Despite being the second fastest growing insurance market in the world, the majority of African countries report dangerously low insurance penetration, a gap that could be closed with the use of traditional insurance and alternative risk transfer solutions.
Speaking at a risk management event in London recently, Allianz Global Corporate & Specialty (AGCS) Chief Executive Officer (CEO) in Africa, Delphine Maïdou underlined the difficulties facing emerging markets as financial sector volatility continues, leaving numerous countries highly vulnerable to “economic shocks.”
Inadequate insurance protection across the region hinders economic stability, resilience, and growth in the face of a range perils, from natural disasters to fire and explosion, and terror or political threats, among many others.
“With growing economies, Sub-Saharan Africa presents a huge potential for business insurance. Insurers and brokers need to work very closely with risk managers, regulators and stakeholders within the region to create awareness about the purpose and value of insurance so more companies, projects and stakeholders can be adequately protected,” urged Maïdou.
After emerging Asia, Africa is actually the fastest growing insurance economy across the globe, and Maïdou implies that regions such as South Africa, Namibia, and Mauritius have better levels of insurance take up than other African countries.
However, Nigeria for example, which is Africa’s biggest country in terms of GDP and has a population of 170 million, has an insurance penetration level of just 0.6%, representing a challenge and an opportunity to the insurance, reinsurance, and also insurance-linked securities (ILS) markets.
“Both traditional insurance and the new generation of alternative risk transfer solutions can be used to find the right responses to an increasingly complex risk environment,” said Maïdou.
To address such a vast protection gap it’s likely the traditional insurance and reinsurance sectors will require the structures, efficiency, and willingness of the ILS market.
Part of the problem with penetrating the insurance markets in developing countries such as Nigeria, is the affordability of the end product to the consumer, while also positively contributing to business performance and revenue.
A combination of re/insurance and ILS can be seen with ventures like the African Risk Capacity (ARC), which successfully protects a variety of poorer, vulnerable countries against the impacts of drought.
The fund utilises a parametric trigger structure that enables fast assessment of the loss and ensures rapid payout, the type of mechanism that could benefit the poorer, most vulnerable African’s against a range of threats and exposures.
The protection gap across Sub-Saharan Africa is significant, and as a result would need the capacity of insurers, reinsurers, ILS players, and likely the support of public sector entities to increase awareness and resilience via partnerships.
“Sub-Saharan Africa’s continued growth depends on closing its vast infrastructure and skills gap, which needs innovative credit and investment solutions facilitated by public private partnerships through a clear policy and legal framework.
“But for these solutions to work, they will require equally appropriate risk management and risk transfer solutions – which essentially means increasing insurance penetration,” said Maïdou.
Maïdou highlights Angola as another country, like Nigeria, that holds potential for risk transfer solutions implemented via public private sector collaborations to develop infrastructure and the wider economy, citing a need for foreign direct investment also.
For ILS and re/insurance firms Africa could open up a range of new risks in a diversifying set of locations, something that would aid growth and profits at times of continued industry pressures.
As with any emerging economy, awareness of insurance and the benefits of risk transfer to those that need it is vital, and Maïdou underlined the need for education.
“Innovative and agile insurance solutions can help businesses in Nigeria and the rest of Sub-Saharan Africa.
“In essence, this involves educating businesses about these risks and advising them on relevant risk management and insurance solutions, while also ensuring such solutions are accessible in local markets.
“It is also critical for all players within the industry to do their homework about the regulatory and legal aspects of insurance within each country so they devise relevant and fully compliant solutions,” said Maïdou.
Of course capital efficiency and the cost-of-capital is absolutely key, when it comes to emerging market risks, and here the capital markets and ILS structures could hold the key to enabling greater penetration of insurance products to occur.
The traditional market needs to embrace the capital markets to shift peak cat risks to investors, to make their own costs of capital more efficient, enabling them to take advantage of the opportunities presented by new markets such as Africa.
Africa, like other emerging markets holds potential for the risk transfer landscape to provide needed, affordable solutions while bringing additional and diversifying risks, and ultimately revenue into the sector.
But it won’t be an easy task, and will take the support of public and private sector entities to ensure affordable solutions can reach the end consumer in an efficient manner.