Commercial Risk Africa - April 2015

Commercial Risk AFRICA

African Risk & Insurance Management News

APRIL 2015

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CRA EVENTS IN AFRICA —Watch this space!— As part of its programme of seminars across the continent, Commerical Risk Africa announces it will be staging an event in Lagos, Nigeria ....... event/web

COUNTRY REPORT—Ethiopia: Ethiopia is the fastest growing non-oil-producing economy in Africa with average GDP growth of 11% over the past decade.......14–19

Kenyan authorities act fast to restore confidence after latest terror attack “The Garissa attack, as a standalone incident, is unlikely to pose a significant impact on FDI inflows going by precedents set,” said Konstantin Makarov, Managing Director of the Nairobi-based research firm StratLink-Africa Limited.

He bases his answer on the following precedent; between 2012 and 2013, the year of the Westgate Siege, FDI inflows accelerated by 98.9% to US$514.4 million, which effectively doubled the previous inflows.

Steve Mbogo news@commercialriskafrica.com

[nairobi]—The Kenyan government has imposed financial sanctions on 86 organisations with immediate effect in the wake of the Al Shabaab terror attack on Garissa University.

The move was followed on Saturday

by Kenya’s Insurance Regulatory Authority which issued a circular to all insurers and reinsurers operating in the country.

They were ordered to cancel all policies with the 86 listed firms with immediate effect.

‘FERTILE GROUND’ At the same time, the government is ordering the clear out of some refugee camps in the north of the country, fearing they maybe fertile ground for the terror group. However, locally, people are reporting that it is too late for that because the terrorists already have papers to be in the country—Kenya has a large legitimate Somali community.

There is also a fear that Al Shabaab has successfully been recruiting among

Kenyans themselves.

A few months ago, Nairobi was voted Africa’s most attractive city for Foreign Direct Investments (FDI) and ranked seventh among the continent’s top 20

cities of opportunity, according to a survey

by PricewaterhouseCoopers.

After the early April terrorist attack by the Somali-based Al Shabaab terrorist group on Garissa University where more

than150 students died, will Nairobi still hold the lead? Some analysts say yes, although the immediate effects on the economy, especially cancellations by foreign tourists, have been felt.

‘ELECTION JITTERS’ Between 2001 and 2002, the year of the Kikambala terror attack at the Kenyan coast when there was a failed attempt to shoot an Israeli airliner and a successful attack on an Israeli-owned hotel in Mombasa where 15 people died, FDI inflows grew near five-fold to $27.7 million.

“It is also important to note that both 2002 and 2013 were election years that typically send jitters amongst investors and decelerate appetite towards the economy,” said Mr Makarov.

“The Garissa incident is also likely kenya: Turn to page 2

Historic Nigerian vote sees Buhari oust Jonathan Billie McTernan news@commercialriskafrica.com

[lagos]—Nigeria’s presidential election marked an important moment in history for the west African nation—the first time an incumbent administration was voted out at the polls.

President-elect Muhammadu Buhari, under the All Progressive Congress (APC) banner, secured 15.4 million votes against 12.8 million for sitting president Goodluck Jonathan of the People’s Democratic Party (PDP).

Originally scheduled for 14 February, the elections were postponed for six weeks until 28 March, as security services said they could not ensure safety during the

elections due to insurgency in the north east of the country from terror group Boko Haram. Chairman of the Independent National Electoral Commission (INEC) Attahiru Jega therefore announced a new date for the poll.

DELAYED VOTE Despite speculation on why the elections were actually postponed—Boko Haram has been a threat for six years—they did indeed go ahead on 28 March but stretched to 29 March in some parts of the country due to malfunctioning biometric card readers at some polling units. As the results were transmitted to INEC headquarters in Abuja from the 36 states, the country sat close to its radios and television screens to hear the announcements.

Reports of violence in parts of Rivers State threatened to spoil the course of the election. INEC chairman Jega displayed calm in the face of an outburst from former Minister of the Niger Delta, Peter Godsday Orubebe.

Mr Jega articulately dismissed Mr Orubebe, gaining popularity from Nigerians across political lines.

As the counting began, APC’s gains were clear.

Ahead of the official announcement, President Goodluck Jonathan called president-elect Buhari to concede loss and congratulate him on his win.

President Jonathan headed the country for one four-year term, after winning the 2011 election, having taken over as president in 2010 after late President Umaru

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2

NEWS

Risk managers at IRMSA to sit first formal professional exams on African continent Liz Booth news@commercialriskafrica.com

[johannesburg]—Risk managers in South Africa have been invited to sit the first formal risk management qualifications in June this year.

The Institute of Risk Management South Africa (IRMSA) has launched the exams as a first step towards a formal certification system for risk managers across the region. Gillian le Cordeur, CEO of IRMSA, said the June sitting followed a pilot exam last November.

