Globalization and Insurance: the Challenges ahead for the Developing Countries from the African Viewpoint

Globalization and Insurance: the Challenges ahead for the Developing Countries from the African Viewpoint

2007-11-28 From: UNCTAD

Bakary KamaraIntroductionThe landscape of the insurance industry in Africa has gone through profound changes in the last four decades. For instance:* In the 1960s, a combination of liberal legislation, a favourable economic climate and the emphasis by UNCTAD on the importance of insurance in national economies led to the rapid establishment of national markets with the creation of local companies with public/private shareholding and foreign participation.* The 1972 UNCTAD resolutions encouraged States to set up local insurance and reinsurance companies. All over Africa, local companies were registered in line with these resolutions. In a number of cases (22 States), monopolies were established.* The economic recession that started around 1980 in many African countries, and which lasted for more than fifteen years, led to a stream of failures in most regulated economies. The downturn had its effect on free markets as well. Structural adjustment programmes were introduced to combat these economic problems, leading to market liberalization and the privatization of public enterprises, including well-managed firms. The insurance sector was not spared from the general trend leading to the establishment of new private companies. Swaziland is the only country left on the continent with a government monopoly, though this situation may not endure for much longer.* While some national insurers and reinsurers such as Reinsurance Company of Mauritius (RCM) and Caisse Nationale de Rassurance, Cameroon, have been liquidated, a few are in the process of privatization.The General Agreement on Trade in Services (GATS) has put pressure on national Governments to open up their insurance sectors to foreign operators and give them equal market access. In this regard, the African Insurance industry finds itself at a crossroad, with only 13 out of 41 WTO members making a commitment to comply, at least in part, with the Agreement.This modest contribution to current studies aimed at achieving further progress in GATS negotiations on insurance services will focus on the following areas:* Features of the African insurance market;* Africa Re corporate profile and financial highlights;* The challenges ahead for insurance services in Africa.Characteristics of African marketsDirect marketIn 1998, there were 580 companies in the industry in Africa, including 157 in Nigeria, 120 in South Africa and 41 in Kenya. In 2004, the number of Nigerian companies fell to 110, bringing the number of companies in the continent to about 550.It should be noted that in the past few years a number of new companies have been formed in East Africa with the liberalization of the Ethiopian, Mozambican, Tanzanian and Zambian markets.As our objective is to analyse the behaviour of the African insurance market from the point of view of globalization as compared to other regions of the world, a comparison of their respective sizes would be instructive. The comparison is shown in tables 1 to 5 below.Table 1. Evolution of market shares in the world (in millions of US$) Africas share of the world insurance market was 1.16 per cent with South Africas income making up 82 per cent of the continents premium production (tables 1 and 2). Moreover, 41 African countries represent only 4 per cent of 1.16 per cent, i.e 0.046 per cent of the world premium. From these figures, it is obvious that the insurance industry in Africa will need a special treatment within the GATS for several years.The reinsurance marketThere are two major markets in the reinsurance subsector, namely North Africa and SouthAfrica, as may be noted in tables 4 to 6.

There are currently about 30 reinsurance companies legally established in the continent including the three big international reinsurers Swiss Re, Munich Re and Hannover Re, all based in South Africa. Three domestic reinsurers are multi nationals Africa Re, Cica Re and Zep Re. They were established with the objective of promoting the development of the African insurance/reinsurance industry. Nine of these companies (Kenya Re, CCRAlgeria, Egypt Re, Namib Re-Namibia, National Re-Sudan, SCR-Morocco, Tunis Re, Tan Re-Tanzania, Sen Re-Senegal and Ghana Re) have the Government as the majorityshareholder although the privatization of some of them is in progress. Two former national reinsurers have been fully privatized, namely Zim Re and Nigeria Re.Furthermore, a private company Aveni Re was set up early this year at the initiative of several insurance companies of the CIMA zone, following the creation of three such private enterprises in Nigeria (Continental Re, Globe Re & Universe), one in Ghana (Mainstream), one in Kenya (East African Re), one in the Tunisian offshore zone (Best Re) and Uganda Re.The biggest reinsurers in 2004 are shown in table 7.

Some 31.5 per cent of Egypt Res business is non-Egyptian income. What makes up the non-Egyptian market is not readily available.SCR income for 2004 is not readily available. We have used 2003 figures adjusted by 5 per cent to arrive at 2004 premium income. The foreign element is 4.77 per cent of the income. An estimate of $12.583 is assumed as foreign business for 2004.

