OVER the years, the insurance industry has experienced a myriad of challenges impeding the growth and overall contribution to Zimbabwe’s growth domestic product (GDP).
At the centre of the challenges has been the loss of revenue to other countries as local insurers and reinsurers declare incapacitation to underwrite some risks.
On average, Zimbabwe reinsurers place 31% of their gross written premiums on the external market, quite a high figure compared to international benchmarks, which peg this ratio at around 25%.
While one would have thought this is a Zimbabwean problem needing home-grown solutions, the just ended Insurance and Pensions Regulators Retreat for Africa in Harare revealed that this was in fact an African problem.
Africa has also been losing billions of dollars to the international market through policy cover externalisation.
In its June 2023 newsletter, the Nigerian reinsurance firm, African Reinsurance Corporation risk management and compliance director Yvonne Palm said risk modelling was essential for a firm’s enterprise risk management strategy.
“Risk modelling involves the use of probability and statistics to represent and predict real-life systems. It involves gathering data, building models, and applying expert judgement in order to predict the outcome of certain events,” she said.
“If used appropriately, risk modelling processes can be a very effective part of a firm’s enterprise risk management strategy and can help an entity determine an optimum allocation of resources to meet its risk appetite and risk tolerances as they relate to its risk profile.”
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Insurance experts revealed that Africa was, in fact, paying the international bill with large international claims averaging a US$5 billion loss in the past two years.
Compliance has become difficult, with only 6,2% of African risk reinsured in Africa, according to Swiss Re.
Higher insurance and reinsurance premiums together with tougher terms and conditions has also seen Africa’s contribution to climate risk being the least standing at 3,8%.
To help solve this, African regulators have been encouraged to ensure collaboration of all stakeholders including governments, to achieve success.
But the key solution to policy cover externalisation lies in combining the reinsurers’ balance sheet for the continent.
Once stakeholders are involved in designing the solutions, they are more likely to own and implement, then fine-tune the balance sheet framework when they encounter challenges.
Waica Re group chief operations officer Abiba Zakariah said practitioners should be singing: “How do we effectively grow our industry?”
The song also needs to be accompanied by a chorus, echoing the need for combined reinsurers balance sheets.
Zakariah said reinsurers could create pools to deal with inadequate capacity and overexposure.
She urged the creation of underwriting pools for main insurance classes of businesses in property and marine spreading across the continent, where reinsurers will have the option to pledge a prescribed percentage of their capital into the pools.
“The pool will ensure that good underwriting terms and conditions are followed while building the technical expertise of that particular class of business for the market. The pools will be treated as local companies,” Zakariah said.
“Risk cannot leave the continent without the participation of the relevant pool. The pools would be managed by professional underwriter teams. The board would be made up of shareholders based on agreed modalities. Underwriting profit would be incorporated into the agreement to serve as an incentive.”
Zakariah believes ensuring effective collaboration and communication among operators, regulators and other stakeholders at all stages leads to a better appreciation of the risk to the industry and a collaborated effort to find the right solutions.
By combining balance sheets, the retreat noted that the alignment of reporting standards such as international financial reporting standards provided a common standard.
Having a common standard, guests at the retreat alluded to, would limit the potential for accounting errors and financial misrepresentation by some reinsurers.
Meanwhile, block chain, big data, the young, tech-savvy as well as adaptable workforce will enhance data quality for risk assessment and underwriting efficiency.
The African Continental Free Trade Area (AfCFTA) was also seen offering advantages by easing access to regional markets and strengthening production chains across the continent.
“The African Continental Free Trade Area agreement has brought together 54 African countries and moulded a single market of 1,4 billion people. AfCFTA is not simply a free trade agreement; it is a vehicle for Africa’s economic transformation. Experts estimate when AfCFTA is optimised, Africa GDP will grow at an estimated rate of 6% to about US$66,4 trillion in the next 50 years,” Finance and Investment Promotion minister Mthuli Ncube said.
“However, I am a not sure if all key stakeholders in the financial services sector are aligned in terms of the implementation road map for AfCFTA. Thus, I urge this forum to set aside time to deliberate on operational modalities for insurance in as far as AfCFTA is concerned.”
He said Africa’s biggest opportunity lies in the potential that already exists within the continent.
“My key message is that insurance regulators and players should be part of national dialogue to inform country positions when offers are being made on trade and regional integration,” Ncube said.
Recognising the importance of insurance to economic growth, the United Nations Conference on Trade and Development (UNCTAD) in 1964 recommended the establishment of national insurance and reinsurance companies.
At the time, UNCTAD noted that this would stem capital flight, conserve foreign exchange, develop insurance and contribute to economic development through African collaboration and unity.
Pan African reinsurer, Grand Re group managing director Tatenda Katome said collaborative effort between regulators and regional countries’ was the amicable way to solve revenue leakages.
He noted that the combining of balance sheets would place Africa on a competitive ground.
“There is so much leakage of premiums that could have been retained by regional reinsurers but it's just finding its way into the European and American markets purely because of the lax in regulation,” he said.
“The view is if regulation can be tightened, and those premiums can be placed before regional reinsurers before they find their way to the external markets. And, like the conference highlighted, combining the regional balance sheets is also key.”
The Organisation of African Insurance Supervisors Authorities president Sunday Thomas said extensive collaboration was key.
“The first port of call is to make sure our capacity is able to fill market gaps. We should be able to collaborate extensively and invest in high yield instruments, not just within individual countries but across countries and be able to relate with excess funds that we have in our portfolios,” he said.
“We must begin to see how we can help establish subsidiaries that put less pressure on the need to undercut risks. If you are having sufficient funds and you are able to make good returns to your shareholders, there will be less pressure on cutting of risk.”
The experts agreed that collaborative efforts by African reinsurers by combining their balance sheets may lead to increased market share for African insurers and reinsurers.