Perhaps the greatest concern for many involved with the insurance industry in Africa is to discover why in so many countries on this continent insurance is so little used and contributes such a small percentage of their Gross Domestic Product, despite universal acknowledgement of the important role played by insurance for a country’s trade and its economic and social development. We are all aware of the essential role that insurance plays as a commercial and infrastructural service. From an infrastructural perspective, insurance promotes financial and social stability, mobilizes and channels savings, supports trade, commerce and entrepreneurial activity and improves the quality of the lives of individuals.
In a fast-globalizing world economy, Governments are faced with challenges relating to the regulatory environment, emerging global trends in the insurance sector and technological innovations. The impact of these trends is more pronounced in developing countries, who potentially stand to benefit from liberalization of the insurance sector provided due consideration is paid to putting in place an efficient and well-functioning institutional and regulatory framework, tailored national policies and well-planned sequential commitments on insurance liberalization.
There is a correlation between a country’s level of development and the extent of insurance coverage. Developed countries tend to have better developed and better functioning insurance services sectors both domestically and in terms of insurance exports, as compared to developing countries. This is evident when one compares the share of industrialized countries in the world insurance markets, which in 2009 stood at about 87 per cent as compared with 13 per cent for emerging markets, the majority of which are developing countries. Another good indication of insurance penetration is the premium volume generated as a percentage of gross domestic product (GDP). For industrialized countries this figure stood at about 8.6 per cent in 2009, whereas for developing countries it stood at 2.9 per cent. What is interesting to note here, however, is that many of the emerging markets have a far higher overall GDP growth rate, than developed countries, indicating the existence of substantial potential for the growth of insurance in emerging markets.
The current financial crisis has not left the world’s insurance markets untouched. If I had to describe one of the effects of globalization in one word, I would say "uncertainty." Life is not "risk-free" and the reason for the insurance industry is to assume risk. However, this is not to say that all risks are insurable. The choice is to plan for and manage risks rather than to be "planned" and managed by uncalculated risks.
Opportunities for Insurance in Africa.
Africa does have some very well developed and world class insurance expertise and institutions, but these are only found in particular locations, and not spread evenly around the continent. History can help us understand why this occurred.
Africa is endowed with the largest known deposits of the most valuable minerals, commodities and energy. Its agricultural resources are immense and, in history, its agricultural output has not only sustained the peoples of Africa, but has provided major exports of agricultural produce and commodities to the rest of the world.
During the 19th century, many of these resources were discovered and developed. The world’s largest Mining Finance Houses were created in Africa to attract and funnel the capital needed to be sunk into these projects in order to make them productive and to create the infrastructure needed to bring the outputs to the markets of the world. Johannesburg became the hub through which these massive ventures were financed and serviced. As a result, Johannesburg grew into one of the world’s important financial centres, developing a critical mass of financial institutions and other professional expertise necessary to support these projects, to verify their activities for investors around the world and to provide all the other services necessary for Africa’s world trade.
Other cities and centres also developed a critical mass of services and expertise to meet the needs of their regions, but probably because of the way communications worked in those days and also because of the Witwatersrand’s growing importance as the world’s largest gold producing region, none matched Johannesburg’s ability to attract as much expertise and critical mass as an independent financial centre, and of course that also included insurance expertise.
Ironically, Africa is one of the first places where there was evidence that, as much as 1000yrs BC, the Egyptians and the Phoenicians trading along the North African Coast practised a rudimentary form of Mutual Marine Cargo Insurance, where merchants deposited a small proportion of their cargo in a warehouse, and this would then be used to compensate those merchants who lost their cargoes at sea.
In modern times, South Africa’s Institute of Actuaries has gained a worldwide reputation for excellence and innovation in the fields of life assurance, pensions and employee benefits. South Africa’s Intermediaries and their Risk Management Companies are recognised as leading innovators in fields of Alternative Risk Transfer, Self Insurance, and Captive Insurance Companies which make insurance available on the most economic and flexible terms for, not only large businesses, but also much smaller businesses who organise themselves as co-operatives to take advantage of the savings and benefits.
In North Africa, the Maghreb countries have also achieved success on a smaller scale in both Life and Non-Life insurances sectors and in the development of Credit and Export Credit Insurance. Morocco and South Africa are the countries with the highest contribution of insurance to their GDP (i.e. the highest insurance penetration).
What has all this to do with Issues and Opportunities for Insurance in Africa today?
We need some understanding of how insurance developed and became concentrated in certain geographical areas on the continent, and probably more importantly, it tells us that the best developed insurance expertise on the African continent in both Life and Non-Life business is already world class and at the forefront of innovation. If countries want to improve their utilisation of insurance, one strategy would be to address what needs to be changed in order to share in the expertise which is already well established on the African continent.