As may be observed in tables 7 and 8 above, African reinsurance companies are performing quite well when compared to foreign competitors established in the continent.Profile of Africa ReThe African Reinsurance Corporation was set up on 24 February 1976 with the aim of assisting in fostering the development of Insurance and Reinsurance activities within the continent.Africa Res Gross Premium Income in 2004 was $299.07 million. Africa Re South Africa (including run-offs handled by the Nairobi office) was responsible for 49.12 per cent of the figure. The Corporation ranks (47) among the world top 50 reinsurers in term of net premium income (264 million).It is the desire of Africa Re to maximize incoming emanating form voluntary cessions. While in 1989, the 5 per cent legal cession on treaties from African markets yielded 67.8 per cent, in 2004 it dropped to 11.19 per cent, due to intensive marketing drive and better acceptability of the Institution security which is rated BBB+ by Standard & Poors and A by AM Best Europe. If not for the weak sovereign ratings of the African economies, Africa Re could have achieved better assessment, as these rating agencies link commercial ratings to the sovereign one of countries where reinsurance companies operate and/or originate from.Table 9 (millions of US$)It is worth mentioning that the African Reinsurance Corporation has successfully completed its capital increase/opening exercise with 71 per cent of its equity held by 41 African countries, 121 local insurance/reinsurance companies and 29 per cent controlled by five AAA-rated development finance institutions, namely: the African Development Bank (founder of Africa Re) 8 per cent; the International Finance Corporation 8 per cent; DEG, a subsidiary of Kfw from Germany 8 per cent; FMO, a joint venture between the Dutch Government and ABN-Amro of the Netherlands 4 per cent; and Proparco, a subsidiary of the Agence Fran?aise de Dveloppement 1 per cent.

