Improving coverage on the continent has attracted reinsurance firms

US and European players have historically dominated the global reinsurance segment, and Africa – where other than a handful of small, government-backed reinsurers benefiting from mandated local coverage requirements, reinsurance contracts have generally gone abroad – is no exception. However, this is beginning to change, as the high growth in Africa’s emerging markets, combined with more robust reinsurance, attracts new entrants and fosters more locally domiciled firms. Premiums rising faster than local insurers’ capital bases have supported rising cessions to reinsurers, either through retrocession or through proportional treaties. This in turn is attracting newcomers from major emerging markets like China, India and Brazil, in particular.

Eager to curb this capital flight and insulate insurance markets from excessive global rate volatility, African governments, with some exceptions, have sought to domesticate more risk, both through legal cessions and by supporting the growth of local reinsurance capacity. Reinsurance being an international business by its nature, the sector’s prospects will consist of a balancing act between protectionist measures and competition between a rising number of global players.

Growing Cession

Africa boasts the world’s lowest insurance penetration rate, at around 3.5% compared to Asia’s 6% according to SwissRe’s Sigma studies. This obscures significant variations, ranging from penetration of below 1% in several markets to 3.4% in Zimbabwe, up to a high of 13.2% in South Africa. In 2012, the latest date for which figures are available, total premiums in Africa reached $71.4bn, according to insurance ratings agency AMB est, of which seven markets alone – in order of size, South Africa, Morocco, Nigeria, Egypt, Kenya, Algeria and Angola – accounted for 90.1%, or $64.3bn. In several jurisdictions, recently enacted requirements to place a share of risk with local insurers, particularly in capital-intensive sectors like oil and gas (so-called local content rules), have stimulated growth in premiums in a growing number of markets, even if underwriting capacity has lagged. Liquidity-rich economies like Nigeria and Angola were the first to pass such rules, in 2010, but Ghana and Uganda are set to as well. Meanwhile, as Africa’s aggregate insurance density rises from $54 in 2012, according to the African Insurance Organisation, closer to the global average of $596, insurers’ underwriting capacities will have to grow. Yet with capital requirements for non-life insurers ranging from KSh300m ($2.3m) in Kenya to N3bn ($18.9m) in Nigeria, underwriting capacity remains limited and insurers heavily reliant on reinsurance support. In markets with smaller players like Egypt, Kenya and Nigeria, the non-life retention ratio for premiums is in the 40% to 50% range. More sophisticated markets like South Africa have typically relied less on reinsurance, with total premiums ceded to reinsurers reaching only $1.6bn in 2013 according to the regulator, the Financial Services Board (FSB), and retention ratios of 88% for life insurers and 69% for non-life.

Facultative Vs Treaty

As the market’s general underwriting performance has improved, with leading insurers recording consistent net profits over several years, the preference has been to move from facultative retrocessions for specific risks to proportional reinsurance treaties. Cessions remain far lower in the life segment in all markets other than South Africa, although some governments are striving to domesticate more accident risk classes such as motor.

Coverage for the lion’s share of premiums, in big-ticket corporate policies, remains highly dependent on offshore reinsurance. Given the limited capacity of many primary insurers in Africa however, they have remained reliant on proportional treaties that cede a high share of risk to reinsurers. By bundling low-loss policy classes with less profitable ones, reinsurers are able to limit exposure to excessive risk. Thus while around 33% of reinsurance business is placed on a non-proportional basis globally, the rate is a much lower 10% in Africa according to Africa Reinsurance Corp. (AfricaRe). The overall trend on the continent is towards more proportional treaties, although AMB est has reported a recent shift towards non-proportional reinsurance for specific high-value risks like hydrocarbons and mining projects. Capital-constrained local non-life insurers have thus tapped excess capacity from other jurisdictions to cede a higher share of their risk exposure. Overall the African rate of cession, at 28.4% in 2010, according to AfricaRe, was approximately five times higher than the global average of 6% that year.

International Competition

Contract terms are typically not published, meaning reinsurers’ relative market shares in specific markets are not publicly available, although surveys by OBG reveal a continued dominance by offshore, predominantly European, reinsurers. Although there are 35 reinsurance firms now domiciled in Africa according to AfricaRe, reinsurance has traditionally been dominated by the Lloyd’s of London market and the European “Big Four” of MunichRe, SwissRe, HannoverRe and France’s SCOR, all of which provide coverage services for the continent out of bases in South Africa or Bermuda.