“We were delighted with the response to that pilot exam,” she said.

“The pass rate was 62%. We had more than 250 people applying to sit the test. We chose 40 candidates, of which 34 people actually sat the exam.”

Ms Le Cordeur said: “We were determined that the pilot should be a fit test and that it should not be easy.

It is about creating a standard and we feel the pilot succeeded in that.”

There were no nasty surprises in the test results, she added, but it proved to candidates that they needed a combination of a body of knowledge and study to pass the test. Ms Le

Cordeur said the results, however, had reflected the need to study and apply practical knowledge.

“Thirty-eight per cent of people who took the test did not pass and it was a mix of those who have been in the industry for [various] amounts of time. No one can assume this will be an easy pass, they will all have to apply themselves.”

The board exam, to be taken on 30 June, will be the first Certified Risk Management Practitioner paper, with entries closing last Friday (10 APR).

“Entrants will have to study but also will need to know how to apply their knowledge—something they can only have gained through practical experience,” Ms Le Cordeur said. “If they can apply their knowledge, then they should be able to pass.”

As with the pilot exam, there will be four different qualifying criteria, to allow for as many people as possible to be eligible. As there have not been any previous formal qualifications in Africa, there has been no set pattern for practitioners to follow. Some have chosen overseas qualifications, some have graduated from local universities, while others have worked their way through organisations without any

NIGERIA: Delayed election surprise CONTINUED FROM PAGE ONE Musa Yar’Adua passed away in office.

Under Jonathan’s watch, corruption was rampant—most notably the failure of the Nigerian National Petroleum Company to account for $20bn in oil revenues. The drop in the oil price from June last year had a big impact on the country, where the commodity accounts for 90% of exports.

The security crisis in the north east caused by attacks from Boko Haram has left more than one million internally displaced people and killed thousands during the past six years. Many

analysts think the president-elect’s background as a former major general in the military will help quell the threat from Boko Haram.

Murtala Touray, of IHS Country Risk, said: “Buhari’s presidency raises the prospect of reform in the public sector to reduce corruption and an increase in government revenue generation capacity. However, Buhari will face significant challenges in implementing change given the vested interests, culture of corrupt practice and aversion to compliance.

“Buhari’s victory is almost certain to result in contract renegotiation and cancellation in some cases, following corruption probes in

KENYA: Al Shabab threat grows CONTINUED FROM PAGE ONE to be eclipsed by the ranking of Kenya among the projected top 10 fastest growing economies in 2015 according to Bloomberg and the hosting of the Global Enterprise Summit which will be attended by the USA President Barrack Obama in July 2015. Having said that, the incident in Garissa highlights the security challenges facing Kenya which will have to be addressed by the government to ensure growth continues to accelerate,” he said.

Kenyan global scholar Mwangi Kimenyi of Brookings Institution and advisory board member of the School of Economics, University of Nairobi said there will be an immediate effect on tourism cancellation and a long-term risk of negative perception of the country.

“Kenya has borne the brunt of the group’s terror activities, which have had serious adverse consequences such as loss of life, negative perception about the country that has impacted tourism, and the general investment climate,” said Professor Kaimenyi.

“I still believe that the international community continues to grossly underestimate Al Shabab’s capacity to export terror and thus maintains only a limited focus on the group than what is necessary to weaken it. In part, I think this is because the international community considers the group’s activities a local east African problem and unlikely to pose a serious threat to the interests of other nations including those of the west,” he said.

Media reports suggest that tourist cancellations were affected in Mombasa and Masai Mara, Kenya’s tourism gems.

Already, more than 30 hotels have been closed since last year because of terrorist attacks in the coastal region and the recent attacks will make the situation worse, hoteliers said.

“These attacks in Garissa simply sealed our fate. The situation will become worse than we anticipated as we go into the tourism high season of July and August,” said Mohammed Hersi, the chairman of the Kenya Coast Tourism Association.

“It seems we might have to go further

formal qualifications beyond school.

IRMSA has always intended that this first level of qualification would be followed by a second, tougher qualification. The second exam will be aimed at postgraduate level.

As with the Certified Risk Management Practitioner, IRMSA will run a pilot exam to be held in November. Entries will open in May or June. Ms Le Cordeur said: “I don’t think the pool of candidates will be as big, purely because it will be more demanding and will require practitioners to have got to a higher academic level.”

The exams are part of a growing IRMSA programme for members. Ms Le Cordeur is delighted at the way the training programme is developing.

“We have a really packed programme for this year and will have training events for the first time in Durban, as well as events in Cape Town.

