Transcript African Insurance Market

37th AIO Conference
23 – 26 May, 2010
Banjul, Gambia
Re-building Consumer trust and
confidence after the Global
Financial Crisis
STEVEN L. CHETTY MBA. FCII. ANZIIF [Fellow] CIP
DIRECTOR
SUN REINSURANCE BROKER, UAE
37th AIO Conference
23 – 26 May, 2010
Banjul, Gambia
ISSUES FOR DISCUSSION
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FORWARD
INTRODUCTION
THE AFRICAN INSURANCE ENVIRONMENT IN PERSPECTIVE
INSURANCE REGULATION IN AFRICA
DEVELOPMENTS IN THE NIGERIAN INSURANCE MARKET
THE NEED FOR INSURANCE REGULATIONS IN AFRICA
INSTITUTIONAL FRAMEWORK
REGULATORY MODEL
CHALLENGES
WAY FORWARD
CONCLUSION
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37th AIO Conference
23 – 26 May, 2010
Banjul, Gambia
SCOPE
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Introduction
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Key Concerns as Reinsurance Brokers
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State of African Insurance/Reinsurance Industry
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Trend Drivers
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Global Trend
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Conclusion & Recommendations
37th AIO Conference
23 – 26 May, 2010
Banjul, Gambia
FORWARD
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I am delighted to be presenting a paper at this Africa’s top Insurance
Forum in such distinguished company and to have the opportunity of
talking to you on “Re-building the consumer trust and confidence after the
Global Financial Crisis” in particular in the Africa Insurance Industry
context.
Indeed, many of you here will probably be upbeat by the fact the first sign
and main crisis arose from the western world, however, due to
Globalization, like they say we now all live in a “Village”, the effects of the
economic crisis from the western world will always filter to the rest of the
world and will spare no countries.
37th AIO Conference
23 – 26 May, 2010
Banjul, Gambia
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The so called ‘Great Moderation’ of the last 50 years finally ended,
not with a whisper but a bang. The crash has severely damaged
wealth and confidence and still causing losses in financial sector,
construction and property related jobs.
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Adding to the problems, access to credit dried up in the midst of the
Banking crash and this situation is only gradually improving, largely
thanks to provision of Central Bank funding and Government
intervention.
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The accelerating deterioration in consumer spending through 2008
has hit sales of cars, electronic equipment and Insurance was of no
exception.
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In response to the slump in volumes, prices plummeted to attract
buyers
37th AIO Conference
23 – 26 May, 2010
Banjul, Gambia
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Clearly you have a situation of job lossess and insecurity,
generating a downward spiral in consumer sentiment, spending and
economic activity.
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In the circumstances, many companies will not just be unwilling but
unable to maintain investment spending
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The sign of expectations for the global economy is that commodity
prices have slumped to about a third of their mid-2008 peaks, or
around half the average level seen in 2008.
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Provided the price fall is passed on, this should benefit consumers,
indeed Consumers!
37th AIO Conference
23 – 26 May, 2010
Banjul, Gambia
INTRODUCTION
It will not be out of place to state from the beginning that in the complex field
of risk management, insurance has become universally recognized and
accepted as the most efficient response to rescue risk related issues. As a
result, the position today is that no modern economy can survive or prosper
without the active support of a disciplined and viable insurance industry.
This is evident from the 2007 World Insurance Market Report published by
Sigma Publication where the 15 major economies have significant
contributions from insurance sector to their GDP ranging between 5-15%.
It is gladdening to note that South Africa is amongst the
first 5 of such economies
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37th AIO Conference
23 – 26 May, 2010
Banjul, Gambia
INTRODUCTION contd.
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Within the last decade, certain factors have made unprecedented
positive impact on global growth and development of insurance. These
include liberalization of world trade, increasing efficiency, advances in
Information Technology and the integration of world financial system
which now provide unparallel economic, cultural, and recreational
opportunities.
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These developments have created new opportunities for insurance
business in Africa; as the African market is now open for global
exploration and competition. Conversely, this has poses new challenges
for insurance regulation
in Africa.
