Africa, with its developing economies and relatively low insurance penetration, is fast becoming the new gold rush for insurers. But with 55 countries, investors require a good understanding of specific risks in order to do well.
All eyes are on Africa today as its rapid economic growth is creating substantial new business opportunities that are attracting many global companies. Improved political and macroeconomic stability have enabled broad-based economic expansion, with FDI soaring around 10-fold in the past decade.
A new United Nations Conference on Trade and Development (UNCTAD) report, “Global Investment Trends Monitor’’, shows that FDI in Africa grew 5.5% to US$45.8 billion in 2012. Globally, macroeconomic fragility and policy uncertainty for investors led to an 18% decline in FDI inflows last year to an estimated $1.3 trillion. Furthermore, FDI declined sharply both in Europe (-36.1%) and in the US (-35.3%), while FDI inflows to developing nations in Asia fell by 9.5% as a result of declines across most sub-regions and major economies, including China, India, Republic of Korea, Singapore and Turkey.
Africa’s collective GDP, currently standing close to $2 trillion, is roughly on par with the large economies of Brazil or Russia, according to the Annual Development Effectiveness Review (ADER) 2012 published by the African Development Bank Group.
Its impressive performance is also increasingly driving social and demographic changes which are creating new domestics engines of growth. Key among these are urbanisation, an expanding labour force, and the rise of the middle-class African consumer.
From South to North – Understanding the risks
Despite Africa’s lure, there are various challenges in its markets.
South Africa, the largest insurance market in Africa, stands out as the lowest risk entry point, with its sophisticated financial services industry and self-sufficient economy. But it is also the country most exposed to the global economy, hence a global slowdown will not be good news for its business environment.
East Africa does not have the same level of infrastructure as South Africa, but reassuring ex-colonial links have put countries such as Kenya, Zimbabwe, Botswana, Tanzania and Zambia on the map as places to do business. In general, East Africa remains a complex operating environment with a number of diverse challenges ranging from political risk to physical insecurity.
West Africa is generally where risk-averse providers and financial institutions shy away from, as a number of countries in the region are grappling with the threats of terrorism and drug and human trafficking. However, countries such as Ghana and Nigeria, where the situation has improved, are getting more attention.
The North has been marked by the Arab Spring uprisings and more recent turmoil such as the Algerian terrorist siege and attacks on the US embassy in Egypt and its consulate in Libya.
Insurance opportunities
The overall demand for insurance in Africa has continued to increase in line with economic growth, but this is relatively concentrated among a few countries. Premiums from the top five countries – South Africa, Morocco, Egypt, Nigeria and Algeria – represented 87% of the continent’s total insurance business in 2011, according to Swiss Re’s sigma report. The African insurance market produced a total premium of $69.3 billion in 2011, up 9.1% y-o-y.
Insurance markets are growing from a low base and at a faster rate than more developed markets. In particular, Nigeria, Namibia, Angola and Mauritius have managed to record double-digit growth in premiums. However, Egypt has been an exception, with a 0.4% contraction in premium due to the unstable political situation after the removal of former President Hosni Mubarak from office in February 2011.
Countries with stronger economies, mainly driven by the energy sector and mining, have shown greater demand for insurance, while affordability remains an issue in poorer African countries. Besides the political risks in many parts of the region, the ongoing financial uncertainty also presents challenges in the form of volatile investment portfolios.
Making microinsurance work
With an overall insurance penetration of around 1%, there are efforts to make insurance more accessible through microinsurance.
According to a microinsurance study by Making Finance Work for Africa (MFWA) and Munich Re Foundation, the number of low-income households in Africa benefitting from insurance services has grown by more than 200% between 2008 and 2012, reaching more than 44 million people. But financial illiteracy and legal framework are still obstacles to the uptake of microinsurance.
Life coverage is the main driver of overall microinsurance growth on the African continent, with health, accident and agricultural insurance continuing to play a minor role, said the study. Southern and East Africa dominate in terms of coverage volumes, although West Africa is on the rise, largely due to growth reported in Ghana and Nigeria.
Rise of takaful
Islamic finance is also growing in Africa and has helped to promote the takaful in the marketplace. With Muslims accounting for around 52% of the continent’s population, an increasing number of African countries are rolling out key initiatives to promote takaful as an alternative to conventional insurance.
A few notable developments in recent months include the approval of Kenya’s first-ever Shariah-compliant pension fund by the Retirement Benefits Authority, the launch of a fully compliant retakaful window by Kenya Re, and the release of takaful guidelines in Nigeria.
Sudan is the only country in Africa that has legalised its financial sector under Islamic laws and regulations, while other countries largely use conventional insurance laws. “In Kenya for example, the Insurance Regulatory Authority has been supportive by approving the commencement of takaful operations,” said Mr Hassan Bashir, CEO of Kenya-based Takaful Insurance of Africa. “The Insurance Act is being revised and Takaful Insurance of Africa has submitted its recommendations. Hopefully by the end of 2013, the Insurance Act will recognise the unique needs of takaful in terms of Shariah compliance.”
He added that the Kenya Re’s retakaful window “is a step in the right direction as takaful operations will now have Shariah-compliant retakaful. This further proves the confidence of the Kenyan government in the takaful model and its underlying values”.
Not for the faint hearted
Without a doubt, there is great growth opportunity in Africa, thanks to healthy economic growth and improved political stability. But it does remain a challenging market, due mainly to the fact that the risks are changing constantly across the vastly diversified economies.
Munich Reinsurance Company of Africa CEO Junior John Ngulube put it aptly when he said in an industry forum earlier this year: “Each and every country in Africa is unique and presents its own set of politics, social issues and cultural dynamics. If a company fails to understand and respect these individual characteristics from the grass roots up, it is setting itself up for failure.”
In closing, Mr Ngulube pointed out that Africa offers good insurance and reinsurance potential but made it clear that Africa is not for the faint hearted. Interested parties need to spread their risks and be realistic in their short-term expectations.