Keep it local: The new national reinsurance company is off to a promising start

Having noticed that insurance companies operating in Gabon were transferring, on an annual basis, about 50% of their premiums to international reinsurance companies, the government has sought a solution to ensure that such capital serves the financing needs of the country instead of going abroad.

The need to create a national public-private company, as a complement to Gabon’s insurance sector, rapidly followed from this realisation, especially as there is no private reinsurance company in all of Central Africa. Drawing on similar experiences elsewhere in Africa – especially Algeria, Senegal, Tunisia and South Africa – the government has created a state-owned commercial reinsurance company, the Société Commerciale de Réassurance du Gabon (SCG-Re).

“The SCG-Re can be considered as the armour of Gabon’s insurance sector. It is also designed to respond to reinsurance needs in the sub-region,” Crépin Ngouodoc, the CEO of the SCG-Re, told OBG. The company’s reinsurance mechanism is primarily based on the legal cession of written premiums.

LEGAL FRAMEWORK: From a legal standpoint, Gabon’s reinsurance model differs from other African cases where the national reinsurance framework is governed by two texts, one establishing the legal cession of premiums and another fixing the management of these ceded premiums. Indeed, Gabon’s national reinsurance system was established under a single executive ordinance, issued on August 11, 2011.

This constitutive text establishes and organises the legal transfer of insurance premiums to the new entity. After having obtained formal approval from the country’s State Council, the ordinance has force of law and took effect on January 1, 2012.

Now the legal transfer of premiums is an obligation for all insurance companies. Non-life insurance companies are required to cede 15% of their premiums, while life insurance companies must cede 10%. Companies which have failed to report all of their premiums and/or to fulfil their ceding obligations can be legally sanctioned. Another ministerial decree also notes that the SCG-Re is entitled to manage all ceded premiums on behalf of the state. The SCG-Re may also receive treaty reinsurance and/or facultative reinsurance acceptances.

COMPENSATORY MEASURES: In consideration of their contribution, insurance companies receive commissions from the SCG-Re based on its investment income. The rates are 20% for non-life insurers and 10% for life insurers. In addition, the SCG-Re participates in the settlement of related claims, up to 15% in the case of non-life claims, and up to 10% in the case of life claims. Companies also benefit from the fact that reinsurance transactions with the SCG-Re are made entirely in local currency.

EQUITY: To encourage the full adherence of insurance companies to the new mechanism, the share capital of the SCG-Re was opened to them. As a result, all insurance companies contributed. The share capital of the SCG-Re was set at CFA2bn (€3m), out of which CFA1.35bn (€2.03m) is owned by the state (67.5%), and CFA650m (€975,000) is owned by insurance companies (32.5%). The state’s share comes from the Strategic Investment Fund of Gabon. “Insurance companies have complained that they were not consulted during the creation of the SCG-Re. However, the state relied on the experience of one of the oldest experts in the sector, Edouard-Pierre Valentin, who was a member of the ministerial committee that developed the project,” Ngouodoc told OBG. “Despite their initial reservations, the companies soon joined this initiative.”

BOARD OF DIRECTORS: The board of directors of the SCG-Re consists of eight representatives of the government and three representatives of insurance companies. Only insurance companies with an equity in the SCG-Re’s share capital above CFA100m (€150,000) are entitled to a seat – in other words, Ogar, Axa and NSIA.

Two meetings of the board have already taken place. The first one, held in February 2012, focused on bylaws as well as on the composition of governing bodies. Chairmanship of the board has been entrusted to Edouard-Pierre Valentin, the founder of OGAR, while executive management was entrusted to Ngouodoc. The second meeting, held in June 2012, focused on the budgetary and financial aspects. Technical meetings are held with all ceding companies after each session.

SPECIAL DEROGATION: The activities of the SCG-Re officially began in February 2012, with a workforce of only five employees. Considering that the reinsurance market was not very active at this time of the year, the immediate application of the law on the legal cession was somewhat complicated. In fact, most insurance companies had already completed their reinsurance transactions by the time activities began.

