By Liz Booth
Africa’s reinsurance market should resume growth next year, after a tricky couple of years caused by a steep decline in African currencies against the US dollar and the sharp drop in oil prices.
Reinsurance executives across the continent continue to be bullish about the prospects of their markets, according to the second edition of the Africa Reinsurance Pulse, launched today at the 22st African Reinsurance Forum in Port Louis, Mauritius.
In 2016, Africa’s GDP growth dropped to 1.8%, below the global average of 2.5%. Insurance premiums declined by 15.3% to $61bn. However, the contraction is mainly due to the depreciation of some key African currencies against the US dollar.
For 2018, the senior reinsurance and brokerage executives interviewed expect results to improve markedly, as the underlying market fundamentals remain largely unscathed from the current decline.
Contrary to the development in US dollar terms, in original currencies, most African insurance markets continued to grow in 2016. Going forward, they are expected to benefit from the low insurance penetration, the recovery of commodity prices and the continent’s need for infrastructure.
Africa’s young and growing population, its expanding middle-class and technological innovations that alter consumer habits, will drive demand and create product opportunities as well as new avenues for distribution.
However, according to the executives, Africa remains dependent on factors external to its own sphere of influence. While insurance markets contracted, excess capacity continues to flow inwards, driving competition and, as a consequence, protectionism.
To some survey respondents, this threatens markets as they exclude themselves from access to foreign expertise, limit the potential for risk diversification and thus increase the exposure within the ‘protected’ domestic economy.
Current premium rates are low compared to the average of the past three years, but due to large losses, rising claims and the introduction of risk-based capital regulation, pricing may be stabilising and the market may be at the bottom of the cycle.
Driven by rate increases in life insurance, cost reductions, tighter underwriting discipline and a steady recovery of the economy, returns are expected to improve.
The inflow of excess capacity into Africa is expected to continue, albeit at a slower pace. Since Africa will remain a growth market, reinsurers rather trim their costs than reduce capacity.
Due to low exposure to natural catastrophes and largely uncorrelated risks, Africa remains a ‘diversification play’ and will continue to attract capacity.
A vast majority of executives assume that reinsurance exposure will grow as fast or even faster than GDP, as the concentration of values continues to rise while rates decline. As a result, premiums are expected to grow at a slower pace than GDP. Only once the economy rebounds, should premiums outgrow GDP again, providing heightened demand that will translate into stable or rising reinsurance rates as well.
On average, the reinsurers and brokers surveyed were active in 20 African markets. During the past three years, a majority of them increased the number of markets they are active in. Going forward, that trend will continue because, for most of the reinsurers and brokers interviewed, an expansion into new markets and/or new lines of business is a top priority for the next 12 months.
Regulation has improved in the past 12 months in Africa. Markets like Morocco and Kenya are adopting a risk-based capital solvency approach, while minimum capital requirements were increased and compulsory insurance schemes more systematically enacted. Still, respondents also noted rising protectionism in Africa and are equally concerned about a lack of enforcement and consistency in regulation.
Underwriting quality, risk management and expertise are seen to be improving. An expanding middle-class, a deeper understanding for insurance products and the emergence of new technologies will benefit insurance markets and help increase insurance penetration, the survey concluded.