on the African reinsurance market, AM Best notes that some countries have prospered – for example, Ethiopia has averaged approximately 10% economic growth for the past ten years and is forecast to be the fastest-growing economy in Sub Saharan Africa during 2018. “Despite the challenging market conditions, the African reinsurance market has experienced material growth over the past decade and has reported respectable financial performance in recent years,” says AM Best. “Legal treaty cessions, domestication policies, and recent regulatory changes support regional (re)insurers’ efforts to develop their profiles and support their respective markets. Growth opportunities, however, are somewhat tempered by a lack of policy enforcement and greater competition from larger, global reinsurers.” In AM Best’s view, the Sub Saharan African reinsurance market continues to offer growth and diversification opportunities for regional and international reinsurers. Amid the challenging market conditions, for regional players in particular, the ability to innovate, attract technical expertise and subsequently execute strategic objectives will determine how successfully reinsurers can capitalise on the market’s opportunities. Africa had the world’s lowest insurance penetration rate, at less than 3% of GDP, in 2017, compared with almost 6% in Asia and more than 3% in Latin America and the Caribbean, according to the Swiss Re Institute. The statistics indicate that the individual Sub Saharan insurance markets are at different stages of development, with penetration rates that range from approximately 14% of GDP in South Africa to just a quarter of a percent in Nigeria. While life operations account for the bulk of the insurance market in South Africa and Namibia, the majority of Sub Saharan African insurance markets tend to be more equally balanced between life and non-life exposures. AM Best expects insurance penetration rates in the region to increase gradually as a consequence of growing investment in infrastructure following the discovery of natural resources, and foreign direct investment is forecast to rise following the resources boom. “Reinsurers are likely to see more opportunities to underwrite construction and engineering risks in the short to medium term. Going forward, the region is also expected to benefit from increased economic momentum and stability following a number of recent or upcoming key national elections, namely in South Africa, Kenya, and Rwanda,” it states. AM Best believes that insurance penetration rates can also be positively impacted through support from local regulators. For example, in South Africa, the 2017 Insurance Act introduced microinsurance as a formally regulated class of insurance business. As a result, the (re)insurance market will likely benefit from increased consumer confidence in this segment, subsequently leading to higher market penetration across the largely underserved low-income population. Despite many reinsurers undertaking cross-border expansion efforts, AM Best anticipates that the profiles of most reinsurers are likely to remain limited in the near to medium term. Generally, it notes that regional reinsurers focus predominantly on risks within the continent, leveraging their local expertise and thereby maintaining stable operating returns within familiar markets. That can be an advantage in some ways – in 2017, the Africa-centric focus of its regional reinsurers meant that they were not exposed to the numerous global catastrophe losses experienced by reinsurers in the wider market. The average loss ratio for reinsurers in the region was 58%, compared to 78% for the largest 50 global reinsurers, reports AM Best, adding: “However, it should be noted that a lack of efficiencies and economies of scale continue to strain performance, with a 38% average expense ratio in 2017 for the region compared with 31% for the biggest 50 global reinsurers.”

Lack of ERM stalling Africa’s reinsurers’ growth potential

Want to read this article?

Read Next

Action needed to bridge $800bn Asian climate finance gap

Courage and collaboration needed to manage emerging construction sector risks

Munich Re ‘more likely’ to exceed 2024 profit target after €2.1bn gain in Q1

Insurance Europe calls for EC to ‘get it right’ on Solvency II

Zurich North America names professional liability, cyber leader

Action needed to bridge $800bn Asian climate finance gap

Courage and collaboration needed to manage emerging construction sector risks

Munich Re ‘more likely’ to exceed 2024 profit target after €2.1bn gain in Q1

Insurance Europe calls for EC to ‘get it right’ on Solvency II

Zurich North America names professional liability, cyber leader

Want to read this article?

Read Next

Action needed to bridge $800bn Asian climate finance gap

Courage and collaboration needed to manage emerging construction sector risks

Munich Re ‘more likely’ to exceed 2024 profit target after €2.1bn gain in Q1

Insurance Europe calls for EC to ‘get it right’ on Solvency II

Zurich North America names professional liability, cyber leader

Related Articles