Underwriting industry in Africa
Unlocking Africa’s undisputed economic potential requires infrastructure. Inadequate infrastructure is consistently raised as a major constraint to doing business on the continent and a key factor in shaping its future. As different types of industry develop throughout the continent, niche insurers will play an increasingly important role in providing the risk management strategies and solutions to nurture this growth.
“Although the funding gap has begun to close in recent years, unlocking the continent’s vast economic potential requires new projects and programmes, with the need particularly acute in transport, power and communications. Doing this requires strong political leadership, a greater role for the private sector and diverse sources of funding. Policy makers and the private sector need to do more work together, with political leaders creating a regulatory environment that will encourage private sector investment,” it was noted at the recent Ernst & Young Strategic Growth Forum Africa. The event saw government and business leaders from across the globe converge on Cape Town, South Africa to discuss Africa’s investment potential and hear from businesses that have achieved considerable success on the continent.
RISKAFRICA caught up with some of South Africa’s major underwriting management agencies (UMA) that have launched operations in the rest of Africa. They told us about their operating models on the continent and the unique challenges and risks they are exposed to.
“Globalisation and the resultant competition from foreign conglomerates make entry into new African markets anything but a slamdunk,” says Stef Theofanidis, managing director of Hollard Corporate Markets. “Market dynamics and specifics need to be carefully considered before entering into insurance ventures in Africa.” Several specialist UMAs of South African short-term insurer Hollard have been providing products and solutions to key African markets since 2005. In particular, Scintilla (engineering and construction); Astra (marine); FASA (personal accident); and Oojah (travel) have established track records in these countries. More recently, specialist liability products (D&O, PI and PL) and construction guarantees have been introduced in these territories.
“Hollard has a strong footprint in the SADC region, having crafted its vision of pursuing local licences and business opportunities in Africa more than 10 years ago,” says Theofanidis. As a result, it has developed significant capability in Namibia, Botswana, Mozambique and Zambia by partnering with and growing local experts and developing key relationships in these markets. Beyond SADC, Hollard has established strategic partnerships and alliances in the rest of Africa.
“The African market provides an interesting opportunity for South African insurers because of the large potential and because South African companies are relatively familiar with African culture and economies, thus arguably making expansion within the continent less daunting than for US or UK businesses,” continues Theofanidis. “Despite serious competition from global players and local incumbents, South African insurers have achieved reasonable success on the continent, including holding leading positions in several markets.”
Theofanidis describes Hollard’s UMA partners as centres of excellence in respect of specialist lines. “Outside South Africa, they provide support and the capability to underwrite the relevant class of business. This involves training local staff, providing underwriting guidelines, policy wordings, capacity and administrative support. When the risks in the country are large and/or complex, these specialists can assist with upfront risk management, as well as post-loss assessment,” he explains.
While the partners provide the technical insurance expertise, staff members based at Hollard country offices provide insights and local knowledge and access to the broker market. This is the essence of the Hollard partnership model. “Our model allows us to offer a one-stop shop and seamless solution for various businesses. Whether it is a South African client that is operating in the SADC region or only within a particular SADC country, we can provide tailored insurance solutions, both for large commercial entities and specialist businesses. Where Hollard does not have a licence to operate in a particular country, we can facilitate a business transaction through our network of partners and joint ventures/facilities across the continent.”
No walk in the park
Since insurance legislation and regulation varies from country to country, Theofanidis stresses that a one-size-fits-all approach cannot be adopted. Challenges vary from country to country, too, but Hollard has observed a number of common factors. For example, among individual consumers, limited disposable income and lack of awareness about the importance of insurance contribute to low penetration. “This is changing slowly but remains a challenge,” says Theofanidis.
He adds that technology will play a key role in overcoming the difficulties associated with traditional distribution channels. “In order to succeed in retail markets, it is likely that insurers will need to embrace alternative models in trying to connect products and customers in a reliable, cost-effective manner.”
A lack of capacity and underwriting expertise to underwrite some classes of business – such as oil and gas, aviation and other specialised lines of business – remain a challenge. In contrast, “Some markets appear to be over-traded in terms of the number of industry players. This has the effect of fragmenting premiums and making markets appear unattractive to new entrants,” says Theofanidis.
“Language remains an underestimated barrier. While communicating can be a challenge, the more significant test lies in the fact that Portuguese and French-speaking countries often have different systems of governance to English-speaking countries on the continent.” From an insurance perspective, the risks are not necessarily higher; they are different. “For example, the additional costs of post-loss management in some foreign territories, especially when specialist loss adjusters’ expertise must be sourced externally from South Africa or Europe.”
Hollard’s approach to managing risks when entering new markets entails building a strong brand and culture, and partnering with local insurance professionals.
