Work in Progress

The African reinsurance market is fast growing up and, despite increasingly competitive market conditions and relatively poor investment returns as elsewhere in the world it still reported a decent collective combined ratio in 2011 and 2010. But according to a leading African reinsurance executive, education and training aside, the market needs to focus on internal risk management systems, the development of catastrophe modelling software that is ‘fit for Africa’ and also maintain discipline and prudent underwriting in the face of the rising competition. These were some of the key messages given by Corneille Karekezi, CEO of Africa Re, during his speech at the recent Africa Insurance Organisation (AIO) conference in Mauritius. Sub Saharan Africa offers huge potential but for this growth story to unfold as dynamically as it could the SSA economy needs a vibrant and growing insurance and reinsurance market. This was the core reason why African Reinsurance Corporation (Africa Re) was formed on the recommendation of the African Development Bank (AfDB), in February 1976 in Yaounde, Cameroon. Its formation was facilitated by an international agreement signed by the 36 member states of the Organization of African Unity (OAU) and the AfDB. The company states that the aim was to ‘reduce the outflow of foreign exchange from the continent by retaining a substantial proportion of the reinsurance premiums generated therein’.hideMr Karekezi told delegates at the recent AIO conference that, in a nutshell, AIO had been created to address ‘unfulfilled needs’ by the creation of an alternative market for African reinsurance buyers. He said that, at the time of Africa Re’s creation, there was a perceived ‘one-sided partnership’ by which the cost for African reinsurance buyers did not seem to reflect the underlying risks. Mr Karekezi said that the African reinsurance market has become increasingly competitive over time. States and local entrepreneurs have identified and seized growing opportunities in the sector and this has led to the emergence of regional reinsurers. This process has been aided by the democratisation, liberalisation and globalisation of economies that he said have introduced ‘dynamism, more opportunities, confidence and access to capital’. The growth of the African reinsurance market has come of course on the back of the income growth of the region’s overall insurance and reinsurance markets, said the reinsurer. Between 2002 and 2010 direct life premium grew by 9% and non life by 12.6%. In the reinsurance market life premium was up 6.4% and non life 6.5%. And, despite the rising competition and wringing of hands about soft market conditions as elsewhere in the world, according to Mr Karekezi, African reinsurers reported combined net combined ratios of 92.9% in 2010 and 93.6% in 2011. Retrocessionaires of domiciled reinsurers reported net combined ratios of 94.6% in 2010 and 93.5% in 2011. This is a profitable market for African reinsurers, he explained. The net technical margin of African-based reinsurers was US$95m or 6.8% in 2010 and US$91m or 7.8% last year. African reinsurers shareholders’ funds are rising. Mr Karekezi estimates that in 2007 the total was US$1.57bn and by 2011 this had risen to US$2.15bn. This was, however, set against premium income of US$7.5bn and so the capacity and experience of foreign-based players is still clearly needed, said the reinsurer. This is reflected in market share numbers. In the non-life market, locally-owned reinsurers amassed just over US$1.5bn in premium income and accounted for only 26.5% of the total market. South African-based foreign-owned reinsurers gathered US$847m in premium to account for 14.7% of the total market while foreign-based reinsurers grabbed US$3.4bn of premium to account for 58.8% of the total US$5.4bn cake. On the life side, the shares were even more strikingly in favour of foreign-owned and based reinsurers as the local reinsurance market only accounted for 2% of the total market of US$836m in 2010. Mr Karekezi said that the market is currently characterised by a ‘sustained’ soft market with high commission rates. Higher but riskier He said that investment yields offer higher returns but are riskier than mature markets. Now, as noted above, the gap between shareholders’ funds of domiciled reinsurers and total African market income is quite high. Mr Karekezi pointed out that, after allowance is made for retro, the ratio of shareholders’ funds to net written premiums is 1:3. “The SHF is still inadequate to service the risks of this market. No wonder many reinsurers domiciled outside the continent are interested in entering the market,” said Mr Karekezi.“The gap between SHF of domiciled reinsurers in the continent and total market reinsurance income is quite high. This shows most likely that reinsurers within the continent (apart from possibly west Africa) do not have enough capacity to satisfy the African insurance market,” added the Africa Re CEO.Mr Karekezi is, however, by no means pessimistic about the prospects and development of this market, He said that he sees some very positive ongoing reforms in regulation and the way that African insurers and reinsurers are being managed. He pointed to a move towards risk-based regulatory and capital management regimes that are in step with international developments. The most obvious example is the SAM solvency regime in South Africa.Mr Karekezi also pointed to developing local content law such as that covering energy in Nigeria and soon to be expected in Ghana. Mr Karekezi said that he perceives a strengthening of internal process across the board and in particular enterprise risk management and corporate governance frameworks, which as the story on the front page of this issue stresses is so important for SSA business generally. He said that he has also seen the recruitment of analytics staff and chief risk officers to support the modelling and pricing of risks and voluntary submission to independent international credit ratings.In conclusion, Mr Karekezi said that he and the rest of the African market is ‘keenly’ watching the ongoing eurozone crises and proposed Solvency II capital adequacy regulations. He said that Africa’s future economic growth is expected to grow as predicted. Despite possible ‘pockets’ of political, social and economic disruption, the continent will march on, he said. As to the African reinsurance industry Mr Karekezi said that it will continue to provide capacity to the primary insurance market. More markets are expected to ‘domesticate’ life and accident classes and allow for greater participation of local players in the oil and energy classes. Foreign reinsurers will continue to lend capacity in peak risk areas such as the energy business in the fast-growing oil-producing markets as well as the ‘vast’ South African Life market, predicted Mr Karekezi.But, while many gains have been made, ‘the road ahead is still steep’, concluded the reinsurer. He identified three big themes for the market to focus upon as it tries to work out how to maximise the opportunities offered by its fast-growing market, three big themes that are astoundingly similar to challenges identified by risk and insurance experts in other fast-growing countries and regions we have recently examined such as Turkey and Latin America. These are: First, effectively deal with catastrophes through modelling software that is fit for Africa. Second, maintain discipline and prudent underwriting in the face of ever-rising competition. And, third, further improve channels of communication between practitioners to help address the problem of skills shortage and professional development.

Work in Progress

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