REVIEW OF KEY CONTEMPORARY DEVELOPMENT POLICIES OF THE INSURANCE SECTOR IN AFRICA

O.E.S.A.I. Annual ConferenceMauritius, 24 August 2015

Israel Muchena, Assistant Director, Underwriting & Marketing African Reinsurance Corporation, Mauritius Regional Office

INDEX

1. Principal objectives of this presentation2. Our role in economic development3. Key development theories & policies from the past4. Current stages of development of African economies5. Key development policy challenges6. Principal insurance development policies7. Summary of key insights8. References

PRINCIPAL OBJECTIVES OF THIS PRESENTATION• Contribute to debate on the

meaning and role of development of insurance

• Examine the link between political economy & industry-specific policies

• Illustrate what we could be doing in alignment with our proposed mission:

“Extending of frontiers of insurability”

• The key question is – are we ready to go through the change which is required?

THE DIFFICULTY OF CHANGETHE DIFFICULTY OF CHANGE

AnticipatoryChange

Reactive Change

Crisis Change

Leading Strategic Change: Black & Gregersen 2002

Most difficult to get going

Difficult to get going

Easiest to get going

THE COSTS OF CHANGETHE COSTS OF CHANGE

AnticipatoryChange

Reactive Change

Crisis Change

Leading Strategic Change: Black & Gregersen 2002

LeastCosts

ModerateCosts

MostCosts

OUR ROLE IN ECONOMIC DEVELOPMENT• Insurance supports efficient allocation

of economic resources• Mobilization of savings• Risk-taking is a “prime catalyst” for

development. • Peter Bernstein correlates level of

development directly with capacity to deal with risk.

• Insurance, in its basic form, is intended to provide financial protection for basic needs of human beings

OUR ROLE IN ECONOMIC DEVELOPMENT

Key recent issues in our region:• Angola: Tax on reinsurance transfers• Indian Ocean Islands: Natural & climatic disasters programme

proposal• Mauritius: New policy paper on Political Risks from the FSC• Mozambique: New law providing exemption of oil and gas

operators from placing insurance in the local market!• Zimbabwe: Changes of Tax Policy – Introduction of VAT on

short term insuranceWhat opportunities do we see for proactive initiative in alignment with our goal of “Extending of frontiers of insurability”?

KEY CONTEMPORARY DEVELOPMENT THEORIES & POLICIES

TIME-PERIOD KEY DEVELOPMENT THEORIES

PRINCIPAL POLICIES KEY REFERENCES

1950s – 1960sPost-Second World War

Classic Theories of Growth & Change

Industrialization Import substitution

“UN Development Decades”

1970s – 1980sEpoch of the “African Development Crisis”

The Revolution of “Dependence Theories”

Protectionism Statist development projects

in both Socialist & Capitalist political economies

UN

1990s – 2000sPost-Cold War

Resurgence of “Market Fundamentalism” following crisis of Marxist Theories

SAPs or ESAPs Austerity measures Market liberalisation Export promotion

“Washington Consensus” - IMF/ World Bank

2008/09 – to date Global crisis of development theories following global financial meltdown

Poverty Reduction Strategies “Market-based” development

initiatives

IMF/ World Bank UNDP DFID/SDC

PHASE 1 DEVELOPMENT IN THE POST-SECOND WORLD WAR

CONTEXT

• Emergence of insurance in Africa:

• Insurance agents expanded to Africa with increasing global trade

• Dependence on legal framework of the “metropolitan” capital

• Key developments:• 1930s – The Great Depression• 1942 - Post-war aid of $13 billion to

Europe under the Marshall Plan • 1944 - Bretton Woods Conference on

restructuring of global finance

PHASE 2EARLY POST-COLONIAL DEVELOPMENT

• Key historical developments in Africa• ‘Winds of change ‘ speech in 1960• Formation of the OAU• Period of euphoria following attainment of independence in some countries

• Key development theories - Classic Theories of Growth & Change (UN)• Stages-of-Growth from Walt W. Rostow • Linear-Stages of Growth from Harrold-Domar• Structural-Change Theories - Lewis’ Model & Hollis Chenery’s Analysis

• Key economic development policies• Development assistance through UNCTAD & other agencies• Statist interventions, Industrialization & Import substitution• Aid/ debt used to suport capital formation

PHASE 2EARLY POST-COLONIAL DEVELOPMENT (cont.)

