All sub-Saharan (SSA) markets, with the exception of South Africa, can be considered frontier markets with long-term growth prospects in the insurance industry, according to Swiss Re’s latest sigma study published last month.
SSA is a diverse region consisting of 48 independent states but the sigma report focuses on seven markets, namely, Angola, Côte d'Ivoire, Ethiopia, Ghana, Kenya, Mozambique and Nigeria.
The report said: “Frontier markets are typically those emerging countries with smaller-sized economies, lower income levels and insurance sectors in the early stages of development. Another important characteristic is a favourable insurance premium growth outlook, driven by strong fundamentals, impending regulatory changes and the influence of some external trends.
“Generally speaking, annual growth in real GDP in these countries is forecast to be strong (5% to 10%) in the near future, and total insurance penetration rates are low (less than 1.5% currently).
“The realisation of growth potential will take years. Investment in frontier markets requires a long-term perspective. Some markets are small and a regional focus may be more appropriate for insurers to build up scale.”
The report noted that since 2000, real premium growth in the SSA frontier markets has been lower than real GDP growth, dampened by years of political instability and civil wars, which affected the insurance sector much more than economic growth. Insurance penetration varies widely among the markets. The degree of under-penetration is more pronounced in life than in non-life insurance. The SSA markets are mostly in the early stages of development, meaning insurance for commercial risks (construction, engineering, mining or oil and gas, group life business) dominate. Motor insurance is gaining in importance, however, due to increasing enforcement of compulsory motor third-party liability (MTPL) cover in many markets.
Kenya leads
Of the frontier markets, Kenya has the most sophisticated insurance sector and regulatory framework, and also the highest level of penetration. In the other countries, awareness of the importance of insurance for economic and social progress is growing, and governments and regulators are increasing their efforts to foster growth of an effective insurance industry.
One area of activity is elimination of malpractices, such as non-payment of legitimate claims, eliminating fake insurance policies/companies, and the enforcement of a “cash and carry” principle (an insurer may only issue a policy after he has received the premium payment). At the same time, improved regulation and supervision should eventually lead to industry consolidation and stronger capitalisation, which in turn will also increase consumer trust in insurers.
Many markets remain highly fragmented, providing ample scope for further consolidation. The region is increasingly attracting buyers from Western Europe, and also from northern Africa and South Africa.
The insurance expertise global and regional players bring into the markets will help close some of the human capital skill gaps still prevalent in certain markets.
Due to the importance of large commercial risks (oil and gas, engineering, mining, infrastructure construction) coupled with the small capital base and lack of underwriting skills of local companies in these segments, much of SSA frontier market insurance business is brokered and underwritten in the international markets. Global reinsurers play an important role in providing know-how. Against this backdrop, many regional regulators are looking to build local capacity by developing rules to utilise available local re/insurance resources, pool certain risks and enforce compulsory cessions to national reinsurance companies.
Sustained strong economic development will remain a key growth driver for insurance in SSA countries. Some other emerging trends will also help raise penetration, including mobile-based and microinsurance, innovative agricultural policies, and large infrastructure projects.
Mobile technology and micro-insurance
With very small premiums, cost-efficient provision of insurance via mobile phones and other technologies (GPS, satellite imaging enabling index-based products) is key. Today consumers can already obtain quotes, purchase insurance products (and be issued policies by insurers), pay premiums and submit claims using basic mobile phones. These mobile-based offers are often driven by non-insurance players like mobile phone operators and technology companies.
A large share of the population in SSA works in agriculture, mostly in small or family farms. Upgrading agricultural production is a central objective of many national economic policy programmes, and this will likely filter through into stronger demand for agricultural insurance in the future.