There are strong indications showing that African reinsurance markets have experienced material growth in the past decade, despite a challenging operating environment, with significant headwinds of currency volatility and inflationary strains amid global softening market conditions.
According to the annual Africa reinsurance report from rating agency AM Best, in the past year, the continent’s reinsurers have been affected by slower growth, reflecting challenging economic conditions and subsequently suppressed demand for oil and gas.
In addition to reduced cover for large value risks, the rating agency notes, there has been a higher frequency of attritional and large claims, as well as increased cost bases together with the need to strengthen reserves given inflationary effects.
“Yet despite this backdrop,” it concludes, “the reinsurance market in Sub-Saharan Africa continues to offer growth potential, drawing in overseas reinsurers. Although domestication policies are designed to retain business locally, overseas reinsurers provide capacity and technical expertise.
“They seek to deploy surplus capital, establish a global footprint and consider the region to be relatively benign from natural catastrophes.”
A notable characteristic of the region is that most primary markets tend to be small and highly saturated. In general, the reinsurance sector is made up of a combination of local and regional participants, with a growing presence of overseas reinsurers. In many of the African markets, the growth of the insurance sector is supported by hydrocarbon discoveries with consequent investments in infrastructure.
Many local and regional reinsurers benefit from legal treaty cessions. AM Best notes that domestication policies remain commonplace, as lawmakers intend to reduce premium outflows to international reinsurance markets and retain increased profits in their respective countries.
“However,” states AM Best, “these domestication policies are not strictly adhered to. In particular, this applies to high-value corporate risks, where additional technical expertise and more sophisticated underwriting skills are required.
“Pools are also used increasingly to retain business within local markets. These include the Energy and Allied Risks Insurance Pool of Nigeria, the Ghana Oil and Gas Insurance Pool, and the Ghana Agricultural Insurance Pool.
“The African Insurance Organisation established the African Aviation Pool and the African Oil and Energy Insurance Pool in 1989 and 1998, respectively. The financial affiliate ARC Insurance Company Limited, a component of the entities forming the African Risk Capacity, is another prominent insurance risk pool. To date, 32 countries have become signatories.”
However, it notes that although these pooling arrangements can support further premium retention in the region, in reality the capacity offered by such pools remains small in relation to the size of many of the large risks underwritten.
While domestication policies, the use of pools and the creation of national reinsurers aim to retain risks in Africa, in general, retention levels for high-value risks remain low. Therefore, AM Best concludes that there will continue to be a heavy reliance on the international reinsurance market.
For AM Best-rated reinsurers in Sub-Saharan Africa, balance sheet strength has been underpinned by strong risk-adjusted capitalisation, owing to companies’ large capital bases relative to their risk profiles. For each of the past five years, return on equity was in excess of 12 per cent . AM Best notes that capital requirements are largely driven by investment.