While capital flight and revenue loss remain major concerns for African reinsurers, foreign reinsurers are having a field day. Omobola Tolu-Kusimo writes on the challenges of local reinsurance amid global competition.
Reinsurance is an international business that makes reinsurance companies provide insurance against loss for other insurance companies, especially losses related to catastrophic risks, such as hurricanes or the global financial crisis.
Without reinsurance, today’s insurance industry would be more vulnerable to risk and would likely have to charge higher prices on all of their policies to compensate for potential loss.
However, part of the standard of international reinsurance business is that a reinsurer must be rated to get business in insurance markets across the world. The rating is however done by foreign rating agencies which include AM Best, S & P, Moody’s and Fitch.
But excessive export of premiums by local reinsurers, without utilising local content, leading to revenue loss from the continent have continued to hinder local reinsurer’s ability to secure competitive rating, a requirement for business opportunities in the market globally.
Besides, the reinsurer’s business in Africa has been subjected to many challenges especially suppression by international reinsurers who have used ratings to outpace them.
Reinsurers groan
Delivering a paper at a reinsurance forum titled: “Mitigating Externalisation of Premiums: Challenges and Opportunities”, the Chief Operations Officer, WAICA Reinsurance, Dr. Abiba Zakariah said externalisation of premium involves remitting premiums to offshore destinations, leading to ‘capital flight’ which according to her is particularly prolific in Africa.
She said: “Basically, as a result of the premium externalisation, capital flight exceeds capital inflows reducing companies net worth and business does not replace what they lose to international market and therefore stagnates their growth.
“We remain dependent on international insurance products and do not provide real insurance solutions to our local markets. Externalisation takes away from the industry hard currency funds we do not have. We are also left without support and or pay for risk that are not from our markets as shown by the example of COVID and September 11.
“The UN Conference on Trade and Development’s (UNCTAD) reports that from 2000 to 2015, roughly $836 billion capital left the Africans, an average of $88.6 billion each year according to UN Economic Development in Africa Report 2020. Africa’s combined total insurance premium was $81 billion. With an average insurance penetration rate of about three per cent, of this an average of 40 per cent of general business and 90 per cent of Oil and Gas business is externalised”.
Dr. Abiba pointed out that presently, capital flight exceeds capital inflows reducing African’s net worth.
She added that the wealth from capital flight from 1970 to 2018 for 30 countries was at $2.4 trillion, noting that this is more than their external debt of $720 billion, leaving a ‘net credit’ of $1.6 trillion.
The figures, she said, indicate that if Africa retains its resources it will not need aid, and the rest of the world would be owing Africa, not the other way round.
“In the words of Nigerian President, Muhammadu Buhari, the funds involved often come from scarce development funds, depleted foreign reserves, a low collected revenue. The Political Economy Research Institute (PERI) also stated that countries with high levels of capital flight have historically devoted less to health care and education on a per capita basis”, she added.
Dr. Abiba further stated that externalisation has increased number of foreign insurers; global business policies of foreign insurers or insureds; relatively low rates of global policies; inadequate capacity; distrust of the local market players; and insistence on rated companies by insureds.
The Chief Executive Officer, FBS Reinsurance, Mr Fola Daniel, on his part, explained that insurance and reinsurance business is by nature an international business which means that risks are spread across the community and in some occasions across international borders so that the impact of a loss will not be so devastating.
He stated that this is why the reinsurers business protect the insurers and they as reinsurers, using the same risk spread mechanism, reinsure with foreign reinsurers called retrocessionaires. This is the chain of risk transfer.
But I think one of the issues that we have as reinsurers in Africa is excessive export of premiums, he said.
He stated that this means what they retain in relation to what they cede out is disproportional.
“The argument of local reinsurers at the forum is not against spreading risk abroad but against taking the bulk of the premium out of the shores of Africa. Some of us have said that since we have more than 40 reinsurers in Africa, why can’t we circulate this risk more in Africa. If we do this, we will be able to retain the bulk of the premium within Africa as against shipping it abroad. It was also expressed as an opinion that if we keep more of the business within Africa, we can enjoy relatively better terms by way of premium rates that we take.
“But when we take our businesses to Europe and America or Asia, they will rate us globally. Global reinsurers look at global experience. Let’s take fire for instance, by the time you combine the fire experience in America, Asia, Europe altogether, you will say fire risk is very bad because of natural disasters that occur in these jurisdictions. They have earthquakes, volcanic eruptions, cyclone, typhoon among others as against Africa that have the incidence of other natural disasters, with impacts largely local without far reaching negative economic impact.
“So, by the time they aggregate all these risks and do what is called global rating, using statistics, they will say for you to reinsure your fire, you have to pay a high rate based on international experience. But if you look at the African experience, risk in Africa is less volatile compared to the other jurisdictions because the occurrence of catastophic disasters is low. For instance, the incidence of earhquake, typhoon, cyclone is rare within Africa. So, if we are looking at rating of the typical African risk exposure, it will be more favorable to us because the rating is related to the risk and experience that we bring to the basket. Unfortunately, we ship our premium out of the continent and the return get very hash and sometimes draconic underwriting terms”.
Mr. Daniel disclosed that the international underwriters have encouraged them to submit their results for rating so that they can enjoy enhanced support.
“For them as international reinsurers, they are rated and so they use those external factors to ensure that local reinsurers are discriminated against the yet to be rated companies.
