How Africa can grow its insurance industry to facilitate trade and investment on the continent

November 30th, 2021
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The Intra Africa Trade Fair was recently held in Durban from 15 to 21 November 2021 and was projected to attract 5 000 conference participants as well as 10 000 visitors and buyers. The 2021 fair focused on the African Continental Free Trade Area (AfCFTA) and recognised the opportunities for growth in trade and investment on the continent.

An event of this magnitude, occurring despite the nearly two years of global economic difficulty wrought by the COVID-19 pandemic, speaks volumes about just how significant the untapped potential for growth based on investment and trade in Africa really is.

One vital service though, underpins all of this potential, and, for the most part, it is not currently being provided by African-based companies.

No trade, transport, development or investment is possible in Africa (or indeed anywhere) without insurance – it is the essential safety net – critical to any investment or trade decision as well as raising the requisite finance. Banks and financiers require it as a guarantee of performance when lending, most especially in large capital infrastructure projects which will be vital for realising the aims of AfCFTA.

It is also vital at the most micro levels. Whether you’re building a super highway connecting multiple countries, or stocking your spaza shop – no formal sector funding or loans are possible without a form of insurance.

As it stands, however, the African insurance industry is underdeveloped. This means there is huge scope for growth. Essentially the service which enables all potential trade and investment growth on the continent, is itself, a massive untapped market. This is true for insurance firms both locally in South Africa and across the continent. This massive growth potential for the sector will hopefully be a subject of discussion at the Intra Africa Trade Fair – including on how to address the not insignificant challenges African providers must first tackle to tap into the market.

Currently, the lion’s share of the market is going to providers off-shore in Europe, the United States of America and China. In infrastructure projects, in particular, businesses from countries like China supply the equipment, skills and resources for projects but couple that with an insistence on using their home-based insurers. In the mining industry, it’s a common contract term with African governments that mines and their operations must be insured in the mine company’s (most often foreign owned) country of origin. For these projects there is currently little room for Africa’s local insurance market to grow.

South Africa’s insurance industry is the most well-developed and well-resourced in Africa, but even the largest insurers don’t necessarily have a big enough balance sheet to carry the risk on potential mega projects needed over the medium- to long-run to realise AfCFTA. In a hypothetical R100 billion road project, local insurance providers would be lucky to keep just 5% of the insurance premium in South Africa.

A lack of balance sheet heft is by no means the only obstacle facing African firms who are looking to expand their footprint on the continent. The same market challenges that impact businesses in general are also faced by the insurance sector. Most pertinent of these include currency fluctuations, poor regulatory and governance environments and unstable politics often characterised by a shaky rule of law and nepotism.

However, local African providers do have a strategic advantage in that they have a better understanding of the context. Take an example from the mergers and acquisitions (M&A) insurance space. A lot of significant work in M&A in Africa is undertaken by generalist providers (which are often foreign owned companies) with little to no previous experience in African M&A. This can lead to a ‘one size fits all’ approach, viewing the market as a homogenous Africa and not recognising the regional and country specific contexts. In cases like this, the results can include a lack of awareness of local regulations and laws, lack of local sensitivities, incorrect asset valuations, poor quality pipeline of deals and an underestimation of cost, duration and complexity of restructuring (among others).

For South African and African firms with direct experience in their own and other African countries, the knowledge of this context is a strategic advantage to leverage.

And doing so is worth it. The continent has many high growth markets for the insurance sector and many of these have relatively low levels of penetration. Many African countries have a rising middle class and young populations. Comparatively speaking, there are also low loss ratios and barriers to entry (other than those discussed) with the potential for higher returns than in home or developed nation markets which are saturated in comparison. This is especially true in the case of the South African market.

So, how to push through the challenges to make the most of this potential?

A simple tweak to the agreements for large infrastructure and mining projects, for example, could make all the difference: the enforcement of a right of first refusal for the local insurance market in the country (or countries) of the relevant project. The local market should be given an opportunity to write the risk, or a portion of it, provided it has the requisite capacity, before the premium is whisked directly off-shore. The introduction of such a right would give local insurers a chance to expand their footprint and balance sheets at pace which is sustainable.

If we don’t at least start on this journey, we will never achieve growth and progress and allow the African insurance industry to help facilitate and drive trade and investment here at home.

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