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Declining profitability a concern for African reinsurers, says report

7th October 2019 - Author: Luke Gallin

The continued rise in protectionism remains the top concern for African reinsurers, while declining rates and rising claims add further pressure on the profitability of the African reinsurance markets, reports Dr. Schanz, Alms & Company in the 4th Africa Reinsurance Pulse.

africa-map-flagsThe latest edition of the Africa Reinsurance Pulse was published recently at the 24th African Reinsurance Forum in Tunis, Tunisia. The report notes an uncertain operating environment for reinsurance firms, driven by lower profits and an uncertain economic outlook.

In recent times, the profitability of the African reinsurance markets has been a strength. However, almost 60% of reinsurance executives interviewed for the latest Pulse report regard profitability as low, driven by rising claims, declining rates and increasing costs.

When compared with other regions and markets, Africa is known for its low exposure to natural catastrophes, however, in more recent times, this image has changed as a result of rising losses from natural catastrophes and also the impacts of climate change.

The report finds that last year’s recovery was simply too short, with almost 75% of those interviewed saying that rates are low or average with the market suffering from a lack in technical pricing combined with poor data quality.

Andreas Bollmann and Henner Alms, authors of the study at Dr. Schanz, Alms & Company, said: “The market assessment among Africa’s reinsurance executives has deteriorated after it had already been on a road to recovery.

“While rates, terms and conditions and profitability are low, Africa’s economic growth has improved somewhat and may translate into volume growth. But executives fear the next crisis may be lurking around the corner as rising trade barriers and a slow-down in appetite for Africa’s commodities cloud the outlook.”

The report finds that the rise in protectionism continues to be a concern for African reinsurance executives, with access to markets becoming more costly, while at the same time, capacity for highly specialised risks remains scarce in certain markets.

The region is home to some of the lowest levels of insurance penetration in the world, which ultimately impacts the amount of demand for reinsurance protection. The study expects that penetration levels would have increased in Africa as more and more insurable values come to market, but the reality is that over the last decade the insurance penetration rate, on average, has declined from 3.26% in 2008 to 2.98% in 2018.

The study states that while greater penetration might come from the expansion of Africa’s re/insurers into new business lines, such as infrastructure and agricultural insurance, rising trade barriers and overregulation affect access to business, increase costs and hinder innovation.

“2018 has been the year of recovery,” says the report. The continent’s GDP increased by roughly 3.5% in 2018, while insurance premiums expanded by almost 5%, ahead of GDP. Furthermore, and according to the authors’ assessment, reinsurance will have benefited in line with insurance growth, exceeding $7.5 billion for the very first time.

Despite this, reinsurance executives noted concern that insurance is still not innovative enough to take advantage of the opportunities in the market driven by technology and the modernisation of the region’s societies and economies.

“The market players ponder strategies to adapt to the new market realities. Apart from contemplating the cost of setting up offices in certain jurisdictions, they vow to strengthen their access to further business by improving their services and product proposition and by gradually upgrading their financial security rating.

“In addition – as a gateway to further markets and risks – they consider strategic partnerships, pools or mechanisms of premium exchanges with other local or international reinsurers,” explains the study.

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