• Principal insurance policies• Regulatory authorities – formation of supervisory departments in new national

governments• Regulatory framework – compliance-based model, which has remained substantially

unchanged in most African countries. • Direct state interventions - Statutory cessions, state-owned insurers/ reinsurers• Social insurance handled in different ways

• Formation of national risk pools (e.g. SASRIA, COID, NASA)• Creation of national insurance companies (e.g. Angola, Mozambique, Zambia)• Transfer to private commercial insurance markets

PHASE 3THE REVOLUTION OF DEPENDENCE THEORIES

• Key developments• Loss of hope following “false start”

of development, wars & coups, • Arab-Israeli war of 1973, leading to

more than 400% increase in oil prices

• Major drought in the Sahel (1973) • Critical debt crisis for a number of

the newly independent economies • Key development theoretical

frameworks - the ‘Revolution’ of Dependence/Radical Theories

PHASE 3THE REVOLUTION OF DEPENDENCE THEORIES

(Conti.) • Key economic development policies

• State interventionism• Centralization• Protectionism

• Principal insurance development policies• Formation of national reinsurance companies to prevent flight of capital• Creation regional reinsurance capacities – Africa Re & PTA Re• Market tariffs • Obligatory insurances

PHASE 4 RESSURGENCE OF MARKET FUNDAMENTALISM

• Key antecedants• Collapse of the Eastern Bloc in 1990• Post Cold War World Order• Shift of influence in global economics to

the World Bank/ IMF – Washington Consensus

• Theoretical framework - Neo-Classical Economic Theories

• Key economic development policies - Structural Adjustment Programmes (SAPs):

• Fiscal probity• Liberalisation & privatisation • Trade and not Aid.• Assistance with “conditionalities”

PHASE 4 RESSURGENCE OF MARKET FUNDAMENTALISM

(Conti.)

• Principal insurance policies• Removal of national compulsory cessions (Kenya,

Nigeria & Zimbabwe)• De-monopolization & insurance market liberalisation

(Angola, Ethiopia, Mozambique & Swaziland)• Competition regulatory framework

PHASE 5POST-GLOBAL FINANCIAL CRISIS

• Global Financial Crisis of 2007-08, the worst crisis since the Great Depression of the 1930s

• Theoretical framework – The failure of certain mechanisms in the crisis has also caused a crisis situation in the prevailing macro-economic theoretical framework.

• Key economic development policies• Bailouts/ hair-cuts in the Developed World• Relief packages to soften blow of SAPs in the Developing World - Poverty Reduction

Strategy Papers (PRSP)• Shift of emphasis from GDP Growth to Human Development Indices (HDI)• Market-based economic development initiatives

PHASE 5POST-GLOBAL FINANCIAL CRISIS (Conti.)

• Principal insurance development policies• Consumer Protection, Know Your Customer (KYC) & Treating Customers Fairly (TCF)• Micro-insurance & Takaful• Regulatory framework – global markets shifting to “risk-based solvency models”

following major failures• Regulatory authorities shifting from Government Departments to more autonomous

structures

CURRENT STAGES OF DEVELOPMENT IN AFRICAFramework proposed by the McKinsey Global Institute:

• Pre-transition• Transition• Oil-exporters• Diversified

KEY DEVELOPMENT POLICY CHALLENGESKey insurance development policy challenges:• Social insurance • Market reports• Regulatory framework• Disaster risk reduction• Development of skills • Local content & protectionism • Consumer Protection

What you see…

is not what you get…

MARKET REPORTS

• Market reports remain one of the key weaknesses of the insurance sector in most markets.

