18 June 2013Re/insurance

Into Africa

Primary insurers in South Africa have big plans. As David Jewell, executive of retail actuarial solutions at African insurer Liberty Holdings, told Bermuda Re: “All of the big primary insurers have African expansion plans. Liberty is probably playing a bit of catch up, but it’s certainly part of our strategic plan and we’ve got a war chest set aside for making acquisitions. I’m sure South African primary insurers are not the only ones who have got their eye on Africa as a growth player.”

Indeed, Salvatore Orlando, head of high growth markets at PartnerRe, can see opportunities for insurance and reinsurance players alike. “We forecast a strong economic growth path for the continent,” he said, “and believe that South Africa will play an important role.

There is no doubt that major investments in infrastructure will result in greater need for engineering, credit and surety as well as agriculture reinsurance. However, it will be paramount for African countries to adopt a solid regulatory, risk-based capital framework in order to maintain high levels of interest in the region.”

Both the nature of the African growth pattern and the ambitions of South African primary insurance players present opportunities for Bermuda reinsurers.

According to Guy Carpenter’s report Cold SpotsHeating Up: Catastrophe Losses in New Growth Markets, South Africa was the 19th largest non-life insurance market in the world in 2011 and is projected to maintain that rank for at least the next 10 years. Figures included in the report state that total insurance premiums grew by 11 percent in developing economies compared to a growth of just over 1 percent in the industrialised world. According to the report: “Reinsurance premiums have grown significantly. While reinsurance premiums remained broadly stable in the established markets of the US, Canada and western Europe between 2007 and 2011, strong growth has been recorded in emergingmarket regions. Positive premium growth trends in developing markets are expected to be sustained over the next decade. During this time, emerging markets are expected to drive global economic growth and foreign direct investment in these regions is likely to increase.”

"A lot of business is placed through reinsurance brokers out of South Africa, but it's not the only avenue. reinsurers can, and do, visit those markets."

The southern-most African nation, South Africa, presents a natural entry point to foreign reinsurers. English speaking, among the swiftly developing BRICS economies (the others being Brazil, Russia, India and China) and currently reviewing its regulatory regime, South Africa could prove an excellent stepping stone into the rest of the continent. By helping primary insurers make that leap—help that, according to Jewell, would be more than welcome—reinsurers can lay the groundwork for their own entrance into the developing African economies.

Needless to say, barriers do exist. In South Africa’s case, these barriers are largely regulatory. Colin Travers, treaty executive at Aon Benfield South Africa, explained that South African regulations distinguish between approved and non-approved reinsurers. Regulations stipulate that in order to be considered approved, insurers and reinsurers must be either a registered South African company or a Lloyd’s underwriter; wholly-owned subsidiaries of foreign companies are considered admitted but branches of foreign companies are not.

Primary insurers who place their reinsurance with those locally registered companies receive reserving credit. Those placing business with foreign reinsurers deemed non-approved do not receive that dispensation.

But that could be changing. According to Jewell: “At the moment our financial services board is looking at how reinsurance is regulated and whether the current regime is appropriate. They may revise that and move to a model where foreign reinsurers can operate through branches.”

Breaking in

PartnerRe gained access to the South African market the good old fashioned way: through acquisition. “We’ve had the historic advantage of being able to develop our presence over time through the excellent relationships first established by SAFR and Winterthur Re more than 20 years ago, further developed by Paris Re and nurtured throughout the years. Continuing to develop a profitable portfolio on the African continent is one of the major areas of focus of our newly created high growth markets team,” said Orlando.

While regulations give local reinsurers a competitive advantage by providing dispensation to the primary insurers doing business with them, all is not lost for foreign reinsurers. South Africa is a broker-led insurance market and, according to Travers, foreign reinsurance play an important role in the South African market. He explained: “It is easier to place the business locally, but in reality we are quite happy to use foreign reinsurers as long as they’re prepared to meet requirements by lodging reserves or putting up a letter of credit.

“To be honest, utilising foreign reinsurers is necessary as local reinsurers cannot always provide the required capacity. We sometimes get as good service out of our foreign reinsuers and in some cases even quicker turnaround time than we do from the local reinsurers who are registered here.”