The 35 Africa-domiciled reinsurers – 15 in life and 33 in non-life – include the ‘Big Four’, four regional, 10 state-backed, two state-owned and 15 private reinsurers. The largest private reinsurers, such as Berkshire Hathaway’s General Reinsurance Africa, operate out of South African bases. Even with such capacity available in Africa, the lion’s share of reinsured premiums have continued to flow offshore: in 2010 Africa-domiciled reinsurers captured 38.6% of reinsured life premiums and 41.2% of non-life, according to research published by SCOR, with the remainder – including most large-scale risks in energy, aviation, political risk and others – reinsured entirely offshore.

Legal Cessions

From the late 1970s onwards African governments have recognised the need for homegrown insurance and reinsurance capacity as key to their development objectives, in developing both private risk management as well as financial and property markets. Two of Africa’s four regional reinsurers, and their mandatory legal cessions, were established then. The Organisation for African Unity, now the African Union, launched its own reinsurer, AfricaRe, in 1976, backed by member-states and global reinsurers. With an initial paid-up capital of $500m and rated A- by both Standard & Poor’s (S&P) and AMB est, AfricaRe commands a legal cession of 5%, meaning all insurers on the continent must cede to it at least that share of their reinsured risk. It has raised an additional $177m in new equity since 2010 to keep pace with rising demand. A majority of insurers place more than the 5% minimum with AfricaRe, for whom voluntary treaty cessions accounted for 93% of total premiums in 2012, according to S&P. Having recorded an underwriting profit annually for the past decade, AfricaRe has brought its combined ratio (of losses and expenses) down from a peak of 99.6% in 2008 to 92.6% in 2013, according to AMB est, while its gross written premium grew 25% in that period, to $670.5m in 2013, according to its annual reports.

The second regional reinsurer, covering the Francophone African common insurance market, the Conférence Internationale des Contrôles d’Assurances (CICA), is CICA-Re, established in 1981 with much smaller initial equity of XOF600m (€900,000), since raised to XOF20bn (€30m). Backed by 12 member states, 50 local underwriters, the African Solidarity Fund and the West African Development Bank, CICA-Re holds a mandatory legal cession of 15% of all reinsured risk ceded by treaty. Whilst significantly smaller, CICA-Re has focused on driving profitability and turnover in recent years, with its gross written premiums growing 20.25% year-on-year to XOF25.9bn (€38.8m) in 2013, while its net profit rose 50% to XOF2.1bn (€3.15m) in the same span. While Kenya-based ZEP-Re, established in 1990 with a capital base of $143m serving insurers in the 20-member Common Market for Eastern and Southern Africa (COMESA), commands a legal cession of 10% of reinsured risk, the fourth and newest regional player does not benefit from such guaranteed business.

The Sierra-Leone-based WAICA-Re, founded in 2011 to serve the five-member West African Insurance Companies Association (WAICA), is lobbying for its own legal cession, although the lack of support from its largest member, Nigeria, has hampered progress.

Rate Volatility

Offshore reinsurers have channelled excess capacity towards traditionally capital-constrained markets in Africa. Despite pricing pressure for both treaties and retrocessions, reinsurance has remained profitable given low insured losses and claims in recent years, according to AMB est. Yet with many markets only served by international reinsurers, or under-capitalised domestic reinsurers, local underwriters are exposed to high potential volatility in rates. With no local reinsurer, underwriters in Egypt faced severe challenges in accessing offshore capacity in 2012 as foreign reinsurers left the market and foreign exchange liquidity dried up. Even in markets with local reinsurance capacity, rate volatility has been an issue. Following Kenya’s Westgate mall attack in September 2013, which caused some KSh10bn (€15m) in losses, insurers reported reinsurance rate hikes of up to 20%.

There has also been contagion in neighbouring markets of Uganda and Tanzania, with lesser increases, according to local press reports. Changes in contract terms can also prove a challenge for local insurers. Since 2008 in particular, reinsurers writing covers in Africa have added more event limits on property treaties, according to AfricaRe. Faced with such adverse terms of trade, a growing number of African governments are striving to domesticate more reinsurance, both through developing their markets’ capacity and forcing insurers to place more risk locally.