“The next step is to grow in southern Africa rather than just South Africa.” Ms Le Cordeur said IRMSA has appointed an education development manager, who started with the organisation at the beginning of the month (APR) and will be developing a strategy for the Association.

Gillian le Cordeur

sectors including power, bulk fuel distribution, defence and infrastructural projects. The investigation raises the risk of suspension of arrears payments to fuel distributors.

“Jonathan’s concession mitigates the severe risk of post-election violence that would have resulted in the loss of thousands of lives and extensive property damage, as was the case in April 2011 with more than 800 deaths when Buhari refused to concede defeat. However, a Buhari victory could still unleash significant unrest in the oil-producing Niger Delta, with the potential to disrupt oil and gas operations and exports in the event the amnesty programme is not renewed and the new government cancels security contracts with former militant leaders.”

Buhari and the APC’s reach grew in this election, not least because APC governors

secured 19 of the 28 states that held elections.

The PDP won eight, while at the time of writing Taraba’s results were not finalised.

In Lagos—which contributes 25% to the country’s GDP—the APC candidate, Lagos State civil service veteran Akinwunmi Ambode, secured the governorship.

A former military leader of the country in the 1980s, president-elect Buhari steps into office on 29 May. Nigerians will be watching keenly to see if he lives up to his promises. If he does not, they know they have the power to vote him out in 2019.

Meanwhile, Fitch Ratings has revised Nigeria’s long-term foreign and local currency issuer default ratings at BB- and BB respectively. Among its rating drivers, Fitch cited potential transition issues following the election.

Other factors included significant erosion of fiscal and external buffers and lower foreign exchange reserves. Fitch did not expect savings to be rebuilt significantly by the end of 2016.

It concluded: “Economic performance is likely to weaken, although non-oil growth will remain robust. Real non-oil growth is forecast to slow to 5.5% in 2015, from 7.4% in 2014 and an average of 5.6% during the past five years. Non-oil growth will be hit by the devaluation of the naira and election-related uncertainty, but will be less impacted by fiscal consolidation due to the small size of the government.

“Reforms in the power and agricultural sectors should continue to support underlying momentum. Exchange rate devaluation is forecast to push inflation into low double digits for the first time since 2012.”

and lay off staff, because we may not sustain even this reduced wage bill.”

Investors will however have been assured by the improving response to terror attacks by the Kenyan authorities and the rising security awareness among Kenyans shocked by the growing scale of Al Shabaab’s attack fatalities. However, Calisto Ogaye, MD of Continental Re’s

east African operations, said people in Kenya are nervous of where an attack may happen next. Government initiatives to try and boost domestic tourism to Mombasa to replace foreign visitors has not really worked, for example, he said.

“Kenyans are choosing to go inland rather than to the coast and an initiative to give businesses tax incentives if they pay

for their staff to take coastal holidays has not taken off.”

Beyond that, as insurers, there is an extra alert for the moral hazard. “We have seen it before when tourism numbers are low, there is an added risk of fires at the hotels. It is a particular problem for the coastal properties because so many of them are thatched,” he explained.

CLOSING SOON: Last chance to enter the CRA survey Commercial Risk Africa is polling risk managers across Africa to gauge their views on political risk, financial risks and to see how risk management has moved up the boardroom agenda.

Commercial Risk Africa will be publishing the results as part of the annual Africa Risk Frontiers survey at the end of May. The poll will take a very short time to complete.

Liz Booth, Editor of

Commercial Risk Africa, said: “We are hoping as many of our risk manager readers as possible will complete the short survey. We would like to build a unique picture of how risk management is changing across Africa and this is a chance for you to be directly involved.” n To make sure your voice is heard, please click on: http://www. commercialriskafrica.com/ rfpoll2015/

NEWS Ebola | Africa Re deals | WEF | News in Brief

3

Cost of Ebola outbreak still emerging in Liberia as first insurance payouts made Liz Booth news@commercialriskafrica.com

[monrovia]—The first insurers have started to pay out to the beneficiaries of victims of the recent Ebola outbreak in Liberia.

Omega Insurance has paid up to L$400,000 (L84=US$1) per policy to those who were caught up in the disaster.

Liberia is waiting to see if the outbreak is finally over after another victim emerged. The 21-day incubation period is due to end this week and the country is hoping no more victims are

discovered and be declared Ebola-free.

In the meantime, Charles Ananaba, Managing Director of Omega Insurance, said the company has paid out on about six group life policies. Alongside these first insurance payments, the government is paying up to $5,000 to the families of any medical workers who died.

“It is a drop in the bucket,” said Mr Ananaba “but is better than nothing.” He said his employees had mostly escaped the outbreak, although the son of one of the underwriters, who was a medical worker, had died. A former employee had also lost his life.

The outbreak had come at a huge economic cost, said Mr Ananaba.