The future is bright
Despite great market and economic diversity from country to country, Africa holds huge potential for the insurance industry. “The continent’s outlook is largely positive, given independent forecasts of growth rates that exceed those of developed markets and a concomitant increase in foreign direct investment, increasing consumer populations enjoying increased levels of disposable income, and proven large-scale reserves of mineral wealth,” concludes Theofanidis.
Despite Namibia being a very small market, Bertus Visser, head of distribution and business development at Natsure, says that Namibia Special Risk Acceptances ( NASRA) has achieved success. It has been running for about two years and, as the registered agent of an Alexander Forbes cell captive wholly owned by the Natsure Group, is able to underwrite all classes of short- term insurance business.
Airspace Africa Underwriters
In Botswana, Natsure acts as a reinsurer to Botswana Insurance Company for its aviation book of business. Where risks are too big, Natsure provides reinsurance through Airspace Africa Underwriters. This year, Airspace Africa became an approved Lloyd’s
coverholder. So while reinsurance is currently placed via Guardrisk in Botswana, once the book has run off, this business will be placed into the Lloyd’s market.
“Most African countries like to keep local revenue inside the country, especially Namibia. In Botswana again, all business has to stay within the country and only when there is a lack of capacity, will it be sourced from outside the country,” explains Visser.
C&G Underwriting Managers
Specialist engineering underwriter C&G Underwriting Managers selectively looks at risks all over Southern Africa. “C&G will look at any Southern African country when it comes to engineering, construction and renewable energy, but will be selective. It is not countryspecific, but risk- specific,” notes Visser. Since many of the markets it operates in are small, the only physical office that the UMA has outside of South Africa is in Windhoek, but its major strength is its long-standing relationships with brokers.
Knowing the risks
“The biggest challenge I’ve experienced in Africa is the push to keep money local. Secondly, we are unfamiliar with these markets and so fully understanding the risks is a challenge.” Visser says that from a regulatory perspective, many African countries lag behind South Africa in the same way that we lag behind the United Kingdom and Australia. While this presents opportunities for South Africa, as less regulation brings down the cost of doing business, a solid regulatory environment can also improve the flow of investment and skills into a country.
PAN AFRICA UNDERWRITING MANAGERS
Low-frequency, high-severity risks characterise the engineering class of business in Africa, says Cas Hansa, managing director of Pan African Underwriting Managers (PAU), a one-year old UMA operating in the speciality engineering insurance sector.
PAU underwrites on behalf of Regent Insurance Company Limited, which has interests in South Africa, Botswana and Lesotho.
With this in mind, insurers need to more astutely diversify to manage these risks. This includes product diversification, geographic diversification and time diversification. “When one construction project is starting, another project will be in its final stages of completion with substantial capital exposure,” explains Hansa.
“Continuously participating in as many risks throughout as large a regional development catchment area as possible, as well as risk sharing among local insurers and reinsurers, helps to simulate the ‘law of large numbers’ and spread- of-risk scenarios critically needed for insurers to succeed in their endeavours to match actual loss experience with expected loss experience,” adds Hansa.
An integrated regional approach therefore improves the ability to secure profit margins in this sophisticated and potentially volatile insurance sector.
The law of the land
Key considerations for a South African-based UMA operating in the rest of Africa largely relates to ensuring full compliance with local insurance legislation, says Hansa. “In most cases, this legislation rightfully seeks to secure local insurer development. The continued prospect of a large African infrastructural or industrial project being front-insured by a local insurer and then substantially reinsured offcontinent has to be tempered to nurture and benefit many more locally based engineering insurers,” he explains.
While this does not mean that overseas capacity and expertise should be excluded altogether, supporting the profitable development of Africa’s own specialist insurance capacity is vital for our own human capital development. “Engineering underwriting on the continent should be strongly supported and facilitated so that a network of engineering specialists (brokers, loss adjusters and underwriters) can ensure that Africa too is at the forefront of this risk/insurance frontier,” continues Hansa.
“The engineering insurance sector is critically important, since prior to any developmental project being given the green light to proceed, the project managers must ensure an engineering/works insurance policy has been secured from an authorised insurer. Engineering-insurance prospects therefore directly correlate with any local and foreign direct investment potential on the continent.”
PAU’s point of focus
PAU provides facultative reinsurance capacity support to local insurers. Through technical support and a focus on local skills development, it seeks to facilitate greater self- reliant development on the continent. The critical purpose of insurance is to resolve and pay claims quickly, which requires local presence and easy access to the requisite skills sets. “It is important to consider the speed at which claims can be professionally assessed and adjusted, especially in fairly remote locations, as well as how quickly repairs can be concluded on sophisticated, imported machinery, for example,” says Hansa
“In this context, also consider the exposures with consequential loss type covers, such as loss of profits or delay in start-up. Even when the damages are insurable, consider road accessibility, border-post/customs processing and actual shipment (road, air and marine) resources.” Once again, this points to an urgent need for an integrated Pan-African strategic approach in all spheres of influence.