It is almost indisputable that for the majority of large countries, and those with large populations, internal trade is by far the largest contributor to the national GDP. As a generator of GDP within a continent, intra-regional trade usually far exceeds the value of its trade with the rest of the world. In the absence of restrictions and national protectionism, the forces which drive this trade are usually explainable by the principle of competitive advantage. A country or region doesn’t have to be better than another in what it produces to make positive gains from trade. It just has to concentrate on the activities it does most economically and let others do the things it does less economically. Where restrictions and national protectionism are implemented, this often interferes with the functioning of the market and as a result encourages the formation of commercially unviable businesses.
Whilst initiatives to create special conditions can be useful to favour and encourage local business start-ups, restrictions and national protectionism can also create severe limitations for the other basic principle of insurance which is to share or spread your risks in such a way that in the event of a claim, it will be well within the insurer’s ability to pay, and will not adversely affect the insurer’s capital or expected annual trading result. Protectionism and closed markets in the long-run are unlikely to provide overall economic benefit. Open markets and the pursuit of a policy of competitive advantage should provide positive benefits for both countries and easier access to international expertise.
The idea that insurance and reinsurance premiums paid to foreign insurers and reinsurers represent an unnecessary drain on a country’s resources demonstrates a fundamental misunderstanding of insurance. An insurance premium is paid to transfer the risk to the insurer or reinsurer so that should the insurer be outside of the country, the claims paid will not put any strain on the country’s economy. Quite the opposite will occur since the country receives inward payments to compensate them for the losses occurring within their economy. In the competitive global insurance market, insurer’s operating ratios are close to 100%, so whatever is paid in premiums this year represents claims that are waiting to happen, hence for most countries foreign insurance and reinsurance is a zero-sum game.
Pursuing a national policy of compulsory local retentions, “legal cessions” might appear to be keeping money in the pockets of local insurers and saving foreign exchange, but when claims have to be paid which far exceed their annual premiums, one has to be certain that local insurers have sufficient liquid capital available to deal with such a situation. Today international reinsurers refuse to work on the old proportional treaty, or quota share basis. They are not interested in “dollar swapping” business and modern treaties are designed to ensure that local insurers are encouraged to retain as much of risk as their capitalisation will safely allow.
If existing practices are not producing the desired growth in insurance business, one way to increase the availability and choice of the types of cover in Africa is to explore ways in which more regional markets with fewer barriers could be achieved.
Five or six years ago a proposal was made at the Council of Ministers within the COMESA countries to look into creating a single common filing requirement for insurers and intermediaries providing insurance services in the COMESA countries. The idea was to reduce expense and the duplication of administration for the countries concerned, and for insurance entities in more than one of the countries. In addition, the objective was to significantly reduce the number of inconsistencies and other differences in the requirements of each of the countries Insurance Regulatory Authorities in relation to the information insurers and intermediaries are required to produce in their annual statutory return.
Another proposal was to look at the development of a single International Motor Insurance Agreement to encompass both SADC and COMESA countries with the intention of improving the flow of vehicles through the borders and reducing both the number of uninsured vehicles and the costs of separate additional insurance.
Additionally, since the Doha Round of the WTO negotiations failed to advance the negotiations, attention has moved away from countries’ WTO commitments, but many African countries already had signed up to open their insurance markets under the previous Round. To create the level playing field probably requires dismantling of "Legal Cessions" and for special privileges granted to Nationalised Insurers to be removed, or to be extended to the market as a whole. It would be useful as part of the quest to accelerate the growth of the insurance businesses of Africa to learn the positive or negative effects of these and any other recent initiatives.
So much for the supply side of insurance in Africa. On the demand, in the countries where penetration of insurance has failed to achieve significant growth, one has to ask what consumers and businesses would actually be interested to buy from the insurance sector. Do insurers and brokers know why there is so little take-up for existing products? Cultural and regional differences will mean that the answers could be quite different from one location to the next, and those insurance personnel who are working locally would be the most likely to know the answers.
The introduction of micro-insurance products in Africa has demonstrated an unfilled gap in the market which is producing an encouraging response, but it is too early to anticipate whether micro-insurance in Africa will become as successful as in China, where micro-insurance has grown to account for about 30% of new business.
One thing that is clear from the lack of penetration and growth of insurance in many African countries is that existing policies, products and methods are not producing the desired results, so new initiatives must be developed and tried out in order to find the products and approaches that meet the needs of the African consumer and businesses. It is easy to look for someone to blame for the current situation, but that cannot produce a solution – innovation and hard work are the most likely ways to achieve success.
By Dezider Stefunko
Chief, Insurance Unit UNCTAD. (Abridged).