Using insurance to counter credit and currency risks in Africa

Credit and currency risks have long been seen by investors as a barrier to entry for African markets, but the continent’s insurance sector is on the cusp of rapid expansion and is set to handle many of those concerns. That’s the view of Mikir Shah, CEO of Africa Speciality Risks (ASR), who said Africa’s insurance market is poised for rapid expansion, with the second-fastest growth rate in the world after Latin America. It is growing nearly twice as fast as North America and more than three times faster than Europe. With 7% year-on-year growth, the region even outpaces Asia. “Africa is one of the last real growth markets,” Mr Shah said, “but the provision of covers has never been the full range we get in the west.” The structure of Africa’s insurance market has historically been fragmented and dominated by a number of regional and local insurers. “The nature of local insurers,” Mr Shah explained, “is that they have small balance sheets and they really look after the retail and SME markets.” Options for corporate and specialty risks are far more limited. We saw that there was a gap in the market to provide the end-to-end covers needed by businesses across the continent.” To do this, ASR’s teams work closely with local insurers, providing training and, crucially, leveraging the company’s technical abilities to insure against complicated local risks. “We have technical skills that can complement and enhance local stakeholder capabilities,” Mr Shah explained. Building out Africa-focused insurance and reinsurance products now can also lay the groundwork to support businesses and investors against future risks such as climate change. This kind of localised risk insurance can provide “real comfort to international investors and corporates”. Fluctuating exchange rates threaten returns and exits, while political instability makes for challenging operational climates. Investors and businesses “need to know that assets won’t be taken away or whittled down to zero… that’s the first step… then they can invest the money”, said Mr Shah. For development finance institutions as well as private investors, helping Africa’s insurance market reach maturity is a critical to achieving wider economic and social development goals. Building out Africa-focused insurance and reinsurance products now can also lay the groundwork to support businesses and investors against future risks such as climate change. “As insurance companies, we can’t have the same impact on climate change as other industries,” Mr Shah explains, “but what we can do is have products that mitigate the impact of the volatility driven by climate change.” Despite its minimal contribution to emissions, Africa is particularly vulnerable to the effects of climate change. Temperatures in north Africa and sub-Saharan Africa are expected to rise by as much as 3.5C from pre-industrial levels by 2050. In a continent where agriculture provides employment for more than half the population, the impact on livelihoods is severe. Weather variation is an area where insurance can have a significant impact of individual farmers. Parametric insurance, which guarantees a direct payout after a qualifying event, offers a means to mitigate against unpredictable external risks in a way that traditional insurance products cannot. Farmers, for example, can use such packages to quickly secure seeds to replant after a flood or drought. Given the dominance of the agricultural sector in Africa such products “allow resilience to be built into local commodities”, said Mr Shah. Technology is another area set to define insurance markets in the years to come. ASR noted: “Digitalisation is available in every single product line. Using technology to improve the risk mitigation process is very important and we’re looking at it in every aspect of what we do.” Technological advances have the potential to democratise access to insurance by raising awareness and improving the affordability of products. According to a recent study, 70% of insurers plan to drive forward digital strategies in the next two years. ASR plans to use digitalisation in its interactions with local insurers. Through an online platform, information can be shared easily by local brokers, while AI can efficiently extract information from risk assessments.

Using insurance to counter credit and currency risks in Africa

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