The challenges aheadThe issuesCompetitionPremium rates are now on the low side in Africa and the situation may worsen in the years to come despite a probable respite following hurricane Katrina. Several local direct operators that are generally very small in terms of capitalization may not be able to compete effectively and could fall into bankruptcy (an indicator is the case of three companies in Mauritius). Further, the expected cross-border electronic insurance trade may be harmful to consumers and operators as well.On the reinsurance side, we have witnessed in recent times (mid to late 1990s) an increase in the number of national/local private reinsurers as a reaction to insufficient capacity due to a relative disinterest of foreign reinsurers in African business which does not give a high volume of premium with its inherent problem of collecting balances due. However, following the spate of natural catastrophes occurring elsewhere, Africa may become very attractive to international reinsurers in the years to come, due to its limited exposure to such natural hazards, coupled with the low insurance penetration in the Continent. Local and regional reinsurers with small capital bases could then be under threat.Legal cessionsLegal cessions on policies and treaties which have been cancelled in Nigeria and Egypt, are still in force in Morocco and Algeria, and are being progressively phased out in Kenya. Further, new reinsurance companies (Namib Re and Tan Re) are legally entitled to legal cessions but have been challenged in Court by the Cedants. For instance, in Namibia, the Government and the industry entered into a five-year deal in which NamibRe agreed to zero-rate the compulsory cession on insurance premiums. The agreement retains the provisions where insurers have to cede 20 per cent of their insurance treaties to NamibRe, which also has the right of first refusal on all other reinsurance business.Legal cessions in respect of treaties are in force in the case of regional reinsurers: Africa Re (5 per cent), ZEP Re (10 per cent), CICA Re 15 per cent). Already with only 11 per cent of its income emanating from this type of cession, Africa Re is brassing up to the abolition of this privilege in the not to distant future. The removal of these cessions may threaten the operations of some of these reinsurers.Localization of insurance of imported goodsThis remains a legal requirement in several African countries. Its phasing out may lead to a loss of a big chunk of premium volume, thus leading to a crises in this class.Delocalization of risksGlobalization is expected to increase the number of risk delocalizations in respect of multinationals (mega risks) and Life/Health covers. These risks shall be directly insured abroad, due the small size of many operators, the sophistication of these products and the existence of global insurance covers purchased by the Head Offices of these multinationals, thus depraving the African Insurance sector of meaningful source of business.Possible outflow of foreign currencyIt is normal for a foreign insurer established in a given country to repatriate its profit. Moreover, consumers may also settle insurance premiums to insurers based outside their country in convertible currenciesOffer of new/modern products by foreign insurers established in the countryAlthough this is part of the tools of competition, it is however singled out as it constitutes a major issue for developing markets as foreign insurers provide a full range of products which compete with often obsolete products in the market.The way forwardConsolidationIn several countries, liberalization of markets is still in its infancy. In due time, however, the critical stage will be reached where consolidations would take place to ensure the overall efficiency of the system.Markets with relatively long experience of deregulation, such as South Africa, Morocco, and the CIMA zone have already started to witness consolidation. From early 2007, the minimum capital requirement for a composite insurer and a reinsurer operating in Nigeria would be $37.5 million and $75 million respectively. This would force a number of companies into consolidation, which may further reduce the number of operators from 110 to a maximum of 30.Consolidation among local operators as well as companies operating in the same region should be encouraged, as it will build a strong regional capacity. Regional co-insurance, which is already practiced in the CIMA zone, could also be introduced in other regions. Regional cooperationThe level of cooperation between the developed and developing parts of Africa, as regards insurance, is still low. Increased interaction of the very developed South African insurance sector with the other markets in the continent would definitely assist sub- Saharan Africa and, to a lesser extent, North Africa in improving the skills of their various markets, especially in the following are: regulation and supervision, manpower development and product development in life assurance, terrorism and sabotage insurance, agricultural insurance etc.Regulation and supervisionEffective and autonomous Supervisory Authorities coupled with an update of Insurance laws to reflect the modernity of our time, are necessary to check the negative effects of and adjust the inevitable globalization in Africa. The South African model has proved to be efficient in that respect. Moreover, an interactive rating at an affordable price such as that provided by the African Insurance Organization, in partnership with a reputable agency, would assist African operators in improving their reputation and acceptability of their security/credibility, as well in the competition field against well-known foreign names with subsidiaries in Africa.Manpower developmentThis is a very effective means to prepare local insurers against the threat of globalization. There is an urgent need to assess the requirements of the industry (Supervisory authorities, Companies, Brokers, Actuaries, Surveyors and Adjusters). However, it must be stated that the setting up of an African College of Actuarial Sciences is imperative. The training of reinsurance underwriters and the setting up of centres for Catastrophe modelling and Risk Management must also be considered as an urgent task.IT developmentThe realization of the AIO project relating to insurance software packages will greatly contribute to the efficiency of small/medium size local insurance operators vis--vis their foreign competitors.Product developmentLife assuranceAs evidenced in table 3, the growth of Life Assurance should be given an urgent priority in Africa hence the support given by the AIO to this class of business is most welcome. Supervisory Authorities should disallow Life/Accident/Health covers given from abroad by way of the Internet or via foreign intermediaries, in order to assist in developing this class of business which is the best conduit in mobilizing long-term investment to finance economic developmentTerrorism and sabotageThis type of insurance needs cross-border cooperation within Africa in view of the volume of capital needed for an adequate cover.A pool or a fund should be established in Africa with the possible technical assistance of SASRIA of South Africa, which has been one of the first joint initiative of Government and business community (insurance industry) to address the financial/economic consequences of terrorist attacks in the world. An alternative would be the extension of the activity of the African Trade Insurance Agency (ATI) to cover terrorism and sabotage in the entire continent, as it is the case in United States (TRIA) and Europe (e.g. Pool Re in the United Kingdom, GARET in France).Agricultural insuranceThis is another area that needs regional/international cooperation, and which should be free of regulatory restrictions in Africa, on the condition that the Insurers willing to provide the guarantee to farmers are well known in the international market.ConclusionThe challenges facing insurance services in Africa in view of the threat of globalization are enormous. Inasmuch as competition should foster a more efficient system, in Africa there is a dire need to ensure not only that consumers are adequately protected, but also that local operators are not wiped out. This is the paradox that we face today in most parts of Africa. In this paper, we have presented a picture of an African insurance market that has both opportunities and threats as it tries to come to terms with the modern age of globalization and liberalization. We have also made some suggestions on the way forward, with specific examples that we believe will help the industry to mature and at the same time benefit from the gains of globalization. We hope to have contributed albeit modestly to develop the insurance awareness and the dissemination of the information on our continental industry.

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