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Africa’s $6.8b reinsurance market to recover in 2018

Monday, October 23, 2017

Reinsurers in Africa are optimistic about the prospects of $ 6.8 billion Africa’s  reinsurance markets in 2018. This is the outcome of the second edition of the Africa Reinsurance Pulse, launched today at the 22nd African Reinsurance Forum in Port Louis, Mauritius. In 2016, Africa’s GDP growth dropped to 1.8 per cent, below the global average of 2.5 per cent and Insurance premiums declined by 15.3 per cent to US$ 61 billion. The report stated that the contraction is mainly due to the depreciation of some key African currencies against the US dollar.

For 2018, the operators expect results to improve  as the underlying market fundamentals remain largely unscathed from the current decline. The Africa Reinsurance Pulse is annual research series, conducted by Dr. Schanz, Alms & Company. The report also stated that Africa’s young and growing population, is expanding middle class and technological innovations, which alter consumer habits, drive demand and create product opportunities as well as new avenues for distribution.

The executives said Africa remains dependent upon 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. The report read: “To some interviewees, 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 seems to stabilise. Still, current profitability is depressed as well.

But according to the interviewees,” we might be closing in on the bottom of the cycle. Driven by an increase in rates 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, premiums should outgrow GDP again, provided heightened demand will translate into stable or rising reinsurance rates as well. On average the reinsurers and brokers surveyed were active in 20 African markets. Over the course of the past three years, a majority of them increased the number of markets they are active in.

Going forward that trend will continue as to 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 adopted a Risk-Based Capital solvency approach, while minimum capital requirements were increased and compulsory insurance schemes more systematically enacted. They also noted the rising protectionism in Africa and are equally concerned about a lack of enforcement and consistency in regulation. Although there is no uniform trend across the reinsurance sector in Africa, rising protectionism and excess capacity are major concerns.

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 penetratio”, it added.