Africa’s insurance sector is poised to record the second fastest growth in the world after Latin America. It is growing nearly twice as fast as North America and over three times faster than Europe. With 7% year-on-year growth, the region is surprisingly outpacing Asia. However, this recent growth has taken place against an extremely low baseline, even as Africa continues to be severely underinsured.
We recently spoke to Mikir Shah, the Chief Executive Officer of Africa Specialty Risks, on how (re)insurance can unlock investment in Africa. During the interview, he expressed optimism over the growth of the Continent’s (re)insurance sector.
Recgnising the Challenge Facing Africa’s Insurance Sector
“Africa is one of the last real growth markets in the world, but the provision of covers have never been the full range of covers we get in the West. The nature of local insurers is that they have small balance sheets and they rarely look after the retail and SME markets,” Shah began.
He wasn’t wrong. The structure of Africa’s insurance market has historically been very fragmented and dominated by just a few regional and local insurers. More so, options for corporate and specialty risks are quite limited. It was, therefore, in recognition of this limitation that Africa Specialty Risks was founded with financial backing from Helios and other major international investors such as CDC, IFC and Fairfax.
“Both we and Helios saw that there was a gap in the market to provide the end-to-end covers needed by businesses across the Continent,” Mikir Shah said.
A Major Step in the right Direction
Note that filling the insurance coverage gap in Africa is expected to unlock investments across the Continent. In the same vein, building capacity among local insurers is an essential piece of this puzzle, as international investors and corporates have been limited to sourcing covers in the global market. Therefore, the mandate, according to Mikir Shah, has been “focused on Africa and to deliver what those investing in Africa need in terms of risk mitigation.”
To do this, Africa Specialty Risks work closely with local insurers, providing training and most importantly, leveraging the company’s technical capabilities to insure against complicated local risks. As Shah explained, “we have technical skills that can complement and enhance local stakeholder capabilities.” This approach makes room for ASR’s experience of complex risk mitigation technique to be deployed by local insurers who provide ASR with further on-the-ground knowledge.
This kind of localised risk insurance can provide “real comfort to international investors and corporates”. As Shah explained, credit and currency risks have long been seen by investors as a barrier to entry for African markets. Fluctuating exchange rates threaten returns and exits while political instability makes for challenging operational climates. Investors and businesses “need to know that assets won’t be taken away or whittled down to zero…that’s the first step…then they can invest the money”. Therefore, for both development finance institutions and private investors, helping Africa’s insurance market reach maturity is critical to achieving wider economic and social development goals.
The Need to Build Insurance and Reinsurance Products specifically for Africa
Building out Africa-focused insurance and reinsurance products can lay the groundwork to support businesses and investors against future risks such as climate change. Shah noted that “as insurance companies, we can’t have the same impact on climate change as other industries, but what we can do is have products that mitigate the impact of the volatility driven by climate change.”
It should be noted that despite its minimal contribution to emissions, Africa is particularly vulnerable to the effects of climate change. Temperatures in North and Sub-Saharan Africa are expected to rise by as much as 3.5C from pre-industrial levels by 2050. For a continent where agriculture provides employment for over half the population, the impact on livelihoods would be severe. But parametric insurance, which guarantees a direct payout after a qualifying event, can offer a means to mitigating against unpredictable external risks in a way that traditional insurance products cannot. Farmers, for example, can use such packages to quickly secure seeds to replant after a flood or drought. Given the dominance of the agricultural sector in Africa, such products “allow resilience to be built into local commodities”.
Mikir Shah is very bullish about both the growth of Africa’s insurance sector and the economic development of the Continent as a whole. He also believes in the role technology and innovation are going to play towards engendering insurance acceptability on the Continent. He believes that the same way technology was used to solve some specific challenges bothering on financial inclusion in Africa is the same way it could be used to grow the insurance sector. In the meantime, ASR is already making this happen because “digitalisation is available in every single product line. Using technology to improve the risk mitigation process is very important and we’re looking at it in every aspect of what we do.”
WATCH OUR RECENT EXCLUSIVE INTERVIEW WITH THE CEO OF AFRICAN ALLIANCE INSURACE PLC
In Africa’s business landscape, there is a select group of individuals who have achi…