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37th AIO Conference
23 – 26 May, 2010
Banjul, Gambia
CENTRAL QUESTIONS
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What are the economic consequences of
the Global Crisis for the Insurance Industry
especially in Africa?
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What change arises as a reaction to the
financial crisis in the field of insurance
supervision in particular in the regulatory
environment in general?
37th AIO Conference
23 – 26 May, 2010
Banjul, Gambia
To RISK or NOT TO RISK
That is the question
Risk Anyone?
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Risks are part of daily life, cannot eliminate them all
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Must learn to live with them and learn how to best
manage them
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It is same in business. Need to identify, measure and
manage risks in the best way we can
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Behind any risk there is an opportunity
37th AIO Conference
23 – 26 May, 2010
Banjul, Gambia
WHAT A CRISIS
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Was this Crisis avoidable? YES
What Caused it?
We all know :- sub-prime mortgages, Overstretched
leveraging, Collateralization happiness etc….
BUT
Did it occur because of lack of rules?
Only in part – mostly caused by inadequate attention to
intertwining effects in financial markets of new “innovative”
products.
37th AIO Conference
23 – 26 May, 2010
Banjul, Gambia
WHAT A CRISIS
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If we had other regulations, could we have avoided this crisis?
Maybe but by a lesser magnitude
Basel II framework was issued already in 2005
Lehman’s paper was still “A” rated by S&P 15 days
before filing for bankruptcy
Beyond regulations, we need to enhance our knowledge of
the risks, the understanding of the impacts they have in our
enterprise and take necessary actions.
Having said the above, my paper will focus to
some extent on the regulatory aspects
37th AIO Conference
23 – 26 May, 2010
Banjul, Gambia
The key objectives of Insurance
regulation include the following
maintain efficient and stable insurance
markets
 fair and safe market for profitable insurance
business transactions
 Provide
adequate
protection
for
the
consumers at reasonable cost

In a recent survey of the South African Insurance
market by Pricewaterhouse Coopers Inc ,it was
concluded from responses of the 27 Companies
surveyed that regulations have created a fairer
playing-field for institutions to reach their growth
targets.
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37th AIO Conference
23 – 26 May, 2010
Banjul, Gambia
THE AFRICAN INSURANCE
ENVIRONMENT IN PERSPECTIVE
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The African continent is characterized by
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high level of illiteracy,
high rural population,
poor infrastructure,
poverty etc
The African insurance markets comprise of
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Insurers (Underwriters),
Reinsurers, Brokers,
Loss Adjusters,
Actuaries and
Agents.
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37th AIO Conference
23 – 26 May, 2010
Banjul, Gambia
THE AFRICAN INSURANCE
ENVIRONMENT IN PERSPECTIVE….
Contd.
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There are risks of potential abuse
Low level awareness
Poor market penetration
Low operating capital
Low capacity for retention and acceptance of foreign risks
37th AIO Conference
23 – 26 May, 2010
Banjul, Gambia
Low Insurance penetration –
for eg. In India
Source: Asia Insurance Review
37th AIO Conference
23 – 26 May, 2010
Banjul, Gambia
What are the Indian regulators
doing about it?
Source: Asia Insurance Review
37th AIO Conference
23 – 26 May, 2010
Banjul, Gambia
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Insurance regulation simply connote laws, rules or guidelines
through which governments controls the practice of insurance
business.
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Regulation of insurance in Africa is mainly through various domestic
legislations creating regulatory authorities/agencies to superintend
insurance businesses. For example,
• Nigeria National Insurance Commission,
• South Africa, the Financial Services Board;
• Zambia here we have Pension and Insurance Authority; etc.
The common denominator of all these institutions is that they were
established by the Governments of the domestic markets.
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37th AIO Conference
23 – 26 May, 2010
Banjul, Gambia
DEVELOPMENTS IN THE
NIGERIAN INSURANCE MARKET
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The National Insurance Commission of Nigeria, for example is
repositioning itself to meet the regulatory challenges. Some of the
strategic initiatives embarked on include:
• Internal re-engineering of operations,
•
acquisition and deployment of efficient Information technology
infrastructure
• Review of its organizational structure for effectiveness,
• enhanced human resources management and
training program.