• Few markets in our region produce up-to-date, informative and reliable market reports

• No clear methodology & benchmarks• An IMF paper on financial soundness of insurance markets proposes a

model for insurance developed from CAMELS, a model for the banking sector

MARKET REPORTS (Conti)

The model proposed for insurance is known by the acronym CARAMELS:• Capital adequacy• Asset quality• Reinsurance & Actuarial issues• Management soundness• Earnings and profitability• Liquidity• Sensitivity to market risks

MARKET REPORTS (Conti)

Why is it important for us to improve accuracy, quality & reliability of our market reports?• To demonstrate financial soundness of the market• To elevate standards of professionalism in the sector• To secure support in our pursuit of our mission: “Extending of

frontiers of insurability”

SOCIAL INSURANCE POLICY FRAMEWORKWhat is Social Insurance?‘A device for the pooling of risks by their transfer to an organisation usually governmental, that is required by law to provide pecuniary or service benefits to or on behalf of covered persons upon the occurrence of certain predesignated losses´

Key characteristics:• Coverage is compulsory by law• Claims benefits may be defined by law • The method for determining the benefits is prescribed by law• May be contributory or non-contributory• Administered or at least supervised by the government

COMMERCIAL VS. SOCIAL INSURANCE

SOCIAL INSURANCE POLICY FRAMEWORK (Conti.)Examples of types of social insurance:• Depositors Insurance Fund (DIF)• Road Traffic Act (RTA) Insurance• Social Security• Workman’s Compensation Act (WCA) Insurance• Unemployment Insurance

SOCIAL INSURANCE POLICY FRAMEWORK (Conti.)Key challenges:• Some schemes with unlimited liability cover, are covered by limited

liability insurance companies!• Exposures such as occupational illnesses excluded in reinsurance• Long tail exposure & retroactive changes of liability through legislation• Administration of long term “pension” type of claims on short term

license• Handling of pricing & underwriting of this business in relation to levels

of exposure and very long tail

EXAMPLE OF A W.C.A. CLAIM FROM MOZAMBIQUE

DESCRIPTION REF COVERED WORKER SPOUSE CHILDREN CHILD 1 CHILD 2 CHILD 3 TOTAL AWARD

Monthly Salary A $5,000

Yearly Salary B B x 12 $60,000

Prescribed % Allocation C 60% 50% 110%

Base Year Allocation D B x C $36,000 $30,000

Number of Dependents E 1 3

Ages of Dependents F 39 13 7 4 Reserve Factor based on Age/ Gender G 19.212 2.93 8.04 10.195

Aggregate WCA Award H (D/E) x G $691,632 $29,300 $80,400 $101,950 $903,282

SOCIAL INSURANCE POLICY FRAMEWORK (Conti.)• How do markets collectively trying to find solutions to these issues

deal with emerging concerns of the concept of competition regulatory framework?

• How do you reconcile exposures from social insurance to emerging risk-based regulatory framework?

* * *

* War & political risks (100% exposure)

* 95% of adult population not covered

* Very low coverage: only 5% of adult population have

* Public health

* Complimentary pensions

* Workmen's Compensation

* * Social security for informal labour, Unemployed & others

* Deposit Guarantee *

* +/-90% vehicles on public roads uninsured

* Only +/-10% of vehicles insured

* Motor Liability & other obligatory insurance types

Commercial Insurance Market

Obligatory Insurance in the Commercial Insurance Market

Uninsured by the Commercial Market

Key Unprotected Basic Fundamental Risks

Contributory social security (+/-3% of total employed population)

Public infrastructure Natural disasters (public property & uninsured people)

Very low penetration: 1.5% of GDP

No depositors insurance for 90% of population which is unbanked

Social Protection covered by Public

Funds

NATIONAL/REGIONAL DISASTER RISK REDUCTION INITIATIVESWhat are some of the key examples?• The South East Indian Ocean

Islands Programme (UNISDR)• Natural Disasters Insurance Pool • Early warning programmes Key issues for these initiatives:

• How do you extend cover beyond the low penetration levels of traditional insurance markets?

• How do you address the problem of “market failure”?

NATIONAL/REGIONAL DISASTER RISK REDUCTION INITIATIVES

• Disaster risk reduction is a key element for sustainable development, UNISDR

• Is this not another opportunity aligned to our mission: “Extending of frontiers of insurability”? :

• Support development of risk-related policies

• Explore new products arising from such development initiatives

CONSUMER PROTECTION

• What are some of the key issues?• Global trend of elevated concern about consumer

protection

• Why is this important?• For restoration of consumer confidence• To offer a more accessible, affordable, rapid &

efficient option in the place of the cumbersome legal system

• Do we value protection of consumers in the same way as we do that of our sector?

