Gauteng Business News

Send  Share  RSS  Twitter  05 Jul 2011

INSURANCE: Southern Africa Needs a Regional Insurance Market


Recent Gauteng Business News

Recent moves by President Zuma to encourage the creation of a free trade zone covering Southern and East Africa is a positive development and could herald the establishment of a regional insurance market as is currently the case in Francophone Africa.

As the planet’s population tops seven billion Africa has become an increasingly important supplier of natural commodities. Over 50 countries with differing regulatory regimes, however, present a challenge for most investors when seeking to insure their investments across a range of countries and legislative regimes.

“Zuma’s call for a free trade zone in the region will, hopefully, lead to the adoption of a regional approach to the way in which insurance is regulated” says Michael Duncan, Executive Leader Alexander Forbes’ Global Practice. Certainly, a much more pragmatic and uniform approach needs to be implemented to encourage, and not hinder, foreign investment.

In virtually every African country there are insurance regulations in place which determine where insurance covers have to be placed. Most countries are seeking to protect their local insurance industries, and the people employed therein, by preventing the unnecessary export of premiums. While Duncan believes that this principle is laudable, “the differing approaches adopted by regulators have resulted in overprotected regulatory environments, acting to the detriment of foreign investors.”

A possible solution would be to follow the example of countries in Francophone Africa, which have adopted the CIMA Code. In terms of the Code, multinationals are required to insure 25% of their risks locally, but are then at liberty to place the balance under their global programmes. This represents a reasonable compromise for regulators and multinationals alike.

A similar approach in Southern and East Africa would be well-received by foreign investors and their advisors as “this would both support local insurance markets while also enabling multinationals to access their global programmes” says Duncan.

At the moment, with very few exceptions, African insurance regulations require insurance covers to be arranged locally, although there are many variations on this theme.

In some countries such as the DRC, there is only one Insurer, which obviously reduces choice. In others, minimum rating levels have been introduced, particularly for larger risks, or risks have to be offered to all locally registered insurers, regardless of their capital base.

A typical multinational organisation will have several global insurance programmes in place covering, for example, their material damage, business interruption, crime and third party liability exposures. These programmes often involve the use of self-insurance structures, such as captive insurance companies, and are designed to offer the organisation cost-effective premiums, high limits and broad coverage in all the countries in which the organisation operates. While this sounds straightforward in theory, “in Africa local insurance regulations unfortunately make this a very complex and often prohibitively expensive process” says Duncan.

Most multinationals want to comply with local regulations, including those relating to the placement of insurance. However, they also want to access their global insurance programmes, which is becoming increasingly difficult in the African market.

This dilemma is exacerbated by the fact that the insurance regulations keep changing, making it virtually impossible for organisations to budget and plan ahead while requiring an increasing amount of time and effort on the part of their advisors.

For multinationals with investments in several African countries, the end-result is “a frustratingly inconsistent approach to the way in which covers are arranged in each country” adds Duncan.

For example, a major South African multinational company was recently faced with a six-fold increase in insurance premiums for one of its subsidiaries in a Southern African country as a direct result of recent changes in that country’s insurance regulations. As a consequence, the organisation now insures its key risks outside of the country, representing a substantial loss of premium income to that country.

Duncan predicts that many more multinationals are likely to follow suit if they feel that the insurance regulations are unreasonable or create unnecessary expense, “unless, at least for Southern and East Africa, a regional insurance market is agreed.”

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