His own firm had managed to keep operating, although the offices had opened for reduced numbers of hours and staff worked a three-day week.

Despite this, he said, he has managed to keep paying his staff— unlike many other businesses, which were forced to close down.

One group of employees affected badly were teachers as schools and universities shut for six months and so far the government has not paid the staff for the time missed. Not only has this cost the country in terms of the lost education for students, said Mr

Ananaba, but it has had a knock-on effect for the local economy as so many workers have lost significant portions of income.

Business leaders, he said, are worried that there may be a spike in levels of corruption as workers look for other ways to plug that gap in income.

Meanwhile, speaking at the Continental Re CEO Summit in South Africa last week, Dr Femi Oyetunji, Group Managing Director/Chief Executive Officer of Continental Reinsurance, cited the Ebola outbreak as an example of why it was vital business leaders across the region

communicate more often. “Our governments were slow to react,” he says, “but I believe as business leaders we should be doing more.”

Continental Re intends to launch a 24/7 communication tool so that in the future, something like Ebola would be flagged as an issue from the first day of the outbreak, giving business leaders a chance to push for a quicker government reaction.

“We have an important role in issues affecting our continent,” he said.

“What started out as a small outbreak in Guinea became an epidemic.” n F or more on the CEO Forum see p20-22

Africa Re continues to grow following two global investment deals Liz Booth news@commercialriskafrica.com

[lagos]—In less than one month, Africa Re has signed two agreements with two leading global investors. The latest was signed on 25 March, 2015 with Fairfax Financial Holdings, which paid US$61 million to become a new shareholder of Africa Re. Fairfax has acquired a 7.15% stake and a seat on the Board of Africa Re. It is engaged in property and casualty insurance, reinsurance and investment management.

The new strategic partnership with Fairfax, after the recent entry of AXA in February 2015, has strengthened Africa Re with a US$122 million capital. It is also a clear strategic move intended to achieve strong business partnerships

with global industry players.”

Corneille Karekezi, Africa Re group managing director / chief executive officer, stated: “We will work together to strengthen our positions in the reinsurance market with regard to product development, underwriting expertise, human capacity development, actuarial services, enterprise risk management, corporate governance, claims management and investment.”

He added it was “a great development for Africa Re, demonstrating the maturity of the company, its commitment and ability to strategically position itself in the fast changing and competitive landscape of the international reinsurance industry.”

The shareholding structure of Africa Re has changed over time from a pure multilateral institution in the

1970s and 1980s to a diversified shareholding comprising 41 African states (34%), more than 100 African insurance and reinsurance companies (33%), the African Development Bank (8%), IRB-Brasil Re, a leading Brazilian reinsurer (8%), AXA, the global leading French insurer that joined recently with a 7.15% stake and Proparco, a branch of the Agence Française de Development.

Until recently, development finance institutions (DFIs), including the International Finance Corporation (IFC), member of the World Bank Group, DEG (branch of the KfW bank) and FMO (Dutch development finance organisation) constituted the core of the non-African shareholding capped at 25% of the capital of Africa Re. Fairfax has acquired part of the shares put back by those DFIs that invested in Africa Re capital in 2004 and are

exiting in accordance with a put option agreement allowing them to exit after the elapse of their investment horizon.

Meanwhile, Africa Re has posted a net profit of US$118.50m for the full year 2014 compared to US$84.80m in 2013, representing an increase of 39.74%.

The performance was driven by strong underwriting profit and steady investment results and was 7.37% higher than the Corporation’s five-year plan projections.

Gross written premium grew by 7.02% from US$670.46m in 2013 to US$ 717.53m.

The growth trend continues to be impacted by the depreciation of the major transaction currencies of the Corporation and a competitive operating environment.

The Corporation attributes the good performance to increased income

from treaties as a result of additional shares secured during treaty renewals.

An improvement of loss experience in almost all classes of business (energy, fire/engineering, life, marine and motor) which led to a drop in the net loss ratio for most production centres, also contributed to the positive results.

Income earned by the Corporation from investment and other sources, including interest on reinsurance deposits and fee income, increased by 8.84% to stand at U$50.50m compared to US$46.40m in 2013.

Investment performance continues to be driven mainly by the equity and bond markets. Currency translation had a negative impact on the investment income.

On an annualised basis, the return on investment was 4.78% compared to 4.53% as at the same period last year.

Underemployment, food and disease top Sub Saharan Africa’s risk list Gareth Stokes news@commercialriskafrica.com

[johannesburg]—The United Nations (DESA 2014) estimates that more than two-thirds of the world’s population will live in cities by 2050, led by Africa and Asia. It estimates that 56% (currently 40%) of Africa’s population will be urbanised by that year.