“The SCG-Re believed that it was preferable to grant a special derogation for risks already reinsured before the law took effect. Thus, the legal cession for this period only applies to the retention of the written premium,” Ngouodoc told OBG. “Our role is not to undermine insurers, but to ensure the market is balanced.”

RETROCESSION: The SCG-Re must reinsure itself with international reinsurance companies for some of the risks it covers. In order to establish its credibility and to gain immediate trust from insurance companies, the SCG-Re selected its reinsurers based on the ratings awarded by Standard & Poor’s. Three firms were chosen by the SCG-Re: Antares (A+), Africa-Re (A-) and Axis Reinsurance Europe (A+).

PERFORMANCE: As of June 2012, the SCG-Re achieved a turnover of CFA3.72bn (€5.58m), a figure higher than the anticipated CFA3.36bn (€5.04m). The turnover included CFA45m (€67,500) coming from facultative reinsurance acceptances concluded in Central Africa (outside of Gabon) and in West Africa. During the period of February to June 2012, the SCG-Re spent CFA100m (€150,000) as its contribution for claims settlement.

In addition, SCG-Re paid CFA726m (€1.09m) in commissions to insurance companies. Its net investment income was of CFA313m (€469,500), a figure that was much higher than the anticipated CFA124m (€186,000). The SCG-Re’s investment strategy was turned toward local investments: CFA3.5bn (€5.25m) was placed with the Banque Gabonaise de Développement (BGD), the Caisse de Depôt et de Consignations (CDC) and BGFI. Its functioning expenses amounted to CFA174m (€261,000), well below the budgeted CFA253m (€379,500). The SCG-Re’s value of retrocession transactions with reinsurers was CFA600m (€900,000), significantly less than the originally planned CFA800m (€1.2m). Its retrocession rate was 10%. The annual target of the SCG-Re in terms of collection of legal cessions has been set at nearly CFA7bn (€10.5m).

PROMOTIONAL ACTIVITIES: Since its inception, the SCG-Re has conducted promotional activities to publicise its reinsurance services within other African countries. The Central African Republic, Chad, Congo-Brazzaville and Equatorial Guinea have already been visited.

“Our ambition is to become the leading reinsurance company of the Economic and Monetary Community of Central Africa (Communauté Économique et Moné- taire de l'Afrique Centrale, CEMAC). Cameroonian operators have expressed interest in entering the capital. As for the Congolese, they would very much like the SCG-Re to be turned into the reinsurance company for all of CEMAC,” Ngouodoc told OBG.

At present, the legal cession of premiums excludes offshore and onshore oil risks, risks related to aviation and those related to health.

“The list of excluded risks might evolve,” Ngouodoc told OBG. “Oil industrial risks represent 80% of the reinsurance market. It is thus in our economic and strategic interest that they can be managed by SCG-Re.”

Aviation-related risks are also expected to be included. As for health-related risks, they should remain excluded, taking into consideration that such liability has already been assumed by the state, through the government’s National Health and Social Guarantee Insurance Fund. In order to include risks related to oil and aviation activities, the SCG-Re has recommended the government increase the company’s capital of the company – insofar as the regulation of the Inter-African Conference on Insurance Markets sets a minimum capital of CFA10bn (€15m) for these types of risks.

Recapitalisation should take place in two stages, with an end date of 2014 targeted for the completion of the recapitalisation campaign. Between 2012 and 2013, the share capital will be increased to CFA7.5bn (€11.25m) through a joint entry by the CDC and the BGD. Then, between 2013 and 2014, capital should reach CFA10bn (€15m). The increase is designed to come from ceding companies, and will be combined with a capital input from international reinsurers and insurance companies of the sub-region.

With the announced capital increase over the next two years, the SCG-Re will have all the means to fully cover the reinsurance market in Central Africa and to contribute to the financing of development projects both in Gabon and in neighbouring countries. Through the legal cession of premiums, the SCG-Re also offers a tailored and highly profitable reinsurance solution to Gabon’s insurance companies, neatly solving a number of sector challenges with a single decisive stroke.