Hansa emphasises, however, “The folly of a Pan-African approach would be to regard the region as a homogenised market or standardised business opportunity. Each country has its own unique business features and local legislation dynamics, which must be understood and respected.”
Apart from physical exposure considerations, each country has its own prevailing skill sets and insurance capacity, highlighting the need for a concerted effort in ensuring the nurturing and development of skilled local footprints, preferably entrepreneurially operated by locals. “As engineering-insurance specialists, PAU is mindful of the need to ensure we respectfully enter regional markets through the sharing of experiences and skills, and the support of local business development through projectprogrammes paid for, in the final analyses, by Africans,” concludes Hansa.
Emerald Risk Transfer
A division of Santam Limited, Emerald Risk Transfer has been underwriting risks in Africa for the past six years. It is the largest corporate property and affiliated engineering insurance underwriter in South Africa and currently has policies in approximately 15 sub-Saharan countries, among them, Mozambique, Namibia, Zimbabwe, Ghana, Guinea, DRC, Nigeria and Zambia. “Emerald specialises in large corporate property risks such as mining, infrastructure, rail and manufacturing. In addition to providing reinsurance capacity, we offer technical assistance, both from an insurance perspective as well as risk engineering and management,” says CEO, Bernie Ray.
Ray notes that Africa, as an emerging economy, offers challenges that are not present in developed economies. “Transport, communication and language are common issues. Then there is the threat of real or perceived political instability and difficulties with foreign exchange,” he says. “Competition is keen, and markets are slow to embrace change. There is no quick fix to establishing an African footprint and it requires determination and perseverance. There are, however, great rewards. Business in our market sphere is usually profitable and the risks are well managed.”
A sizable Santam office and adequate infrastructure make Namibia the easiest country for Santam Aviation to operate in outside of South Africa. In addition to Namibia, the division has quite extensive dealings in Botswana, Zimbabwe, Zambia and Mozambique. “Botswana has come a long way on the aviation front to make it safer, especially in the swamp areas. The country’s civil aviation authority has tightened up regulation around when and where you can fly, as well as improving airstrips around the Delta region, which is the area that carries the most air traffic in Botswana. The registrar has also stepped up its game in terms of doing business there and companies must go through local subsidiaries,” comments James Godden, head of Santam Aviation.
Botswana is more accessible than Mozambique. Aircraft wrecks can be brought into South Africa relatively easily via a flatbed truck; while in Mozambique, retrieving aircraft can prove more challenging. “Language is another issue and it’s important to have someone on the ground who can speak Portuguese,” notes Godden.
He says that Zimbabwe has been wide open for business as overseas companies have stayed away from the country. “It’s important to go through a local insurance company when operating in Zimbabwe. There is a very small aviation market there, so we don’t have too many problems.” Santam Aviation operates through Tristar Insurance Company in Zimbabwe.
Zambia, though much the same as Zimbabwe, is slightly more efficient due to political reasons. Generally, a lack of infrastructure, as well as the lack of maintenance and repair skills is a challenge. Currency issues, such as exchange rate fluctuations, makes doing business tougher. From a risk exposure point of view, dealings in West Africa, including Ghana and Nigeria, are more concerning, but this region is opening up and offers major opportunity.
The cost of recovery from most countries is quite expensive and repairs must usually be done in South Africa. Inevitably you have to look at higher excesses, which is not ideal for the client.
Some of the risks posed by this region include fuel contamination, which occurs when water seeps into fuel that is being stored in barrels at remote airstrips; the quality of the landing strips; as well as herds of cattle and goats, and sometimes people, walking across the strips.
“The cost of recovery from most countries is quite expensive and repairs must usually be done in South Africa. Inevitably you have to look at higher excesses, which is not ideal for the client,” says Godden. “We are very selective of the risks we write. A country like the Democratic Republic of Congo is a massive concern for us and has the highest fatality rate in the world. It is also located on the equator and is exposed to incredibly harsh storms, has virtually no infrastructure and is in political turmoil.”
Santam Aviation operates through local brokers in Kenya and Tanzania. The South African operation offers underwriting and claims control, taking a bigger portion of the risk as the local players are generally quite small. “I think that will change. The Zambian State Insurance Company, for example, is now prepared to write 100 per cent of aviation risks,” says Godden.
“There continues to be a lot of activity in this space. Aviation will grow faster in a country like Nigeria, for instance, than in certain other African countries. Santam Aviation will keep expanding but will be very selective about the risks we accept.”
A lack of capacity and underwriting expertise to underwrite some classes of business, such as oil and gas, aviation and other specialised lines of business,
remain a challenge.