The mass migration of people contributes significantly to the global risk landscape because the majority of the urban populations in developing economies live in slums with inadequate sanitation. Rapid

urbanisation and associated risks are therefore “top of mind” among Africa’s risk managers. They have their work cut out to mitigate the myriad risks their respective country markets face, while paying close attention to the increasing interconnectedness of global risks.

Interplay between risks is illustrated by the recent outbreak of Ebola in Gambia, Liberia and Sierra Leone.

“The virus has broken out on many occasions in the past three decades, but infections have usually been isolated,” said Christopher Gilmour, an analyst at Absa Investments. “The main differentiating factor this time around is the high degree of urbanisation.”

Rapid urbanisation—a global

NEWS IN BRIEF Global natural catastrophes down [zurich]—Swiss Re has reported total economic losses from natural catastrophes and man-made disasters were around US$110bn in 2014, with global insured losses of around US$35bn in 2014, below the US$64bn average of the last 10 years. Swiss Re said there were 189 natural catastrophes worldwide last year, one of the lowest numbers in a single year. However, it warned severe thunderstorm losses were trending upward.

Disasters cost the lives of some 12,700 people in 2014.

trend—acts as an accelerant for the risk of the spread of infectious diseases. It places strain on infrastructure, which in turn creates power, sanitation and water crises and contributes to social unrest. Poverty and unemployment, meanwhile, contribute to rapid urbanisation as rural communities migrate in search of job opportunity, causing the cycle to repeat.

Mr Gilmour observed that South Africa’s struggles with power and water provisioning are a stark warning that countries are unable to absorb the migration from rural into urban areas. He suggested that governments could mitigate urbanisation risks by committing enough capital to

infrastructure projects. “A well managed infrastructure programme could address unemployment and water and food crises, as well as improving the outlook for national governance,” he said.

Risk managers in Sub-Saharan Africa are particularly concerned with the region’s ability to tackle unemployment or underemployment, food crises and the spread of infectious diseases, while north Africa has singled out water crises, profound social instability and interstate conflict as their primary concerns. These focuses are unsurprising given the different challenges exhibiting in each region during the past few years.

The World Economic Forum’s

Little prospect of reducing economic losses [sendai]—Meanwhile preliminary results of a catastrophe modelling study presented at the Third UN World Conference on Disaster Reduction showed little prospect of reducing economic losses from present levels of US$240bn per year.

Dr Milan Simic, Senior Vice President of AIR Worldwide, said the study normalised the economic losses from major natural disasters across the last 20 years and found they oscillate around a baseline value of US$240bn.

Kenya shilling set to weaken [mombasa]—Kenya’s shilling is set to weaken from a more than three-year low as a drought curbs output of its tea, which

Global Risks 2015 report, now in its 10th edition, sheds light on the risks that are “top of mind” among global risk experts by considering 28 predetermined risk events and then ranking them by likelihood and impact, before considering the interconnectedness of risks globally and regionally.

The latest report reflects on the emergence of geopolitical risks over economic risks in a world that is more concerned with interstate conflict (Russia/Ukraine for example), the failure of national governance, and state collapse or crisis, than it is with fiscal crises or the risk of an energy price shock.

is Kenya’s largest export product, according to a report from Bloomberg. Factories in the southwest were reported to be cutting back production, as sales in Kenya’s largest auction in Mombasa dropped 27 per cent last month (MAR). The shilling is forecast to weaken about 2.5 per cent in the next year.

SA TAX LAW LEADS TO RANGE OF BENEFITS [johannesburg]—Hollard Life has launched a new range of income protection benefits, coinciding with changes in tax legislation. The company said the new products will offer a flexible range of options. It explained the changes in South African legislation means premiums will no longer be tax deductible, but benefit payments will be tax free. This means advisors should review client portfolios.

COMMENT

4

NEWS Nigeria ‘cash-before-cover’ —regulator confident

In or out?

T

hreats to business do not

necessarily come in big packages.

Things that seem innocuous or trifling can play a major disruptive part. Take the traffic jams in Nairobi, for instance. When one risk manager recently put that in his top three risks for the year, others looked surprised.

But he explains that the increasingly bad traffic usually results in at least one person failing to make a meeting—and if that is the decision-maker then the day is over before it has begun.

Likewise, the issue of visas. Recently, governments have increased their scrutiny of incoming visitors—for whatever reason. The result: business leaders are missing crucial meetings. How can you agree and sign a contract face to face when you are not allowed in the country or your passport has been stuck in an embassy for four weeks?

In or out? That was the question on the agenda when a group of insurance CEOs met in South Africa last week. They were discussing capital flight and asking whether it was time for greater protectionism for the local insurance markets.

They also considered sustainability in the insurance sector—something that is equally crucial in any business, whatever its size.

