African expansion is growing, but is only for the brave
Colloquially, Africa was always known as the “Dark Continent” or “Deepest Darkest Africa”. This stems from the time before colonialism where the continent was largely unexplored and pretty much a black page in world history. However, this has not deterred
This presents many opportunities for insurance companies who are brave enough to venture north of the border. According to the latest version of the KPMG Insurance Survey, this is becoming an increasingly attractive option.
The rise of the phoenix
KPMG points out that the continents economic outlook for 2013 and 2014 is promising, confirming its healthy resilience to internal and external shocks and its role in growth opportunities in an ailing global economy. According to KPMG’s African Economic Outlook 2013, Africa’s economy is projected to grow by 4.8% this year and will accelerate further to 5.3% in 2014.
Africa is increasingly able to draw attention globally in terms of attracting investment. Foreign Direct Investment (FDI) into Africa has followed the oil resources in the past decade and as a result, the top six African oil producing countries (being Nigeria, Algeria, Angola, Libya, Egypt and Sudan) are among the top eight recipients of FDI.
This bodes well for a continent whose place in the global economy is long overdue. However, this does not come without a certain cost in the form of risk.
The petrochemicals industry is a high investment industry with infrastructure costs sometimes reaching close to a billion dollars. This is followed by other key assets which potentially needs to be covered by an insurer. Of the top six oil producing companies in Africa: Libya, Egypt and Sudan have all experienced brutal civil wars in the past 10 years while Nigeria constantly experiences political turmoil with rebel groups looking to control the country’s resource rich Niger Delta.
Key entry points are a hive of activity
The continent’s larger economies are situated in the Southern African region as well as North Africa. It is these regions which have benefited the most from FDI and KPMG expects this trend to continue for the foreseeable future.
However, South Africa’s role as the continent’s largest economy is under significant threat and it is expected that by 2020 it will lose this accolade. These large economies are all perfect entry points into the continent and KPMG expects Nigeria, Angola, Kenya, Egypt and South Africa to be the foremost players in this regard with Ghana providing an interesting option into the West African market.
The Angolan insurance market has been growing and developing since the country’s liberalisation in 2000. During this time there have been a number of visible market transformations, the most significant of which is the growth from one market player to its current 13 players.
KPMG adds that this growth reveals that the interest that this market has been generating and its attractiveness for new investments will only increase in the future with the number of players expected to increase further in the coming years. In the last few years the Angolan insurance sector has maintained a consistent growth rate with direct insurance premiums reaching $864-million with an average growth rate consistently above 15%.
While the oil and gas industries have been the major contributor towards FDI in the country, an analysis of the evolution of the economy shows a diminishing influence of the oil and gas industries on the insurance sector. This reveals that it has the capacity to offer products which can serve and assure the various sectors and activities of the Angolan economy.
The Nigerian insurance market, the largest in the West African region, recorded total premiums of $1.54-billion in 2011. However, penetration into the Nigerian market is currently considered very low when compared to its population of over 165 million people.
There are currently significant legislative reforms taking place in the Nigerian market which are expected to impact the local economy positively. The reforms intend to deepen insurance penetration to become the insurance industry of choice among the emerging markets in terms of capacity, safety, transparency and efficiency.
Non-life insurance contributed to approximately 70% of the total insurance premiums generated in 2011. This can partly be attributed to the regulatory reforms which mandated insurance in different sectors, although the full measure of the reforms is yet to be realised.
Companies are taking the plunge
It is evident that Africa is upwardly mobile in terms of growth and the fact that the continent is experiencing growth while more developed markets, such as China and the USA, are slowing down makes it an interesting option for companies looking to expand.
But we can sit here all day and rattle statistics about Africa’s opportunities, but is there tangible evidence that companies can stomach the risk that Africa offers?
In the past, we have reported that Lireas Holdings is looking into expanding into Africa and we reported extensively about the long awaited re-entry of Allianz who will be expanding into Africa on a significant scale and have based their African base here in Johannesburg.
One of South Africa’s oldest insurers, Old Mutual is also reportedly looking into expanding its reach into Africa through its member company Mutual & Federal and has reported that it hopes to achieve this by 2020.
Speaking to the FAnews Mutual & Federal Executive for Africa and New Markets, LeRoy Munetsi said that the group has committed R5-billion to achieve this.
“We definitely see Africa as a potential growth area for Mutual & Federal. The company started developing an expansion strategy two years ago and is looking to play a significant role in Western, Eastern and Southern Africa. Initially this will be run from South Africa, but as we are confident that the markets are self-sustainable we will establish hubs in key market areas,” says Munetsi
Editor’s Thoughts:
It is clear that Africa is an attractive growth platform, but a key factor in a decision to expand into Africa is its current state of affairs. KPMG points out that Africa’s share of the global insurance business is approximately 1.3% with the Southern African industry accounting for 73% of the continents premium income. African insurance penetration levels are as low as 3.5%.
Africa is geared towards risk. Apart from the political instability pointed out above, Africa has a history of establishing constrictive legislation which typically discourages FDI. Other challenges which affect the market are insufficient poverty reduction rates, persisting unemployment and increased income inequalities.
If companies can overcome these challenges, then the sky is seemingly the limit in terms of growth. And it seems as if it’s a brokers life out there with brokers accounting for over 70% of industry premium in Nigeria. Brokers in Nigeria bid for underwriting contracts and then contract the underwriting policy to insurance companies.
This is a very unique model to follow. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts[email protected].
