Tapping into the African insurance market

Lexology

The world's insurance industry is dominated by insurance companies of developed countries. In 2014, KPMG reported that G7 countries (Canada, France, Germany, Italy, Japan, United Kingdom and the United States of America) account for approximately 65% of the world's insurance premiums, yet cover just over 10% of the world's population. In comparison - according to CNBC Africa - the insurance market in Africa is underdeveloped with only 3.5% of the African market being insured. This status quo – with many first world countries being inundated with insurance firms and African countries being underrepresented – has led many insurance firms to identify Africa as an opportunity for growth.

Ahead of the surge, South Africa's leading insurance companies have started to make inroads into this predominantly untapped market by expanding their scope into African countries. In December 2013, Santam and Sanlam Emerging Markets entered into an emerging markets partnership, with an aim to expand both parties' reach into, among other geographical areas, Africa. In February 2014 Sanlam announced its entry into the Nigerian insurance market through its associate company, FNB Life Assurance, which acquired a controlling interest of 71.2% in Nigeria-listed short-term insurer, Oasis Insurance. Similarly, Africa's biggest insurance company, Old Mutual has set aside R5 billion for the next three to five years in order to increase its reach into Africa.

Although expanding into the African insurance market is potentially very lucrative, the decision and resources such a move requires is not without risks. Prior to entering the African market, insurance firms need to thoroughly assess the plausibility of the market, and consider the restrictions, controls and uncertainties inherent in insurance regulation in African countries. These considerations include the:

• level of know-how, local market data and knowledge needed to adequately assess the risks. There is currently an absence of or lack of information on the insurance market in Africa which may make insurance firms reluctant to tap into the continent's potentially lucrative market (Source: Final Report of the Commission Expert Group on European Insurance Contract Law and CNBC Africa);
• additional resources and capital output required for managing claims in countries across the African continent (Source: Insurance Europe);  
• level of demand for insurance in African countries. Some of the reasons for the low rate of penetration in African countries include multinationals being reluctant to enter the African market due to the high rate of poverty, lack of private sector development, and the lack of regulation and supervision. Conversely, this low penetration rate can be viewed as an incentive for insurance firms to enter a potentially profitable market (Source: Insurance Europe and KPMG);  
• level of experience and familiarity with the legal, regulatory and taxation systems in African countries as well as the potential risks faced by insurance firms that enter African countries. Based on these factors the insurer may need to adapt its insurance contract to the conditions and requirements imposed by another country in order to comply with that country's legal and regulatory requirements for insurance firms (Source: Insurance Europe);
• insurer's capacity to cover potential claims in African countries while still satisfying its solvency requirements and its financial obligations to its investors. Factors such as poor risk management and actual incurred claims exceeding expected claims can lead to the non-viability of an insurer providing insurance in foreign countries (Source: Insurance Europe and International Association of Insurance Supervisors); and
• feasibility of maintaining a continuous relationship with policyholders domiciled in another country (Source: Insurance Europe).    

Africa's insurance industry has scope for further growth and if properly assessed can offer profitable opportunities for insurance firms. The ultimate aim in entering the African insurance market is ensure profitability, sustainability and longevity of the insurance firm's business. In turn, insurance firms entering the African market can provide the impetus needed to develop Africa's insurance industry.

Commercial considerations such as the insurer's ability to insure risks in foreign jurisdictions, the repercussions of foreign law on the insurance contract and the impact of other legal and regulatory requirements will influence an insurance firm's decision to enter the African insurance market.