According to a new report from AM Best, reinsurers operating in Africa and other emerging markets are exposed to heightened levels of economic, political and financial system risks, and within recent years these risks have been “exacerbated” by external shocks, such as the Russia-Ukraine conflict and the COVID-19 pandemic.
Best states that with global economic conditions expected to remain a challenge throughout 2023, the creditworthiness of African institutions is likely to be pressured, which could potentially lead to growing levels of asset risk for re/insurers within the region.
Moreover, the report highlights how soaring commodity prices, as a result of supply-chain disruptions and price shocks related to the Russia-Ukraine conflict, have resulted in increased inflation and financial instability across Africa, especially for the markets that are reliant on the import of fuel and other commodities.
At the same time, softer demand conditions may halt growth and reduce government revenue, adding even more challenges faced by many African economies.
As the year continues, Best expects the debt burden of many African countries to remain high, and possibly increase, as they balance the trade-off between “tightening monetary policy” to “tackle high levels of inflation”, with rising recessionary risk.
However, as the cost of servicing debt rises, there is also an increased risk that more countries will be forced to consider debt re-structuring or outright default, especially if inflationary pressures persist longer than expected. This would then lead to tougher financing conditions and difficulty in restoring access to much-needed foreign capital.
Best also noted that it expects claims inflation to place negative pressure on underwriting performance,
especially for lines that rely on imported goods.
Lastly, despite African re/insurers’ best efforts to mitigate macroeconomic risks, the risk environment
continues to deteriorate in many countries in the continent.
Best warns that it will not always be possible for companies to manage these risks fully, and in the more extreme cases, deteriorating conditions could potentially lead to negative pressure on the enterprise risk management assessments of some AM Best-rated re/insurers.