As part of “Extending of frontiers of insurability”, we can initiate self-regulation & not wait to be obliged by law.

LOCAL CONTENT POLICY

• How is it supposed to work?• Leveraging on a key sector to promote development• Key areas of focus - mega-projects in mining, energy, oil and gas

• What are some of the key challenges/opportunities?• This policy is rarely structured in alignment with macro-economic policy • Interventions of insurance sector on the tail-end of the process • Target operators can structure projects beyond reach of local content policy• Local insurance operators are easily played off one against the other

INSURANCE REGULATORY FRAMEWORK• Traditional model - Compliance-based Regulatory Framework

• Insurers required to do business in accordance with “prudential rules” • All companies are required to satisfy the same minimum rules• Regulators wait for specified reports tp minotor compliance

• Risk-based Regulatory Framework• Regulators focus on “principles” of doing business in each company as

opposed to generic rules• Supervisors required to monitor how each operator is handling assumed risks• Minimum capital is based on risk portfolio of the insurer• Regulators also looking at risk holistically including Strategic Risk, Market Risk

& Liquidity Risk

INSURANCE REGULATORY FRAMEWORK (Conti.)• Progress in Africa on this emerging regulatory framework

• South Africa has taken lead position in following this framework. • It is work-in-progress in a few other countries including Botswana, Namibia

and Mauritius• There is far much more progress in the African banking sector compared to

insurance• Key challenges that most African markets have to overcome:

• Lack of actuarial skills at all levels to support this approach• The required regulatory changes are still work-in-progress in a number of markets• Some unresolved underlying issues will become a major headache – for instance, how

much capital do you provide for unlimited liability in social insurance?

TRAINING & DEVELOPMENT OF SKILLS1. What is the current state of affairs?

• Limited number of local Insurance Institutes • Outdated manuals• Very limited development of other critical areas:

actuaries, loss assessors & risk managers

2. What initiatives should be considered?• Development of course material with local

content• Modular courses leading to development of

“actuarial tecchnicians”• Development of courses aimed at other skills

besides underwriting

SUMMARY OF KEY INSIGHTS & PROPOSALS• Be on the lookout for opportunities for

anticipatory change in order for us to work towards our mission: “Extending of frontiers of insurability”

• Global macro-economic policy is a key determinant of policies that can be effectively pursued at insurance sector level.:

• We should engaging proactively in macroeconomic development policy dialogue

• Identify specialists & researchers to contribute in public discourse

SUMMARY OF KEY INSIGHTS & PROPOSALS• There is a need for a

comprehensive review of the social insurance policy framework in most African markets.

• Workshops focused on areas of extreme exposure to exchange insights and to start developing appropriate standards

• Support from institutions such as the ILO, IAIS and IFC to assist in elaboration of a policy discussion paper

SUMMARY OF THE KEY INSIGHTS & PROPOSALS• The Depositor Guarantee Fund could

be extended to cover savings type insurance

• Market reports essential elements for demonstrating financial soundness

• Benefits of reports could be enhanced by adoption of appropriate models.

• Training and development of skills – there is room for major improvement & to support emerging mission: “Extending of frontiers of insurability”

A new future requires new behaviours.

 

If we always do what we always did, we’ll always get what we always got.

 

To achieve something different we need to do something different.

Unknown

REFERENCES

• Bernstein, P. L. 1996. Against the gods: the remarkable story of risk, New York: John Wiley.

• Churchill, C. (2008). Protecting the poor – a microinsurance compendium

• Das, U.S., Davies, N., and Podpiera, R. (2003). Insurance and Issues in Financial Soundness: IMF Working Paper, WP/03/138, IMF: Washington.

• Foley, D.K. (2006). Adam’s Fallacy – a Guide to Economic Theology. Massachusetts: Harvard University Press.

REFERENCES

• IAIS (2013). Issues Paper on Policyholder Protection Schemes • McKinsey & Company (2009). Global trends in financial inclusion• Moyo D. (2009). Dead Aid – Why Aid is not Working and How

There is another Way for Africa. London: Penguin Books• Muchena, I. (2015). Development of Insurance in Mozambique.

Tate Publishing

We must be the change we wish to see in the world

Ghandi

We must be the change we wish to see in the world

Ghandi

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