Domesticating Risk

The continent is witnessing a divergence in approaches to the reinsurance market, between those countries seeking free competition among global reinsurers and those fostering local capacity. South Africa remains an open and highly competitive market with 10 reinsurers, having licensed SCOR in 2009 and FlagstoneRe in 2012, and with internationally competitive rates. Since 2013 however South Africa’s regulator, the FSB, has sought to level the playing field between locally incorporated and offshore reinsurers by requiring underwriters to use local reinsurance capacity first before ceding offshore.

The regulator’s aim is to bolster the domestic industry’s capacity to compete with jurisdictions like Bermuda as a gateway for African reinsurance, a strategy showing signs of success. Several South African insurers, including One Alliance Insurance and Infiniti, set up reinsurance arms in 2013 to serve African markets: the Democratic Republic of the Congo, Equatorial Guinea and South Sudan for the former, and South and East African markets for the latter. Other markets, like Egypt, are entirely dependent on offshore reinsurers.

In one of the most recent signs of liberalisation, Morocco lifted a mandatory 10% legal cession to domestic reinsurers from 2011. As a result, premiums collected by Moroccan reinsurers dropped 23% y-o-y to Dh163.2m (€14.5m) in 2011, an effective 6% of total insurance premiums according to the Société Centrale de Réassurance (SCR), a subsidiary of Morocco’s Caisse de Dépôts et de Gestion. The number of reinsurers domiciled in Africa has grown apace in the past decade even if average capitalisations are low by global standards, fuelled by both public and private ventures. Aside from WAICA-Re established in 2011, West Africa has welcomed the launch of the Côte d’Ivoire-based AveniRe in 2004 with XOF10bn (€15m) in equity, 74%-owned by CIMA-based underwriters. Five other state-backed initiatives have since followed suit: NamibRe, TanRe, SeychellesRe, UgandaRe and the Société Commerciale de Réassurance du Gabon (SCG-Re).

There have also been several private initiatives, backed by underwriters seeking to pool their capacity. A group of nine underwriters in the CIMA and Ghana established the GlobusRe pool in Burkina-Faso in 2011 as a captive reinsurer for their network of 34 underwriters. Larger underwriters, like Ivorian groups NSIA and Colina, have launched their own in-house reinsurance windows to cater to smaller insurers.

In Tunisia, although the privately owned Société de Réssurance Tunisie (TunisRe) does not hold a statutory cession, local insurers typically cede over 15% of their risk given TunisRe’s capacity. Yet TunisRe is increasingly competitive in its own right, having rapidly expanded its business south of the Sahara since listing on the Tunisian Stock Exchange in 2010. Dynamic private reinsurers have also emerged in West Africa, including Nigeria-based Continental Reinsurance established in 1987 and Ghana’s Mainstream Reinsurance since 1995.

Regulating Effort

States have been eager to support their local reinsurers to improve the terms of trade compared to global players. Since 2012 Gabon’s government has required all life and non-life insurers to place 10% and 15% of their premiums, respectively, with the national reinsurer SCG-Re, which is 67.5% state-owned. Likewise, Uganda’s Finance Ministry has enforced a 15% legal cession to Uganda National Reinsurance (UgandaRe) since its licensing in 2013. In Ghana, the government has continued to require that insurers exhaust domestic capacity, 80% of which consists of state-owned GhanaRe, before placing treaties or cessions offshore. Regulators have moved to tighten standards for reinsurers serving their markets, both by requiring credit ratings and more capital. In the past decade all major markets have raised requirements for reinsurers, although these remain low by global standards. Nigeria hiked reinsurers’ capital floors from N350m (€1.65m) to N10bn (€47m) in 2009.

South Africa maintains a floor of R10m ($1m) for nonlife reinsurers, although its enforcement of the Solvency Assessment and Management (SAM) rules from 2014 means the risk-adjusted requirements for South African domiciled reinsurers will grow. Meanwhile Kenya raised requirements from KSh500m ($5.7m) to KSh800m ($4.6m) in 2012. The 14-member CIMA doubled capital requirements for insurers to a still-timid XOF1bn (€1.5m) in 2010, although new, stricter, rules for reinsurers are expected in 2014.

