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African insurance penetration threatened by rising reinsurance rates

By David Whitehouse
Posted on Monday, 2 November 2020 18:30

Berkshire Hathaway Chairman Warren Buffett walks through the exhibit hall as shareholders gather to hear from the billionaire investor at Berkshire Hathaway Inc's annual shareholder meeting in Omaha
Berkshire Hathaway Chairman Warren Buffett at Berkshire Hathaway Inc's annual shareholder meeting in Omaha, Nebraska, U.S., May 4, 2019. REUTERS/Scott Morgan

Short-term progress in increasing insurance penetration in Africa will be a victim of pressure from the “Big Six” global reinsurers to increase prices, says Ryan Phillips, chief operating office at Afro-Asian Insurance Services.

For the first time in 20 years, global reinsurers are pushing up prices across the board, says Phillips in London. “The flexibility has to come from African reinsurers and insurers,” says Phillips. “Insurance companies are going to have to pass on the cost.” The likely result, he says, is that increasing insurance penetration in Africa “will take a back seat for three to four years.”

The six largest reinsurance companies by premiums written in 2019 were Munich Re, Swiss Re, Hannover Re, Scor, Warren Buffett’s Berkshire Hathaway and Lloyd’s. Afro-Asian is a Lloyd’s reinsurance broker which deals with Asian and African risks, with Phillips concentrating on Africa.

Persuading African businesses to pay higher rates will be made even harder by refusals to pay out on COVID-19 claims. In South Africa, tourism and restaurant businesses have taken Santam, the country’s leading general insurer, to court in Cape Town to challenge their refusal to pay. A ruling in that case is expected by mid-November.

READ MORE South Africa’s Santam fights claims of avoiding COVID-19 pay outs

According to S&P, the global reinsurance sector will again fail to earn its cost of capital in 2020. The momentum towards higher reinsurance prices, which was already clear in 2019, is set to continue into 2021, says S&P. Swiss Re’s head of Middle East and Africa Beat Strebel has said that the company has “no appetite” for pandemic reinsurance and that compensating businesses for interruptions is a job for government.

READ MORE Swiss Re: Insurance industry can’t foot the bill for COVID-19 damages

The trend towards higher prices started before COVID-19 and would have continued even without the pandemic, Phillips says. For years, he says, reinsurers have failed to make an underwriting profit, and have relied on investment income.

  • The reasons are not specific to Africa and include losses from US hurricanes and the Beirut ammonium nitrate explosion, he says.
  • Aviation reinsurance rates have risen for both passenger and cargo traffic and have close to doubled over the last 18 months, he adds.

Digital Channels

During the long “soft” reinsurance market, Phillips says, reinsurance rates drifted down by an average of 5% to 10% per year. He hopes that it will now be possible to implement price increases gradually to limit the impact on African buyers of insurance. A gradual approach to price changes, he says, is needed on the way up as on the way down. “There has to be a balance.”

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In a normal year before COVID-19, Phillips would spend about six months in Africa. While there are innovative insurance policies and apps to distribute them, Phillips sees no sign of them really taking off.

  • The underlying problem, he argues, is that “no one has been able to come up with an affordable product.”
  • Neither are much-vaunted digital distribution channels likely to make much of an impact in the short term. It’s a “step too far”, he argues, to expect rural farmers with access to an app to hand over data and regular cash to an unknown and invisible corporate entity.
  • Even tech-savvy consumers, he says, would rather have someone to talk to rather than signing up for a policy on line.

Bottom line

Refusing business-interruption pandemic claims looks like a short-sighted strategy when insurers will need to ask their customers to pay even more.

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