How Africa can grow its insurance industry to facilitate trade and investment on the continent

The Intra-African Trade Fair was held in Durban from November 15 to 21 and was projected to attract 5,000 conference participants and 10,000 visitors and buyers. The 2021 fair focused on the African Continental Free Trade Area (AfCFTA) and recognised the opportunities for growth in trade and investment on the continent.

An event of this magnitude, occurring despite the nearly two years of global economic difficulty wrought by the Covid-19 pandemic, speaks volumes about just how significant the untapped potential for growth based on investment and trade in Africa really is. One vital service underpins all of this potential, and for the most part it is not currently being provided by African-based companies.

No trade, transport, development or investment is possible in Africa (or indeed anywhere) without insurance — it is the essential safety net that is critical to any investment or trade decision as well as raising the requisite finance. Banks and financiers require it as a guarantee of performance when lending, especially in the large capital infrastructure projects that will be vital for realising the aims of AfCFTA.

It is also vital at the most micro levels. Whether you’re building a super highway connecting multiple countries or stocking your spaza shop, no formal sector funding or loans are possible without a form of insurance.

However, as it stands the African insurance industry is underdeveloped. This means there is huge scope for growth. Essentially the service that enables all potential trade and investment growth on the continent is itself a huge untapped market. This is true for insurance firms both in SA and across the continent. This growth potential was a subject of discussion at the Intra-African Trade Fair — including how to address the not insignificant challenges African providers must first tackle to tap into the market.

Currently, the lion’s share of the market is going to providers offshore — Europe, the US and China. In infrastructure projects in particular, businesses from countries such as China supply the equipment, skills and resources for projects but couple that with an insistence on using their home-based insurers. In the mining industry it is a common contract term with African governments that mines and their operations must be insured in the mine company’s (most often foreign-owned) country of origin. For these projects there is currently little room for Africa’s local insurance market to grow.

SA’s insurance industry is the most well-developed and well-resourced in Africa, but even the largest insurers don’t necessarily have big enough balance sheets to carry the risk on potential mega projects needed over the medium- to long-run to realise AfCFTA. In a hypothetical R100bn road project, local insurance providers would be lucky to keep just 5% of the insurance premium in SA.

A lack of balance sheet heft is by no means the only obstacle facing African firms looking to expand their footprint on the continent. The same market challenges that affect businesses in general are also faced by the insurance sector. Most pertinent of these are currency fluctuations, poor regulatory and governance environments, and unstable politics often characterised by a shaky rule of law and nepotism.

However, local African providers do have a strategic advantage in that they have a better understanding of the context. Take an example from the M&A insurance space. A lot of significant work in M&A in Africa is undertaken by generalist providers (often foreign-owned companies) with little to no previous experience in African M&A. This can lead to a “one size fits all” approach, viewing the market as a homogeneous Africa and not recognising the regional and country specific contexts. In cases like this the results can include a lack of awareness of local regulations and laws, lack of local sensitivities, incorrect asset valuations, poor quality pipeline of deals, and an underestimation of cost, duration and complexity of restructuring, among others.

For SA and African firms with direct experience in their own and other African countries, the knowledge of this context is a strategic advantage to leverage. And doing so is worth it. The continent has many high growth markets for the insurance sector and many of these have relatively low levels of penetration. Many African countries have a rising middle class and young populations. Comparatively speaking there are also low loss ratios and barriers to entry (other than those discussed) with the potential for higher returns than in home or developed nation markets, which are saturated in comparison. This is especially true in the case of the South African market.

So, how to push through the challenges to make the most of this potential? A simple tweak to the agreements for large infrastructure and mining projects could make all the difference: the enforcement of a right of first refusal for the local insurance market in the country (or countries) of the relevant project. The local market should be given an opportunity to write the risk, or a portion of it, provided it has the requisite capacity, before the premium is whisked directly offshore. The introduction of such a right would give local insurers a chance to expand their footprint and balance sheets at pace that is sustainable.

If we don’t at least start on this journey we will never achieve growth and progress and allow the African insurance industry to help facilitate and drive trade and investment here at home.

• Lee is head of insurance at IQbusiness.