PartnerRe differentiates itself from local insurers in this way. Orlando said: “As a multi-line insurer operating in multiple geographies, our worldwide operations are structured to meet the demands of our clients across a broad spectrum of markets and business lines, including agriculture, engineering and mining—which are important risks for insurers in South Africa.

“In an environment where local firms increasingly require input and sign-off from head office, response time can pose a challenge. PartnerRe’s clients benefit from our decentralised decision-making structure which gives us the ability to be responsive to our clients’ needs by serving them locally without diluting our expertise.”

According to Jewell, the gaps in the market and disappointments left behind by local reinsurers can also entice primary players to place their risks offshore. He told Bermuda Re: “We’ve just come through a process with local reinsurers wherein the contracts we entered wound up looking great for them and not so great for us. A number of the reinsurers appeared to come to the party and effectively renegotiate the terms. I would want to keep the spirit of any future arrangement as that of a partnership, so if we decide there is a problem we feel we can talk together.”

While according to Travers catastrophe reinsurance-- needed for perils familiar to Bermdua players, such as earthquake, hail and flood-- is offered through local insurers, that has not been Jewell’s experience. He said: “As a result of regulations, the only area in which we currently transact with foreign reinsurers is in respect to catastrophic risk. We haven’t even had proposals on the table from the locally domiciled reinsurance providers so we go offshore. It doesn’t make a difference because we can’t get reserving credit for it anyway.”

With holes in the market that Bermuda is well positioned to fill, opportunity in the South African market abounds. But how can Bermuda reinsurers best attract primary insurers in the market? According to Jewell, the way forward is simple: provide the best quality service and appeal to expansionist aims.

Foreign reinsurers, according to Jewell, would do well to approach relationships like partnerships and be ready to provide excellent service, including product development, pricing support, facultative underwriting support and assistance on claims. But equally important is innovative thinking. Jewell confessed: “It doesn’t feel like there’s real dynamism in the South African reinsurance market. I worked for a reinsurer about 15 years ago, and if I take a quick look at what’s happening now it doesn’t feel particularly different. That’s an opportunity for foreign reinsurers—there’s potential to exploit that if they can bring radically different thinking and write risks that the locally domiciled players haven’t wanted to take.”

Branching out

By utilising innovative thinking and a collaborative mindset, Bermuda players can position themselves as ideal partners with which to take the plunge into the wider continent. In addition, they have experience and talent to offer human resource-strapped South African players looking to make such a move. “Reinsurers have got a great story to sell,” Jewell said. “Most companies looking to grow and make acquisitions are unlikely to be able to take large numbers of their best people and deploy them into those territories, given that they’ll be worrying about other issues at home. The African markets are much smaller than South Africa, so it isn’t a traditional risk management play. It’s more about skills.”

By providing primary insurers with the skills and experience they’ll need to break out of South Africa without breaking the bank, reinsurers can prove their value and form ties to the continent in the process. Jewell elaborated on the importance of a reinsurer’s ability to bring skilled employees to the table when considering a step into Africa.

“My background is actuarial. If I look at the number of actuaries actually practising in places like Kenya, Uganda, Tanzania, Nigeria, there just aren’t a lot of them. And if reinsurers are well placed to make introductions and form relationships that would also be handy.”

Those connections can be made through brokers such as Aon Benfield and Guy Carpenter, both of which have teams familiar with the markets (although Francophone countries, due to a barrage of cultural and language issues, are not usually dealt with by South African brokers), or by reinsurance players directly. “There is more than one way to skin a cat,” Travers concluded. “A lot of the business is placed through reinsurance brokers out of South Africa, but it’s not the only avenue. Overseas reinsurers can, and do, visit our markets regularly and source business through intermediaries and on a direct basis, as do the locally registered reinsurers.”

Whichever way Bermuda reinsurers plan to reach Africa, the most important part of the journey is the first step. A partnership with a South African insurer—with both parties working towards tapping the considerable potential of African markets—is an excellent place to begin.