In Ethiopia, another group of CEOs were meeting to discuss the insurance industry, as well as infrastructure concerns. Again—in or out? How do local insurers ensure they increasingly play a role in such projects, to the benefit of the local economy?

In or out? That was also the question being asked in Nigeria recently. Should Goodluck Jonathan remain in or should Muhammadu Buhari push him out? The voters decided in favour of Buhari and, in a move seen as hugely important, Jonathan quickly conceded defeat.

In that simple telephone call, he ended fears of riots and violence in the wake of the result and ended concerns that the results would be challenged. Nigeria is in a transition period now but

Liz Booth news@commercialriskafrica.com

[addis ababa]—The Nigerian the optimism is already palpable. People voted for change and their expectations are high.

After re-basing last year, Nigeria is Africa’s largest economy and, despite the weakening oil price, there is confidence that it will continue to grow. For risk managers operating in the country there are plenty of challenges, not least from the oil price impact and, for those with northern operations, the security risk posed by Boko Haram.

Sadly, the terrorists have struck again in Kenya with the shocking attack on the University at Garissa. Confidence has been dented. Kenyans admit to fear that there will be another attack and that they will be caught up in that.

But there is relief that the government has reacted fast. Not just with a physical response but with financial sanctions too. Some 86 organisations have been subjected to sanctions and the financial institutions have been told to end all business dealing with them immediately.

Sanctions are a tricky issue for businesses and they do pose a major risk.

In the past month, I have continued to meet with risk managers across the continent as part of our annual survey—and online responses are still coming in. We will close the survey at the end of April and you will see the results for yourself at the end of May. It has been extremely interesting—and enjoyable—meeting so many of you and is definitely something we will continue to do in the years ahead.

In the meantime, our various discussions will be informing the agenda for our three African events this year—covering Southern Africa, East Africa and West Africa. I do hope you will be able to join us in what are building up to be interesting seminars with some exciting speakers already lined up.

In the meantime, enjoy reading this issue!

Editor Liz Booth +44 [0] 1263 861 676 [w] lizbooth@commercialriskafrica.com

Liz Booth Editor Commercial Risk Africa

regulator has hit back at insurers and reinsurers concerned that the local content regulations and cash before cover rules have had some unintended consequences.

Critics of the cash before cover approach were worried that, short-term, it was causing a dip in insurance buying among those who had been used to paying for cover across the year.

Speaking exclusively to Commercial Risk Africa while attending the Zep-Re CEO Forum in Addis Ababa, Fola Daniel, the Insurance Commissioner at the Nigerian regulatory authority (Naicom) said the rules did provide for spread payments.

He said: “I am sure there are some elements of the market which benefited from the old approach but they are learning to operate under the new system.”

Mr Daniel said the biggest buyer of insurance in the country is the government. It too, he said, had had to learn that without premium payment, there would be no cover. Although it took a while, he believed the new system is benefiting insurers as a whole, providing more certainty in terms of cash flow.

“Government departments spend up to US$80m in premiums. They have been given an incentive in the form of discounts for paying on time. And it has worked,” said the regulator.

Mr Daniel said the biggest concern was the aviation sector— airlines being unable to fly without insurance in place, but again they have quickly adapted to the new rules.

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RISK FR ONTIER N AFR S

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While every care has been taken in publishing Commercial Risk Africa, neither the publisher nor any of the contributors accept responsibility for any errors it may contain or for any losses howsoever arising from or in reliance upon its contents. Editeur Responsable: Adrian Ladbury.

AFRICAN RISK & INSURAN CE MAN AGEMEN T NEWS INDUSTR Falling prices Y FOCUS—Oil & Gas: producing may already be impac oil ting those parts of Africa but what are the prospe where explor cts for those uncovered deposits worth ation has only just exploiting? ....................

20–21

& Liz Boot news@comm corruption, h with risk manag ercialriskafric Kenya and a.com ers in Nigeri South Africa [LAGOS & as an ongoin all citing corrup a, “The LONDO tion broad. problem is that politic ACROSS Africa N]—RISK MAN only is it g risk to their busine ” al risk is so impacting sses. are increasingly AGERS but the daily operat Not by growin also the Peter Mulw concerned g ions East a Kioko, Risk Saharan regionpolitical risks across Africa, Terry appetite of investors.

