Reinsurance in Sub-Saharan Africa in 2020
This deteriorated economic environment, coupled with increased competition among the various players, resulted in a mixed performance of the reinsurance market.
Reinsurance in Sub-Saharan Africa: a high growth potential
Despite a constraining context, the growth potential of reinsurance in Sub-Saharan Africa remains significant. The region has:
- significant natural resources,
- strongly growing economic indicators,
- strong insurance growth potential due to a young and dynamic population,
- evolving insurance legislation.
Reinsurance in Sub-Saharan Africa: premium growth
During the period 2011-2020, Sub-Saharan, national, regional and international reinsurers achieved an average annual growth in gross written premiums of 9.15%. This performance comes at a time when local currencies are experiencing significant depreciation against the dollar. The Naira (Nigeria) and the Rand (South Africa), for example, have depreciated by 63.5% and 54.8% respectively over the past decade.
This premium growth is mainly attributed to non-life insurance. With the exception of South Africa, life insurance is not very developed in many Sub-Saharan countries.
From 2011 to 2020, this growth dynamic was punctuated by periods of double-digit growth (+19% in 2013, +15% in 2017) and others marked by a sharp decline (-10% in 2015).
The contraction in premiums, observed between 2014 and 2016, was due, among other things, to the collapse of oil prices. With the economic recovery from 2016 to 2019, the curve quickly recovered. During this period, premiums grew by an average of 12.8% over four years.
The Covid-19 crisis, however, plunged the market back into stagnation with reinsurance premiums growing by 0.82% in 2020.
Evolution of insurance and reinsurance premiums in Sub-Saharan Africa: 2011-2020
In millions USD| Indicators | 2011 | 2012 | 2013 | 2014 | 2015 | 2016 | 2017 | 2018 | 2019 | 2020 | 2011-2020 evolution |
|---|---|---|---|---|---|---|---|---|---|---|---|
Insurance premiums | 62 606 | 64 476 | 62 836 | 62 378 | 56 608 | 51 668 | 57 471 | 61 381 | 58 672 | 50 755 | -18.93% |
Reinsurance premiums | 2 451 | 2 399 | 2 867 | 3 186 | 2 850 | 3 210 | 3 705 | 4 069 | 4 618 | 4 664 | 90.28% |
Reinsurance cession rate | 3.91% | 3.72% | 4.56% | 5.11% | 5.03% | 6.21% | 6.45% | 6.63% | 7.87% | 9.19% | 135% |
Reinsurance growth rate | 21.34% | -2.12% | 19.51% | 11.13% | -10.55% | 12.63% | 15.42% | 9.82% | 13.49% | 0.82% | - |
Source : Atlas Magazine
Reinsurance in Sub-Saharan Africa: a moderate loss experience
Sub-Saharan reinsurers are traditionally focused on local risks. They are therefore not very exposed to losses linked to natural catastrophes. The region's average loss ratio is, therefore, better than that exhibited by the global reinsurance market. The average loss ratio for 2020, stands at 59.5% for AM Best rated reinsurers in the subcontinent, compared to 76.2% for the top 50 global reinsurers.
In 2016, this ratio was 53.2%. In the absence of major claims, this nearly six-point deterioration in the loss ratio in four years is accounted for by:
- fierce competition,
- the erosion of premium rates,
- rising claims costs with the depreciation of local currencies particularly for reinsurers that operate in dollars and set up their balance sheets in local currency,
- economic instability and political uncertainty.
Another factor points to the management expenses that are often high. This increase in administration and business acquisition costs affects the management expense ratio and by extension the combined ratio. Management expenses amount to 38.4% in 2020 for all reinsurers in Sub-Saharan Africa, compared to 28.7% for the top 50 reinsurers worldwide.
The average combined ratio for the region stands at 97.9% in 2020. It fluctuated between 91.2% and 93.2% during the period 2014-2016 before reaching a peak of 99.2% in 2019.
Combined ratios: 2014-2020
Return on equity
Reinsurers continue to deliver solid profitability, with an average return on investment over five years, from 2016 to 2020, set at 9.5% compared to the 5.7% reported by the top 50 global reinsurers. This high ROE rate is explained by the generally decent level of risk-adjusted capitalization.
Despite the improvement in the shareholder’s equity for African domiciled reinsurers in recent years, regional capacity remains low. Cedants' needs, particularly for construction and energy risks, have increased significantly, driven by industrialization and new infrastructure.
As a result, local insurers often turn to large international reinsurers for their expertise and capacity to cover complex risks. This phenomenon contributes to reducing the level of premium retention in the reinsurance market in Sub-Saharan Africa.
Return on equity : 2015-2020
Reinsurance in Sub-Saharan Africa: a market protected by regulators
In many Sub-Saharan countries, barriers to entry into the reinsurance market remain high. Protectionist local regulations often support state-owned companies by imposing legal cessions.
Regulators force insurers to cede risks to local and regional reinsurers before they can explore international markets. These cessions can be for direct premiums on each and every policy as well as for treaty and facultative reinsurance.
In a country like Senegal, a direct insurance company makes legal cessions to the national reinsurer Sen Re (on each and every policy and reinsurance cession on treaty and facultative business), the regional reinsurer CICA Re (on each and every policy and reinsurance cession on treaty and facultative business) and the continental reinsurer Africa Re (reinsurance cession on treaty business only).
In addition to regulation, other factors reduce the presence of foreign reinsurers such as:
- the geographic scope of the market,
- the small size of direct markets,
- disparities in taxation and regulation.
Premiums and retention rates of reinsurers rated by A.M Best: 2011-2020
Despite the various constraints, some players have been able to set foot on the Sub-Saharan market. In early 2021, Africa Specialty Risks, a London-based pan-African specialty reinsurance start-up, began underwriting in Sub-Saharan Africa from its Mauritian entity.
According to AM Best's forecasts, the reinsurance market performance should improve in 2021 thanks to sustained economic growth and a general tightening of reinsurance rates.
However, if the Covid-19 pandemic persists, the economic recovery could be jeopardized, thus slowing down growth in the reinsurance market and triggering volatility in investment results.
