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One size fits all doesn’t make sense
Targeted regulations across Africa's insurance markets and the markets that companies want to invest in are necessary. A 'one size fits all' approach can't work says the CEO of Allianz Africa.
Ethiopia is among the most attractive untapped insurance markets, and the opening of the sector to foreign investment is just a matter of time, Allianz Africa CEO Coenraad Vrolijk tells The Africa Report. Foreign direct investment in insurance is not allowed in Ethiopia.
But there are very few countries that persist in excluding foreign capital in the long term, he says. Vrolijk hopes to oversee Allianz’s entry into Ethiopia within the next three years: “it’s a question of when.”
Signs of market opening remain at this point “discussions”, but they are “positive discussions which are picking up in frequency.”
African insurance has shown average annual organic growth of 10% in dollar terms since the mid-1990s, and Vrolijk sees no sign of that slowing. Markets with substantial growth potential include Morocco, Nigeria, Kenya and Ghana, he says. Allianz has a wide range of possible new African markets.
About half of the continent’s 54 countries are “interesting,” yet Allianz is present in only 13. Vrolijk says he is “slightly more optimistic” for the company’s prospects in 2020 than he was at the start of 2019. This is due to internal organisational improvements, such as IT system upgrades.
The growth story in Africa faces a possible hurdle in the form of claims ratios, which push up costs for insurers when they increase. François Jurd de Girancourt, head of the McKinsey Africa financial institutions practice, says they could derail the industry’s growth.
In auto insurance, the largest line of business in many countries, have deteriorated in the past three years in maturer markets such as South Africa and Morocco, he says: “This is not just a short-term effect, but a trend which requires insurers to revisit their business model.”
Capturing and using data, combating fraud, reviewing claims processes and reinventing the relationship with agents are all areas insurers must look with regard to these markets, says De Girancourt.
Vrolijk “strongly disagrees” with McKinsey’s worries. Africa, he says, has “the lowest claims ratios of any continent in the world and will remain so for the next five years.” Kenyan experience supports his argument.
According to Deloitte’s Insurance Outlook for 2019-2020 in East Africa, expense and claims ratios in Kenya, one of Africa’s more mature insurance markets, showed a slight upward trend from 2012 to 2017, before declining to just over 40% in 2018. As markets mature, Vrolijk says, claims ratios tend to go up.
When that happens, he argues, premiums will rise and claims will fall again. He says that claims ratios that are too low show that little is being given back to the customer. Managers reporting claims ratios of less than 40% have to provide him with explanations.
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Vrolijk sits on the board of the Africa Reinsurance Corporation, which gives him access to insurance regulators who are also board members. He is encouraged by the conversations he has had, which leave him with no reason to slow down investment. There is a continent-wide trend towards improving capital and solvency rules, he says. “African regulators are making the journey.”
Large-risk and industrial insurance in Africa are problems, as very little experience has been accumulated on quantifying losses in those fields, he says. Some African insurers also fail to reinsure their risks, he says. “It keeps regulators awake at night.”
Nigerian penetration has been held back by a lack of insurance agents. There are fewer agents in the whole of Nigeria than at the largest Kenyan insurer, Vrolijk says. Likewise, bancassurance in Nigeria has so far been “ineffective” and remains a tiny market. “There have to be people selling insurance.” Still, the Nigerian insurance market is “professionalising very quickly” after years of being “extremely fragmented.”
Compulsory insurance offers one way forward, he says. The first job is to get governments comfortable with why an insurance industry is needed in their country. The role of insurers in developing a pool of collective savings means that they can be the biggest buyers of bonds issued by African governments, he says. “When governments issue bonds, we jump on them.”
Third-party insurance for cars and accidents at work should be compulsory too, he says. Whereas third-party liability in Morocco is unlimited, such cover for Nigerian road accidents results in meaninglessly small payouts, he says.
Need for a strong judiciary
Kenya’s much higher levels of insurance penetration, by contrast, have been achieved because of “relatively liberal” regulatory rules that have allowed insurance companies to start innovating, says Vrolijk.
The main obstacle to compulsory insurance, is that it takes time to develop and is complicated to enforce. A crucial ingredient, he says, is an “effective, fast and predictable” judiciary system, essential to adjudicating third-party claims.
The strength and independence of a judiciary and the extent of insurance penetration have a “very strong” correlation, he adds.
African free trade, Vrolijk says, is “not yet really happening on the ground.” It remains impossible for Allianz to draw on shared supplier services – such as in the back office – across jurisdictions because “the taxman won’t accept it.”
This hurts smaller African countries in particular, as it means it is not viable to run operations there. Allianz has pulled out of some smaller markets such as Mali, Central African Republic (CAR), Togo and Burkina Faso.
These, he says, are too small to justify meeting regulatory requirements on capital. Even 100% market dominance in CAR, he says, would not justify the funding injection demanded. “Capital requirements need to be scaled to the size of the market,” he says. “One size fits all doesn’t make sense.”