News Africa07 Oct 2019

Africa:Reinsurers cautious due to lower profitability & uncertain economic outlook

07 Oct 2019

The mood among Africa's reinsurance executives has become more bearish as declining rates and rising claims weigh on the profitability of the African reinsurance markets with a current premium volume of roughly $7.5bn, says the Africa Reinsurance Pulse 2019.

While Africa’s economies are still recovering from the commodity crisis of 2016, which highlighted the continent’s vulnerability to external shocks, executives are once again concerned about the current outlook in light of renewed economic and political uncertainties.

However, the senior executives of Africa’s leading brokers and reinsurers interviewed also expect that the inflow of excess capacity from advanced markets into the continent has finally come to a standstill. While some capacity had been hit by poorly performing markets and in response retreated, it has been replenished by a return of international capital, trying to capitalise on a hardening of rates as well as local and regional players seeking to deploy their funds.

Still, the market assessment among Africa’s reinsurance executives has deteriorated after it had already been on a road to recovery, say Andreas Bollmann and Henner Alms, authors of the study at Dr Schanz, Alms & Company which is a research, strategy and communication consultancy.

The writers said, “While rates, terms and conditions and profitability are low, Africa’s economic growth has improved somewhat and may translate into volume growth. But executives fear the next crisis may be lurking around the corner as rising trade barriers and a slow-down in appetite for Africa’s commodities cloud the outlook.”

Fundamentally, Africa’s underlying narrative based on population growth, infrastructure needs and an expanding middle class remains intact. With the enforcement of risk-based capital regimes and tighter capital requirements markets are seen to becoming more sophisticated.

Challenges

However, shortage in skilled labour has become a concern to all reinsurance executives as experienced talent is needed to advance risk management, product development or technology.

The rise of protectionism is another worry as access to markets becomes more costly, while capacity for highly specialised risks remains a scarcity in some African markets.

Africa’s low insurance penetration should increase as more insurable values come onto the market. Instead, the continent’s average insurance penetration rate has declined in the last 10 years from 3.26% in 2008 to 2.98% in 2018.

Although improvements may come from the expansion of Africa’s insurers and reinsurers into lines of business that are seen as growth drivers, namely infrastructure and agricultural insurance, rising trade barriers and overregulation affect access to business, increase cost and hamper innovation.

Finally, rising losses from natural catastrophes and climate change steadily alter Africa’s image as a marketplace known for its low exposure to natural catastrophes.

Last year’s recovery in rates was short lived. Close to three quarters of interviewees perceive rates as low or average as markets suffer from a lack in technical pricing and poor data quality. Rates also suffer from additional capacity created by regulatory action. As supervisors increase their solvency requirements, reinsurers raise capital and deploy the additional funds to write more business.

Profitability is regarded as low by almost 60% of interviewees as rising claims, declining rates and increasing costs are taking their toll. Due to the negative legacy from recent losses, improvements will take time.

The findings of the report are based on 19 in-depth telephone interviews with executives representing regional and international reinsurance companies and intermediaries. The interviews were conducted from July to August 2019.


 

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