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In Kenya Manager at the campa of violence Political shin, Risk , ign areas, includ risks include a numb for Intern Agnes Mbaire, respon agitations MTN Nigeria, saw elections has period, the road during al and politic to the al motivated ing the risk of politicer of and Comp Audit, Risk Manag sible three concer terrorism as one of are concernedbeen mainly calm. Nigeri liance violence and ns and his top ement ally- risk ans exchange see a concer about security and remains a at Postbank, said fraud rising fast in the fears political risks rates, sanctio riots, foreign want ted major challen are effort to ensure to latory risks. manag country. ns and The decisio country. it for the regu- Kirika ers operating in Kenya ge for risk Nigeri n in Februa Goodluck However, ry During , Head of Jonathan Risk Manag , with Joan electio a’s presidential and to postpone risk manag uncertainty Insurance Haram has Mr Jonathan’s tenure gubernatorial ement ns—o ers Regul made some , elections or caused by forthc say that it remain atory Authority, at the scheduled ne week ahead attacks, from of its most Boko date— of their governorships. adding to oming horrific s a culture the risk change is 200 girls from the kidnapping of more problem. many observ did not come as a surpris Gilbert The electio the main of governmental than Uncertainty cause Protecht, also Mwalili, Risk Manag Independent ers and participants. e hotly contes ns were set to State last April the town of Chibok in Borno ted race is impacting for concern. of er put political Electoral Comm be a The to the mass ness of foreign his concer risks at the at already behind destruction the willing ission was Goodluck Jonath between President massacre of some 2,000 top impor on certain countr investors to comm - very quickl ns. “In business, people January. Presid people in Bagaand ted perma the delivery of newly Democratic Party an’s ruling People y affected by ies they say. it to People ent are nent in ’s (PDP) and Jonathan’s the annou from respon political instab voters’ cards Political risk will nonchalant ncement but Muha ex-military presid opposition outcry se to both events also includ that the organisation react in different ways. ility. were being caused a public es the risk ent mmadu Buhar , leading elections postponed may see One of others to i of the newly General country All Progressive see it as a majorit as zero risk, while concerns was unexp because of securit calling on protests across the formed Congr y PDP government ected. Voters now go to risk. had suffere ess (APC). Last year, these threats. to address the d five presidential polls on 28 March will governors Chief execut who crossed defections from vote, and on for Financial Deriva ive of the Lagosthe floor to 11 April for the APC—govern join the ors of based the potent tives Comp any, ially split votes.states that could now Rewane, said the reason govern Bismarck ment gave PoLitiCaL: Liz Booth Turn to page 2 news@

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COUNTR Y REPORT With an electi —Nig is very much on on the horiz eria: on, foreign invest in a holding patte Nigeria rn, with ors biding their time ............14– 19

Risk ma n risks top agers conclude po list of co ncerns fo litical r 2015

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“One airline group had been paying on a quarterly basis but had never paid on time. Now they have paid 100 per cent—and the money came in early,” he added.

“Without receiving premiums, the insurance industry could not meet its claims obligations and that was giving insurance a bad name. In the past 24 months that has changed and claims are being met.”

In terms of the local content regulations, Mr Daniel said the rules were not actually that farreaching because they centred on the oil and gas sector. He denied suggestions that the rules would stifle innovation locally, because insurers could relax knowing the business had to come to them first.

Mr Daniel also rebuffed the suggestion that it hampered claims payments because so many insurers were now involved in every risk. He said the lead underwriter would always be the first point of contact for the insured and would settle the claim. It was then up to them to go to the rest of the market for settlements.

Insureds, he suggested, would soon choose other insurers if claims settlements were slow to materialise. “It is a competitive market,” he said, “and insureds have choices. So if there is a slow payer, then we are not going to insist the insured uses them in future years.” Mr Daniel was confident this would help drive up standards while the clear regulatory framework would give insureds and insurers greater certainty and confidence.

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23 JULY CRESTA LOD

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NEWS Continental Re | Ratings | Home loans | Agenda

5

Ratings picture is mixed following fall in oil revenues, fiscal pressure Liz Booth news@commerialriskafrica.com

[ london ]—The falling oil price is impacting rating agency confidence in some African countries.

Among a flurry of rating actions, Fitch Ratings has revised the Outlook on Angola’s Long-term foreign and local currency Issuer Default Ratings (IDR) to Negative from Stable and affirmed the IDRs at ‘BB-’. The Country Ceiling has been affirmed at ‘BB-’ and the Short-term foreign currency IDR at ‘B’.

It said: “We expect Angola’s economy to slow as a result of a sharp fall in government expenditure, a shortage of dollar liquidity and uncertainty about the future direction of oil prices constrains activity in the non-oil economy.

Fitch expects growth to moderate to 3.3% in 2015, from 4.4% in in 2014 and 6.8% in 2013.

“The 45% drop in oil prices since July 2014, which once again highlighted Angola’s vulnerability to oil price shocks, is expected to result in a sharp drain on reserves, weaker economic growth and rising debt. Nonetheless, the Angolan authorities have responded quickly to sharply lower oil prices by severely cutting expenditure and allowing the exchange rate to depreciate, in sharp contrast to the delayed policy response in 2008, the last time oil prices collapsed.”