“These are factors that some international reinsurers have deployed to oppress and suppress local reinsurers. Unfortunately, some of the countries, even within Africa are now insisting that unless you are rated, they cannot do business with you. The regulators on the continent also insist on rating”.
Citing Nigeria as an example of countries that have utilised local content to curtail excessive outflow of premiums, he said some other countries have revisited measures to reduce premium outflow.
“In many of the markets, certain businesses have been restricted. Life business has been restricted to within Africa. You can’t find any reinsurer take it abroad. You can only reinsure it with a broker within Africa. It is the same in Ghana and some other countries that have put up measures to curtail excessive outflows of premium”.
He maintained that regulators of insurance and reinsurance companies in Africa need to relax their insistence of rating.
On the other hand, the Deputy Managing Director/COO, Africa Re, Mr Ken Aghoghovbia, stated that prior to independence of African states, the markets were all dominated by foreign reinsurers.
He stressed that many of the governments, soon after independence quickly realised the importance of the insurance sector in the mobilisation of earnings to support economic development.
“Thus, they set up insurance and reinsurance companies to mobilise funds and stem the outflow of foreign currency. Subsequently, a number of private reinsurers were attracted to the market while many government-owned ones were privatised or commercialised. Yet, the foreign reinsurers still dominated the markets as most African reinsurers were not rated and characterised by low capitalisation and high cessions to foreign reinsurers. No wonder therefore, that the capacity crisis in the international markets largely impacted the still dependent African market.
“For this reason, Africa Re initiated a position paper to the African Insurance Organisation (AIO) executive committee to establish a platform where the insurance industry can meet primarily for reinsurance discussions with a view to increasing the volume of business retained within the continent.
“Within the last 10 years, the reinsurance sector has seen the rise of strong African reinsurers including national, sub regional and regional reinsurer. Together, we have been able to deploy significant reinsurance capacity and have drastically reduced the flight of premiums out of the continent. In the most recent decade from 2011 to 2020 alone, the top 10 African indigenous reinsurers have recorded more than USD 18.3 billion in gross written premiums.
“African reinsurers have already demonstrated expertise and capacity by supporting the insurance of many important sectors of the African economy including Oil and Gas, Aviation and Agriculture. The reinsurers have helped to establish and manage pools for key classes of business and catastrophe exposures across the continent. Indeed, the activities of African reinsurers have greatly contributed to the development and economic growth of the continent”, he added.
The Chief Executive Officer, CICA-RE, Mr Karim DIARASSOUBA, also disclosed that the average cession rate is only 33 per cent in Non-Life despite the weak retention capacity of cedants in the region.
“Similarly, the average cession rate is only five per cent in Life despite the weak retention capacity of cedants in the zone. However, it should be noted that a large part of the business which include savings and capitalisation is not subject to reinsurance cessions. Life and Non-Life cash deposits increased from CFAF 114.19 billion in 2016 to CFAF 164.35 billion in 2021, a growth of 44 per cent.”
Speaking on impact of African reinsurers on the development of the economy, he said total reinsurance premiums mobilised in Africa in 2020 are estimated at USD 5.298 billion against USD 5.215 billion in 2019, like a growth of 1.6 per cent, according to Atlas Magazine.
Way Forward
Dr. Abiba said UNCTAD recognising that the reasons for externalisation has negative effect on Africa’s development made a recommendation that a sound national insurance and reinsurance market is an essential characteristic of economic growth and it is desirable to pool the technical surpluses retained nationally by developing countries and to redistribute them on a regional basis before they are returned to traditional reinsurance markets.
“The Insurance Act, may state that an insurer or reinsurer shall utilise the local capacity available in insurance business originating from the local market before recourse to any overseas reinsurance”. CIMA and Ghana are practising this. Not more than a fixed percentage can be insured outside and Nigeria is a good example where this is observed. A 100 per cent localised of some lines of insurance business like life, motor and general accident. This is being practised in Ghana and CIMA. In Kenya and Zimbabwe, out of the amount of the paid-out capital, not less than a fixed percentage shall be owned by citizens”.
Mr. Daniel submitted that reinsurers are clamoring that the regulators should look at its insistence on rating, arguing that rating does not guarantee that a company cannot fail.
“If I am to submit to rating agencies, I submit my three-year financials but the last year financials are already obsolete after six months. So, if you rate me on the basis of what I have done by December last year, it does not guarantee that going forward, I will not run into trouble.
“So, what reinsurers are saying is that the regulators in Africa should reduce rating requirements to enable the African reinsurers do more business. This is one of the ways forward for reinsurers growth”, he posited.
Meanwhile, Mr Aghoghovbia’s said whereas African reinsurers can be proud of the current reinsurance capacity and our achievements that have contributed to the existing level of economic development across our dear continent, we should do more.
“We must strengthen our capacity to meet the demand for covers on emerging risks and to withstand external shocks which have the potential of reversing the economic growth and gains achieved in the continent”, he said.
For DIARASSOUBA, there is need for promotion of cooperation between African reinsurers to increase underwriting capacity in Africa.
“It should be noted that the increase in the number of African reinsurers to date augurs well for the future of the insurance industry and the African economy. While much has been done, much remains to be done to provide more visible support for the development of the African economy.
“Furthermore, African reinsurers must have a sense of solidarity in order to pool their efforts in the current context of climate transition”, he said.
