Growing demand increases African allure
Global insurance trends are changing. In the past, demand for insurance was mainly high in developed markets where the public saw the need for financial protection. Today however, there is a significant shift towards developing markets where economic growth is outstripping that of developed markets.
This is particularly true in Africa where there is a growing middle class in many countries. This middle class is made up of young professionals who are eager to engage with intermediaries on insurance which would best suit their unique needs. However, there are conflicting messages as to the true extent of this demand.
The roadmap of African challenges
Apart from South Africa and Nigeria, there are very few economies in Africa which are well developed. Because of this, expansion into the continent will be met with significant challenges.
A recent study by auditing firm KPMG pointed out some significant factors one needs to bear in mind when looking at African growth. The market for insurance in Africa is under-developed, largely because most people simply cannot afford it. Access to insurance products only starts to increase in the upper middle income groupings; with most people still struggling to meet their basic food and day-to-day needs. This points to the fact that insurance is still a long way off for the majority of people in Africa.
There are also a number of other issues which contribute to the penetration of insurance on the continent. Apart from the lack of means, one of the other biggest challenges the KPMG study shows is that people do not trust financial service providers.
Due to the level of poverty on the continent, which is affecting the demand for insurance, the study shows that there is not enough incentive for multinational insurers to enter African markets and develop the sector.
Taking a positive approach
The findings by KPMG are a bit unfair in the sense that while the study shows multinationals will find it hard to motivate African expansion, we are seeing insurers such as Liberty, AIG and Allianz actively formulating quite extensive African expansion plans.
Zurich Insurance Group is also feeling the allure of increasing its African presence, which was the topic of a recent round table which included representatives from Marsh, the Institute of Risk Management South Africa (IRMSA) and the Financial Services Board (FSB).
Michael Duncan, Executive Leader of the Marsh African Region said, “there is significant appetite for insurers to handle and underwrite African risk, particularly in the short-term space.” Caroline da Silva, Deputy Executive Officer for Financial Advisory and Intermediary Services (FAIS) at the FSB added to this by saying, “expansion into Africa needs to be done cleverly and off the back of a well-defined strategy.” She pointed out that while there is demand for short-term insurance, the African public is currently still averse to life insurance and funeral policies.
Regulation also seems to be a significant concern for insurers. South Africa is currently going through significant regulatory changes which will no doubt be proliferated across the continent. Sheralee Morland, President of IRMSA, pointed out that Africa is where insurers want to be, and because of this, compliance is essential. “Regulation is not going to disappear. If organisations take on compliance in good spirit and maximise the benefits of compliance, there is a lot they can achieve on the continent,” she says.
Where does one stand?
The majority of insurers that want to expand into Africa set up a regional office on the continent. Because of South Africa’s rich history of insurance, it is usually the destination of choice.
In essence, insurers looking to expand into Africa face a tug-of-war when it comes to regulation. Not only do they have their own internal governance processes they have to follow, but also the regulation set out in South Africa, and the destination of expansion.
“It would be ideal for regulators across the continent, or even within the Southern African Development Community (SADC), to sit down and establish common regulation principles insurers should follow. Compliance will become easier if a standard is set,” says Duncan.
This may prove to be difficult as Africa has an array of cultural and language differences which pose the biggest challenge to this happening. However, Da Silva does admit that harmonisation is a way to effectively combat regulatory arbitrage.
Playing on the global market
Africa has long been the sleeping giant of the insurance world, and there is significant demand for insurance products on the continent, provided that insurers base their expansion off the right product mix.
Andy Gibson, Head of IPZ and Cross Border for Zurich, pointed out that globalisation is happening at such a rapid pace that insurance has struggled to keep up. “If one was to travel to all of the insurers in the world, not one of these would agree on how insurance should be conducted. However, there would be an agreement on how to approach risk coverage,” says Gibson.
Former leader of the Democratic Alliance (DA), Tony Leon, chaired the round table discussion and pointed three indispensable facts out about insurance. The first fact is that the global value of insurance is estimated to be $4.3 trillion. According to a report by Swiss Re, the value of insurance premiums in Africa in 2011 came to $68.1 billion. However, South Africa dominates this by accounting for 80% of the continent’s life premiums and 50% of the continent’s insurance premiums.
The current value of the insurance industry is closely linked to the second fact that Leon pointed out in that insurance is growing at a rate of 11% year on year. This means that there is massive potential for growth, most of which will occur in developing markets.
The last fact that Leon pointed out is that cost and efficiencies are critical levers of the current insurance industry. Traditionally, the cost of doing business in Africa is high and this remains a challenge for insurers.
Editor’s Thoughts:
Participation in Africa depends on the company’s appetite for risk and their estimated return of investment. Doing business in Africa is not for everyone and it will be interesting to see who feels that the allure of Africa is too great to ignore. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts [email protected].