Specialised Risks

Despite these moves to domesticate a greater share of reinsurance treaties, the fragmented nature of African insurance markets and the capital-constrained positions of most underwriters make them highly dependent on offshore reinsurance capacity. This is especially the case for big-ticket risks in energy, mining and infrastructure, where risks are largely covered through London.

The combined capital bases of African reinsurers excluding South Africa remains below $2bn, roughly one-fifth of annual investment in Angolan deep-water oil exploration and production. An offshoot of state-owned energy giant Sonangol, AAA, handles all energy insurance and places it through its own syndicate at Lloyd’s of London. Aside from such larger conglomerates, most insurers in Africa remain highly exposed to rate increases on international markets. As local content initiatives to domesticate more risk take root, insurers will need to transfer a growing share of this risk to global reinsurers through retrocessions. While compliant insurance) remains small in Africa, its growth in countries like Sudan, Egypt, Morocco and others has attracted retakaful providers. Established in 1985 in Tunis as the continent’s first private reinsurer, BestRe is the world’s largest dedicated sharia-compliant reinsurer: it is backed by Gulf investors and since 2011 has operated through Malaysia’s tax-efficient Labuan.

Other retakaful firms include AfricaRe’s Takaful Reinsurance Company, and sharia-compliant windows operated by TunisRe, ZepRe and KenyaRe. Sudanese retaka-ful firms have carved out a strong niche, including National Reinsurance of Sudan, Sudanese Insurance and Reinsurance and Shiekan Insurance and Reinsurance.

New Competition

And even as local players pop up, the continent is still attracting overseas operators as well, from both traditional and emerging markets. In 2012 SwissRe closed its non-life African operations in South Africa, writing covers from its Swiss base while targeting life risks with its African subsidiary. However, the number of Lloyd’s syndicates operating from South Africa has grown in the past decade, just as it has in Singapore, offering a full suite of specialised risk covers. Foreign reinsurers are also targeting niche segments, with Bermuda-based PartnerRe launching a dedicated agricultural reinsurer in Morocco in 2014 in partnership with local insurer Mutuelle Agricole Marocaine d’Assurance (MAMDA) and France’s Mutuelle Centrale de Réassurance (MCR) for instance. The number of emerging markets newcomers has expanded in the past five years, adding SaudiRe, Arab Re-Insurance Group (Arig), KoreanRe and Asia Capital Re, but reinsurers from Brazil, Russia, India, China, and South Africa (the so-called BRICS countries) have been the most aggressive. India’s reinsurer General Insurance Corp. (GIC) was an early mover among new reinsurers, acquiring a 14.75% stake in Kenya-based East AfricaRe in 2007 and buying out South Africa’s SaxumRe in 2014. Premium growth should also be stoked by the arrival of leading Indian reinsurance broker J.B. Boda, which opened an African markets office in 2012. ChinaRe maintains an arm’s length relationship with African risk, covering most of the risk ceded by fellow state-owned People’s Insurance Company of China (PICC). In 2013 African risk accounted for a mere 1.28% of ChinaRe’s gross reinsured non-life premium, although a partnership with South Africa’s Hollard Insurance in August 2012 to develop business in Africa and China could boost ChinaRe’s exposure. Meanwhile, part state-owned IRBBrazil, Latin America’s largest reinsurer, acquired a 4.8% stake when AfricaRe raised $306m in equity in 2012.

Looking Abroad

While attempts to build local capacity are laudable, reinsurance will remain an international business. As local reinsurers like SCR, TunisRe, KenyaRe and ContinentalRe have grown, they have been careful to diversify their risk exposure beyond their home markets. Protectionist measures like mandatory legal cessions to national reinsurers may hinder expansion by foreign firms, but global reinsurers will still see growing retrocessions. As the number of reinsurers targeting Africa – with its high growth rates and under-capitalised underwriters – continues to grow, so will pressure on pricing in this competitive market. Insurance regulators and governments must balance properly supporting local reinsurance capacity and not excessively intervening. The question for reinsurers in African markets is how to approach local reinsurance companies: by partnering, acquiring or building anew.