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37th AIO Conference
23 – 26 May, 2010
Banjul, Gambia
These reflect both the need to address particular problems and possible
abuses in the business, as well as ensure the development of insurance
market. The key objectives of government interest in the regulation of
insurance industry include:
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Protect consumers of insurance products
 Ensure solvency is maintained
 Reasonable rates are charged
 Insurance covers are available
Standardize the conduct of insurance business
 Regulation of entry
 Supervision of conduct
 Ethical conducts of business
Establish sound financial system
 Enhance healthy competition
 Transparency
 Free flow of information
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37th AIO Conference
23 – 26 May, 2010
Banjul, Gambia
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The establishment of regulatory and supervisory institution as part
of the bureaucratic structure is on the decline
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There is the growing acceptance by African countries of the need
for the regulation and supervision of insurance activities through a
separate structure outside the core government ministries
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These development
supervision/regulation.
will
no
doubt
enhance
effective
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37th AIO Conference
23 – 26 May, 2010
Banjul, Gambia
REGULATORY MODEL
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Insurance regulation in Africa is largely compliance
based
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‘one cap fits all’ approach predominates.
same set of rules applied to all
No cognizance for the risk profile.
This model is costly in terms of:
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finance,
manpower and
time
Added to the cost element is the loss of required
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37th AIO Conference
23 – 26 May, 2010
Banjul, Gambia
STATE OF THE AFRICAN
INSURANCE MARKET - “Raise the
Bar”in low retentions and high
 Capital inadequacy resulting
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demand for reinsurance.
Currently there are rising demands
sophisticated covers requiring better
companies
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for more
capitalized
As a fall out some countries are beginning to embrace
recapitalization, Mergers and Acquisitions (e.g Ghana, Nigeria,
Gambia, Kenya to name a few)
Lack of capacity and underwriting expertise to underwrite
some classes of business e.g. Oil and Gas Risks,
Aviation and other specialized lines of business
37th AIO Conference
23 – 26 May, 2010
Banjul, Gambia
STATE OF THE AFRICAN
INSURANCE MARKET
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Globalization & Competition from foreign companies
Basic insurance and reinsurance products on offer.
Lack of customized insurance solutions to suit local
requirements.
Weak and unsophisticated supervision (environment for
unethical practices to thrive)
Many African Countries have weak economies with resultant
low Insurance penetration due to lack of disposable income,
ignorance and inertia.
37th AIO Conference
23 – 26 May, 2010
Banjul, Gambia
STATE OF THE AFRICAN
INSURANCE MARKET
 Generally the risks of the continent are good but portfolios are largely
unbalanced
 Inadequate pricing;
 Companies compete on price not on service
 The net effect is rate cutting which is now widespread
 Companies are beginning to embrace ICT in service delivery
 ART & Financial Reinsurances not widely practiced but may be the case
with globalization and maturing economies
 Reinsurance demands for non-sophisticated International reinsurers provide
basic covers, capacities and dictate price. Consequently, African insurers
are paying prices disproportionate to their experience
 African insurance companies end up paying higher price for their
Reinsurance requirements even when markets were considered soft.
37th AIO Conference
23 – 26 May, 2010
Banjul, Gambia
The African Insurance Industry –
Conditions & Market practice
Primary Insurance:
Low per-capita income and market penetration
Per-capita income (2006, US$)
0.0Insurance
1.0
2.0
3.0 penetration
4.0
5.0 (2006,
6.0 in %)
market
World
North America
40,000
Western Europe
30,000
Japan/AUS/NZ
20,000
Penetration much
lower if South Africa
is excluded (NL:
0.82, L: 0.33)
Emerging Asia
m
er
Africa
A
Af
ric
a
pe
ur
o
E
gi
ng
rn
e
rn
AU
op
Eu
r
m
er
A
th
pa
n/
ld
W
or
ic
a
Latin America
As
ia
0
S/
N
Z
Eastern Europe
ic
a
10,000
tin
La
te
Ea
s
er
Em
Ja
te
W
es
N
or
 In sum, catch-up potential for insurance clearly
visible – together
with high real
Non-life
Life
GDP growth, this leads to expected strong insurance premium growth
Source: Munich Re
37th AIO Conference
23 – 26 May, 2010
Banjul, Gambia
TREND DRIVERS
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Change Drivers that have significantly impacted on current global
insurance and reinsurance business cycle includes;
Terrorism: September 11 marked a watershed in the history of insurance –
Led to the shortage of supply Reinsurance and the need for appropriate
pricing
Escalating CAT Losses from Natural Catastrophes all over the world
Globalization
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Information Technology
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Improved Risk Management and Governance Practices
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ART & Financial Reinsurance
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Credit & Capital market Crisis
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Commitment of IAIS to significant improvement in quality of supervision.
