Risk management still to be tested in African insurance markets

Deniese Imoukhuede, chief risk officer, and Ronnie Kasapatu, director of partnerships, government relationships, agriculture and microinsurance, both at ZEP-RE, talk to Liz Booth about the need for strong risk management through the Covid-19 pandemic and beyond… Firstly, how do you think the African insurance markets are managing the risks emerging from Covid-19? Covid-19 has had a multifaceted impact on the insurance industry in Africa, which makes a concise response to this question difficult. I think a short answer is that the risk management capabilities of the industry are yet to be fully tested, given the current, relatively slower development of the pandemic on the continent. It is well documented that the impact of the pandemic in Africa appears to be less severe in terms of numbers of cases and deaths reported, when compared with the west; and even with the numbers of cases reported to date, the insurance sector has yet to feel the impact from potential losses arising from medical and life policies written, for example. This may be a reflection of the benefits from risk management practices of the industry or it could be down to good fortune arising from the impact of the (hypothesised) favourable demographics, with Africa’s younger population and warmer climate hindering the severity of the pandemic. In addition, the low penetration of life and medical products may also be a variable that is reducing loss exposures for the industry. How will this picture look over time? If reported cases increase in severity there will be a rise in demand for healthcare services, or in the event mortality rates elevate to the levels seen in, say, Italy or the UK. The ultimate cost to the industry cannot be accurately forecast. We simply do not know what the ongoing treatment requirements and eventual mortality or morbidity rates will look like. For other classes of business at risk from the pandemic – marine, aviation, trade credit insurance, events cancellation, etc – the industry has experienced negligible impact to date, mainly due to the risks representing a modest proportion of the industries’ business. We know that policy wordings have aided in reducing loss exposures arising from other areas, namely business interruption (BI). With economic activity suppressed by containment measures, and the halt of the hospitality, entertainment, and travel sectors, the environment should be ripe for BI claims to materialise. However, the requirement for physical loss to occur, as a condition on such policies, has so far limited the reporting of claims. The jury is still out with regards to the management of investment and credit risk exposures. With the industry maintaining material equity and property risks exposures on its balance sheets, and the potential for severe fluctuations in investment values, as seen in the capital markets during the second quarter of the year, there is risk of impairment of insurers’ solvency positions. Such positions may be difficult to sell off at this time to avoid the impact of future volatility. Further still, the increased potential for insolvencies amid the weakened economic environment may also affect liquidity levels of the industry. On a positive note, the industry overall appears to have been successful in administering its business continuity plans, as the environment has all but mandated businesses and individuals to undertake remote working. Have there been many disputes to date or have wordings stood up? The (re)insurance contracts exclude pandemics and that is a typical exclusion on all property contracts. In addition, the property BI cover in original insurance contracts follows material damage, and lockdowns that have caused reductions in turnover are not material damage to the property insured. In the meantime, we have not seen any disputes in the wordings with respect to pandemic exclusion. In health insurance policies, there are cases without pandemic exclusion and these policies are responding to the claims from Covid-19-related treatments, as well as life policies. Going forward, is there appetite for a pan-African solution? The pandemic has illustrated the need for a pandemic solution, whether pan-African or otherwise. The use of traditional insurance products cannot be considered the best approach to address this risk, simply because the uncertainty and severity of accumulations arising from such exposures would likely impair the financial strength of insurance industries and possibly lead to their demise. For example, the sheer scale of BI losses arising from a pandemic would be too immense and likely be far beyond an insurer’s financial capacity. Furthermore, the need to maintain solvency positions would mean the industry would have to provide such pandemic covers at prices that would be unaffordable or unviable for individuals and businesses. As demonstrated across the world, governments and central banks have provided extensive support through the loosening of fiscal and monetary policies, and African sovereigns have increased their debt by substantial amounts to support their respective economies during the Covid-19 pandemic, illustrating that there is appetite for an alternative solution, backed by public-private partnerships, to support future pandemic responses. It is unlikely that individual governments would have the desire to go it alone, given limited capacities available, resulting from their high dependence on development finance institutions for financial support, and their existing financial obligations, which limit their ability to manage a future crisis. We are seeing movement, not just in Africa but globally, as governments consider their response to future pandemics, by considering possible risk-sharing mechanisms, as they come to the realisation that it is impossible for the private sector to endure such risks on its own. There is growing eagerness to develop a regional response framework. Countries were caught off-guard and there is a growing consensus that nations should be prepared for the next epidemic or pandemic. Today, most countries are supplementing their internal resources with loans and grants from multilateral agencies. COMESA stated, at the recent policy meetings, collectively called for a regional approach to combatting Covid-19 in partnership with the private sector. To this end, ZEP-RE has engaged the COMESA secretariat and reviewing options for a pandemic response facility. What do you think that would look like (a pandemic pool arrangement)? Several solutions have been produced worldwide to support the funding gap arising from past pandemics and act as examples of initiatives that can be undertaken to support Africa’s response to future pandemics. This includes the World Health organisation’s Pandemic Emergency Financial Facility, which was established in 2016 in response to the ebola crisis, with the aim to provide financial support following a large-scale outbreak. There is also the Caribbean Catastrophe Risk Insurance Facility, formed in 2007, as the ﬁrst multi-country risk pool in the world, developing parametric policies backed by both traditional and capital markets. The approach being proposed by ZEP-RE is a risk pool framework similar to what is used in the Caribbean to manage cat risks. We are aware that the African Risk Capacity is developing and is fairly advanced with a different pandemic solution. We are certainly not ruling out working with any of the regional players in developing solutions to combat pandemics.

Risk management still to be tested in African insurance markets

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