analysis and focus on reinsurance and ......prudential regulation under solvency assessment and...

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ANALYSIS AND FOCUS ON REINSURANCE AND INSURANCE - CONTINENTAL ADVANCEMENTSANALYSIS AND FOCUS ON REINSURANCE AND INSURANCE - CONTINENTAL ADVANCEMENTS












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REINSURANCE AND INSURANCE

ANALYSIS AND FOCUS ON

CONTINENTAL ADVANCEMENTS

AFRICA

JUNE 2019

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ANALYSIS AND FOCUS ON REINSURANCE AND INSURANCE - CONTINENTAL ADVANCEMENTS














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ANALYSIS AND FOCUS ON REINSURANCEAND INSURANCE

–CONTINENTAL ADVANCEMENTS

AFRICA

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ANALYSIS AND FOCUS ON REINSURANCEAND INSURANCE

–CONTINENTAL ADVANCEMENTS

AFRICA

Introduction

Africa has generally been considered to be a developing continent in terms of social, technological and legal factors and simultaneously considered to have moderate to very high levels of risk from an Economic, Political and Financial standpoint.1

However, during the past 5 years within the scope of Insurance and Reinsurance, risk management and capital standards developed to the point that some of these African countries can align themselves with and even rival their global counterparts.

At Trust Re, we invest in the continent via market intelligence reviews, business partners’ seminars, market visits and developing long-term business relations with both brokers and cedants. As a result, we are able to obtain a first-hand view of these dynamic developments and the way in which they affect the insurance and reinsurance industry. We share our perspective in this article that follows.

1 AM Best – Best’s Country Risk Report 2018

can align themselves with and even rival their global counterparts.

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Regulators across the continent have displayed the propensity to enhance the operation and development of Insurance and Reinsurance business within their respective regions and the African Insurance Industry, in general.

Yet, with these advancements, the interpretation and acceptance of these regulatory controls can vary depending on the geographical operations of Insurers and Reinsurers. From varying perspectives, this may be considered protectionist in retaining the risk within the local market, inconsistent with neighbouring markets and burdensome in restricting market prospects.

Within the continent, regulators can operate at opposite ends of the spectrum from being too lenient to being too burdensome with their requirements.

Examples of the Regulatory reforms and advancements currently being implemented across the continent include:

- Working towards adopting common regulatory standards, ensure stability of the sector and regional integration to promote cross border trading of insurance services.2

- Focus on corporate governance, capitalism, investment, stress testing and supervision of insurance firms.3

- Risk-based capital approach that aims to strengthen the market and improve its conditions. However, apart from the positive shift to a Risk-based capital environment, if the focus on the risk transfer remains totally or significantly within the local market, the protectionist view arises and the downside to these approaches is that these markets can potentially detach themselves from competitive foreign capacity, innovative underwriting expertise and the ability to diversify risks properly to avoid local economic impact.

- Twin peak regulatory environment with prudential regulation under Solvency Assessment and Management (SAM) framework that is similar to Europe’s Solvency II and conduct of business regulations under the Retail Distribution Review framework.

- Innovation and digitisation to increase the insurance penetration of the market.

- Comprehensive strategy for the non-banking financial services aimed at developing non-traditional and innovative solutions with its priorities focusing on raising capital and insurance rates.4

Regulatory control

2 (Uganda Insurers Association, 2015)3 (Business Daily, 2017)

4 (Financial Regulatory Authority, 2019)

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While enhanced regulatory protocols can provide new opportunities for insurers, the continent as a whole still lacks the necessary experienced and qualified personnel to offer stability to the market’s pricing - which in many regions is based on commoditisation rather than a risk-based approach – or expand into new specialised product lines. This can cause severe competitive underpricing and negatively affect the insurer’s ability to provide profitable insurance products. If continued, the outcome can have detrimental results for these lines of business and the ability for the local insurers to attract and retain reputable global reinsurance support.

The most significant opportunity that exists within the continent is the low insurance penetration rate. Against a world average of 6.1%, some key African markets such as Nigeria, Angola and Egypt still have penetration of less than 1%. Additionally, increased disposable income means that the affordability of insurance increases too, making it more attractive.

African insurers have tended to offer a more traditional suite of product solutions, remaining within their comfort zone and risk appetite of local insurers. This is in spite of technological and digital advancements within the continent, which now expose markets to previously unseen complex risks. International insurers are now able to provide innovative solutions to emerging risks and outdated regulatory controls may restrict the offering of these products in Africa.