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37th AIO Conference
23 – 26 May, 2010
Banjul, Gambia
CHALLENGES OF INSURANCE
REGULATION – “Bumpy Ride”
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The African Insurance Market has grown in the last decades
There has been substantial increase in the number of players and
activities
The world financial system has been liberalized with national
boundaries broken
Communication and Information Technology has changed the
business landscape
These developments have all combined to pose regulatory
challenges to our various country regulators.
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37th AIO Conference
23 – 26 May, 2010
Banjul, Gambia
CHALLENGES OF INSURANCE
REGULATION cont’d
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Absence of reliable data for effective supervision
Poor public perception of insurance
Inefficient financial market needed to galvanize reliable
investment returns
Slow process of law making
Judicial system and enforcement of the laws
Inadequate human capital
Low level of technological infrastructure
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37th AIO Conference
23 – 26 May, 2010
Banjul, Gambia
CHALLENGES OF INSURANCE
REGULATION cont’d
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Ineffective legal frame work
Lack of adequate funding for effective regulation
Emerging trend of group structure
Cross border transactions by regulated entities
Inadequate cooperation by the regional and
continental regulatory bodies
Prescriptive capital requirement
Disconnect between product and consumer needs
Lack of independence of regulatory
institutions
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37th AIO Conference
23 – 26 May, 2010
Banjul, Gambia
WAY FORWARD – “Take the Right
Step”
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Migration from compliance to risk based model of
supervision
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Migration from prescriptive capital requirement to minimum
capital determination based on risk profile.
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Massive investment in creation of public image through well
crafted public relation strategy
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Redesign human capital development plan
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37th AIO Conference
23 – 26 May, 2010
Banjul, Gambia
Way forward… contd.
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Increase investment in technology
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Adequate funding of the regulatory system
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Reform of insurance legal framework
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Regionalization and expansion of regulatory cooperation
including forging overseas alliances
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Reinvigoration of African Insurance Supervisor Association
(AISA)
37th AIO Conference
23 – 26 May, 2010
Banjul, Gambia
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Rate of change at the global market place is assuming
a dizzying pace and I believe that recent and not too
recent happenings will have a lot of impact on our
industry and the way we do business.
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The African Insurance and reinsurance industry being
a part of the global market place is going to be affected
by what is going on in the global insurance industry
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My mandate is to look at trends in the insurance
Industry from an African Broker’s viewpoint.
37th AIO Conference
23 – 26 May, 2010
Banjul, Gambia
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In looking at the trends, this paper will highlight some
major events responsible for observable trends in the
global reinsurance industry and their implications.
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My conclusions and some recommendations will follow.
37th AIO Conference
23 – 26 May, 2010
Banjul, Gambia
KEY CONCERNS AS
REINSURANCE BROKERS
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As a reinsurance broker, part of our overriding concern is
finding the right reinsurance protection for our client at the
right price
In this regard our interest in the reinsurance value chain will
include
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Profile and quality of risks our clients bring to the market
Their retention ratios
The capacity available in the market to meet our clients needs
The terms under which Cover is granted to our clients
37th AIO Conference
23 – 26 May, 2010
Banjul, Gambia
KEY CONCERNS AS
REINSURANCE BROKERS
Contd…
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Improvement in client service
The timeliness and quality of claims
settlement
Growth of the market
Impact of supervision on business
practices
Risk management practices by reinsurers
37th AIO Conference
23 – 26 May, 2010
Banjul, Gambia
GLOBAL TRENDS
•
•
Most players deploy IT in service delivery. International Reinsurers are
deploying rating tools in pricing.
