As microinsurance penetrates Africa reinsurance capacity need will grow

Parametric or weather-index insurance cover through microinsurance schemes continues to expand its reach across Africa, a trend that could result in greater demand and utilisation of reinsurance and insurance-linked securities (ILS) capacity.

During 2014 total identified microinsurance written premiums across Africa increased to $756 million, from $387 million in 2011, representing growth of roughly 50%, according to a new report from the Munich Re Foundation and the Microinsurance Network.

Approximately 61.8 million people across the continent were protected by at least one microinsurance policy at the end of 2014, compared with just 44.4 million in 2011. According to the report, this translates to a total coverage ratio of 5.4% of the total population across Africa.

Clearly, the uptake of microinsurance policies is on the rise in Africa, with an increasing number of citizens being able to purchase parametric insurance protection against a growing number of weather or disaster risk exposures, as well as indemnity policies for life, health and other personal lines risks.

Microinsurance, as an innovative sub-sector of the insurance and reinsurance industry utilises features such as parametric weather insurance to provide more affordable protection, which importantly, pays out rapidly post-event, mitigating the financial and economic impact to emerging regions.

And as the sector has matured and the products continue to evolve to meet the divergent needs of regions and individuals, there’s an opportunity for reinsurers and also ILS players to provide the capital and skill set, and drive further sector growth.

“It is great to see indications of a maturing African market with an increasingly diversified coverage. Whilst life and credit life products are widely spread on the market, new types of bundled covers especially in health and personal accident are being developed.

“Looking at the subset of products for which claims, administrative expenses and commission ratios were reported, the study showed clear profitability for many products, with more than half of products with combined ratios below 75%,” said Michael McCord, Chair of the Microinsurance Network.

Microinsurance is vital in supporting and protecting the livelihoods of low-income people, especially those in poorer parts of the world that are susceptible to a host of natural disasters, such as drought, flooding, and other extreme weather events.

In recent years the microinsurance sector has flourished in some developing countries, facilitating the expansion of parametric weather insurance, and index-based insurance covers to those that need it most.

Initiatives like the African Risk Capacity (ARC) are an example of a concerted effort between public and private sector entities to improve disaster resilience and recovery for vulnerable nations. Being Africa’s first sovereign catastrophe insurance pool, ARC utilises parametric insurance products and the capacity of the global insurance and reinsurance market, as well as some ILS capacity, to protect member states against drought conditions.

ARC has been praised by leaders of global organisations, insurance and non-insurance by nature, and has ambitions to expand its reach across Africa and also grow its product set to include cyclones and other weather events.

The desire from ARC to expand further and also the fact that microinsurance penetration is on the rise elsewhere in Africa suggests that as the sector scales up, the need for reinsurance protection, and also capacity from the capital markets could have an increasingly important role to play.

ILS players that participate in collateralised reinsurance agreements likely have some exposure to ARC policies and perhaps other microinsurance schemes throughout the continent. But the involvement of ILS capital and features more directly within the microinsurance landscape could grow in the coming years as the market looks to expand, ultimately requiring more reinsurance.

Outside of Africa other organisations are increasingly looking to broaden the reach of parametric insurance and index-based weather insurance products to those in need, ultimately seeking to narrow the protection gap (difference between economic and insured losses post-event).

Global Parametrics is an example of this, an entity focused on providing vulnerable, underserved and underinsured parts of the world with parametric risk transfer solutions and looking to leverage the global reinsurance market and ILS or third-party investors for capacity as it grows.

Undoubtedly, as microinsurance in Africa and beyond continues to broaden its reach, covering more and more people, and evolving into larger programmes and initiatives, catastrophe reinsurance will become an ever more important part of the set-up, an area that ILS is becoming ever more prominent.

With public and private sector entities showing an increased willingness and desire to ensure those in vulnerable regions are able to afford adequate risk transfer solutions, it’s possible that reinsurance and ILS, which is more than capable, will have an important role to play.

“We were pleased to see that data from the WMM was used in the preparation of the 2015 G7 decision to provide an additional 400 million poor people with insurance against the risks of climate change by 2020. This is an unprecedented opportunity, but a lot of challenges still lie ahead.

“This Landscape Study on Africa provides important new information on opportunities for and challenges faced by microinsurance in the region. We are convinced that reliable data on microinsurance markets is essential to the development of inclusive insurance markets and thus leads to better protection of the poor against risks,” said Dirk Reinhard, Vice Chairman at the Munich Re Foundation.