Underwriting dynamics

Northern AfricaWestern AfricaCentral AfricaEastern AfricaSouthern Africa

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The African market’s tendency for lower-rated securities to protect significant exposures has the potential to cause a devastating, vicious cyclical collapse due to large losses from over-exposure. From the economic point of view, it is important to tackle the phenomenon of under-insurance, also known as the Protection Gap i.e. the difference between the amount of insurance that is economically beneficial and the amount that is actually purchased.

Whereas, it is the objective of the insured and cedant to obtain a competitive cost of risk transfer, the line should always be maintained whereby purchasing of the minimum adequate cover for the specific peril or asset should not fluctuate based on a pre-determined premium.

If this is not adhered to, it may result in the client or cedant accepting a reduced amount of cover to meet a financial (premium) target, which would possibly result in a more significant financial burden and negative economic impact in the event of a loss.

This is particularly pertinent to Natural Catastrophes and Political Risks. Market polls indicate that protection for each of these perils only reaches 30% adequacy. The primary reasons are low market risk awareness leading to underestimation of the risk and poor risk modelling leading to low acceptability of risk- based pricing from international markets from whom the cover is sought.

The direct insured and by extension, the insurer, should fully appreciate not only the financial and economic effects of under-insurance but also the societal factors to its employees; being the loss of employment income, or redundancies stemming from downsizing of operations, or closure due to bankruptcy of locations affected by underinsurance for which the insured is not able to financially sustain the loss without adequate insurance and reinsurance protection.

Bancassurance and Digitalisation have led to the dawn of a new world of insurance distribution channels and cashless exchanges. With these means come innovative products with the ability to restructure and reshape the insurance market, namely: micro-insurance solutions to access the lower income and SME market segments and enhancements in data analytics from customer information to identify specific client needs and provide tailored solutions.

With the advent of Blockchain technology, redesigning the world of transparency, this can lead to the further enhancement of trust and efficiency of the insurance market by reducing asymmetry of information. Changes to business models and cultures can boost efficiency too.

From this stems the need for cyber insurance products that are robust enough to withstand the various challenges of the IT revolution, which is causing disruption in a positive manner.

The African market remains a largely untapped market. Furthermore, its population has nearly trebled from an estimated 478 million in 1980 to the current estimate of close to 1.2 billion; it is projected to increase to 1.5 billion by 2025 and to 2.4 billion by 2050. Those of active working age (25-64 years) comprise the fastest growing age group compared to any other. When looking at advancements in insurance and reinsurance in Africa, we must bear in mind that the continent’s demographic dynamics play a key part in shaping future development.5

Given the varying individual market conditions, Africa may not be able to achieve a one-size fits all regulator. However, with suitable regional

Market opportunities

Outlook

5 United Nations Economic Commission for Africa. The Demographic Profile of African Countries. March 2016.

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consolidation and adaptability, it can be transformed into a harmonised, transparent market under a reformed regulatory body that operates depending on the overall individual market maturity and dynamics. There would be matured but saturated markets such as South Africa alongside younger, developing and high potential growth markets such as Ethiopia.

The underlying basis of this focal point would be that market discipline encourages sustainability.

If this notion came to fruition, then the African market could be compared to the insurance regimes of India’s Insurance and Regulatory Development Authority (IRDA) and Saudi Arabia’s Saudi Arabian Monetary Authority (SAMA). Both these entities outlined protocols for rates and deductibles for certain risks, which allows for proper pricing and risk transfer, and prevents undercutting.

In order to enable such progress, the markets would have to be more synergetic to allow for more strategic relationships and to benefit from the expertise of international insurers and reinsurers. Ultimately, the African continent could benefit from and achieve sustainable and rapid developmental growth by adopting previously introduced and proven advancements from their global counterparts.

There is no need to reinvent the wheel when it is already rolling – only continuous improvement is necessary.

Outlook (continued)

Business Daily, 2017. EAC insurance regulators to discuss common rules. [Online] Available at:https://www.businessdailyafrica.com/markets/marketnews/EAC-insurance-regulators-to-discuss-common-rules/3815534-4057378-7fu0s3/index.html[Accessed 01 February 2019].

Uganda Insurers Association, 2015. The East African Insurers Association’s constitution is signed. [Online] Available at:http://uia.co.ug/the-east-african-insurers-association%E2%80%99s-constitution-is-signed/[Accessed 01 February 2019].

African Insurance Organisation, 2018. Africa Insurance Barometer 2018, s.l.: Dr. Schanz, Alms & Company.

Bibliography

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Copyright © 2019 Trust International Insurance and Reinsurance Company BSC (C) (“Trust Re”)All rights including the Authors’ rights are reserved to Trust Re

Title: Analysis and Focus on Reinsurance and Insurance, Continental Advancements AFRICA

Authors: Property Underwriting Department, Trust Re.

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