The unrelenting Credit and Capital Market Crisis is going to impact on
insurance and reinsurance business in many ways. Some possible
scenarios are examined below:
•
•
•
Anticipated decrease in the capital base of reinsurance
companies worldwide.
Decreasing capital base likely to result in the reduction in
reinsurance capacity (supply)
Reduction on refinancing options available to primary insurers
may stimulate the demand for reinsurance
37th AIO Conference
23 – 26 May, 2010
Banjul, Gambia
GLOBAL TRENDS
•
•
•
•
•
•
Lower capital market returns and decrease in investment
incomes for companies
Decrease in profitability for reinsurers
For Africa any further economic crisis will likely impact insurance
penetration already the world lowest
Increased exposures from natural hazards likely to result in significant
increases in individual and catastrophe losses
The above events are likely to result in increase in pricing of
insurance/reinsurance products
Continuous improvement in supervisory oversight as a result of
national development initiatives and the requirement of IAIS.
37th AIO Conference
23 – 26 May, 2010
Banjul, Gambia
DECREASE IN CAPITAL BASE OF REINSURANCE
COMPANIES WORDWIDE
Source: Munich Re
37th AIO Conference
23 – 26 May, 2010
Increased exposures from natural hazardsBanjul,
and Gambia
increased Catastrophe Losses
Source: Munich Re
37th AIO Conference
23 – 26 May, 2010
Banjul, Gambia
At the Reinsurance Rendezvous held in Monte Carlo in September
last year, the practitioners were unanimous in their conclusion that;
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The reinsurance industry has weathered the credit crisis through
their excellent risk management procedure
Reinsurers have managed the business cycle excellently over
time, since 2001
They also agreed that rates will continue to decline in spite of
global losses and it is likely to take a ceded insured loss of
about USD15 billion to USD20 billion to stabilize that softening ,
and a ceded loss of about USD40 billion to USD50 billion to
cause a material upward change in rates – Mr. Erhart (Aon Re
Executive)
37th AIO Conference
23 – 26 May, 2010
Banjul, Gambia
CONCLUSION &
RECOMMENDATIONS
African Reinsurers must put their acts together and;
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Recapitalize adequately to enable them play a primary role in
providing capacity for the African continent.
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Improve on their fundamentals and get rated by appropriate
rating agencies
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Invest heavily in human capital development, especially in the
area of specialized risks e.g. Oil & Energy, Aviation
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Invest in the development of customized reinsurance solutions
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Embrace ICT to upgrade their service delivery to their markets
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Improve in training for direct underwriters.
37th AIO Conference
23 – 26 May, 2010
Banjul, Gambia
CONCLUSION &
RECOMMENDATIONS
International Reinsurers should
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Apply differential pricing (taking into consideration the differences in
exposure and experience in pricing covers) – No continent should
subsidize losses from other region
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Play a complementary role in the continent and contribute their to
developing the African insurance markets
Direct underwriters should;
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Recapitalize to retain more and only buy reinsurance at the top levels
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Embrace ICT in service delivery
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Improve on Risk Management and Corporate Governance
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Embark on cost optimization through
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Reduce cost of doing business
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Make each line of business pay for itself
37th AIO Conference
23 – 26 May, 2010
Banjul, Gambia
CONCLUSION &
RECOMMENDATIONS
Regulatory Authorities;
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Create enabling environment for
insurance companies to grow and
develop
Encourage companies to explore
other methods of Risk financing
other than the traditional
Reinsurance
37th AIO Conference
23 – 26 May, 2010
Banjul, Gambia
CONCLUSION &
RECOMMENDATIONS
Considering all foretold The African
Reinsurance Industry would not
Generally expect an increase in rates for
2010. Rather will expect each market to
be rated, taking into account their
exposure and experiences
37th AIO Conference
23 – 26 May, 2010
Banjul, Gambia
FOOD FOR THOUGHT
37th AIO Conference
23 – 26 May, 2010
Banjul, Gambia
THANK YOU FOR YOUR ATTENTION