ELSEWHERE Meanwhile, Fitch has affirmed Ghana at ‘B’, with negative outlooks. It reported: “The IMF board is expected to approve Ghana’s

US$940m extended credit facility in April, which should provide some easing of severe external and fiscal financing pressures. However, Ghana’s track record of increasing spending ahead of elections raises concerns about the government’s ability and willingness to meet the ambitious fiscal consolidation targets set by the IMF. For Zambia, Standard & Poor’s (S&P) has affirmed its ‘B+/B’ Ratings although the outlook remains negative on fiscal and external risks. S&P said “We continue to believe that Zambia’s institutional strengths and solid growth prospects remain sufficient to offset increasing short-term fiscal and external challenges.

“However, we consider that policy-making could be constrained by political considerations, pre-

venting the final resolution of key fiscal uncertainties, which could add to copper-price led currency depreciation and external pressure.”

Meanwhile, S&P affirmed ratings for Congo at ‘B/B’ with a stable outlook. It explained “The ratings on the Republic of Congo are constrained by low institutional effectiveness and income levels, presidential succession risk, high fiscal, external and economic dependence on oil, and limited monetary flexibility.”

Fitch has also affirmed Congo’s rating, at ‘B+’ with a stable outlook, reflecting Congo’s strong balance sheet and positive growth outlook.

Finally, Fitch has revised Tunisia’s outlooks to stable from negative. Its Long-term foreign and local currency Issuer Default Ratings (IDRs) have been affirmed at ‘BB-’ and ‘BB’

respectively. The issue ratings on Tunisia’s senior unsecured foreign currency bonds are also affirmed at ‘BB-’.

DEMOCRATIC MANDATE It explained: “The smooth legislative and presidential elections in late 2014 enabled the formation of a new, democratically-elected coalition government in early 2015, which benefits from a large majority (more than 70%) in a parliament elected for five years.

“This puts an end to a fouryear political transition process and lays the ground for better political stability in the country. Political and economic destabilisation risk from social unrest or terrorist attacks remains significant, however, as illustrated by the recent attack in Tunis.”

Continental Re launches specialist construction, property and engineering risk services subsidiary Liz Booth news@commerialriskafrica.com

[ j o h a n n e s b u r g ] — Continental Reinsurance has launched a new specialist subsidiary, Continental Property and Engineering Risk Services (CPERS) to meet the growing demand for specialist engineering insurance risk advisory services, which is currently driven by Africa’s infrastructure and construction boom.

The firm said that with Africa’s investment in infrastructure, rapid urbanisation, projected economic growth, rising middle class, focus on regional integration and improved governance in many of Africa’s 54 nations, investment in construction on the continent is on a strong upwards trajectory. Consequently, the demand for specialist engineering insurance skills is also increasing, according to Mr Lawrence Nazare, Executive Director of Continental Reinsurance.

“It is imperative for Africa’s development for African reinsurance

companies to provide the required specialist insurance skills and expertise to support efforts to bolster the retention of African reinsurance premiums in the continent,” said Mr Nazare. “For this reason, we have strengthened our core engineering capability by enhancing our existing offering,” he added.

Historically, foreign reinsurance companies have provided the requisite engineering insurance advisory skills and benefited from premiums generated in Africa.

“The time has come for Africans to support Africa’s growth by using

local engineering insurance skills as well as fast-tracking the transfer of knowledge and training for insurance companies across the continent to ensure that Africa strengthens its capability to support its own growth,” said Mr Nazare.

The four key functions of CPERS are: underwriting of engineering and construction risks in Africa; risk and advisory services; claims handling services; and training for the insurance companies.

Cassim Hansa, a professional civil engineer and MBA graduate, with more than 20 years’ experience

in both the engineering and insurance industries in the US and South Africa has been appointed Managing Director of CPERS. “Insurance professionals in Africa are hungry for training and unless we step in and fill the urgent need for knowledge transfer in the insurance sector, Africa is at risk of losing the opportunity to foreign firms by not developing its own capabilities,” said Mr Hansa.

CPERS is committed to facilitating skills transfer and training to develop a stronger specialist engineering insurance sector on the continent

Not-for-profit home lender continues its expansion [johannesburg]—Home Finance Guarantors Africa (HFGA) has expanded into Zambia and has plans for further expansion across Africa after years of successful operations in South Africa.

Ethel Matenge-Sebesho, Head: New Markets, at the not-for-profit organisation, said the aim is to pave the way for small businesses and homeowners to get a foot on the property ladder.

HFGA’s model is to take the risk away from the lending institutions by guaranteeing the top-up part of loans, enabling the banks to offer 100% mortgages.

AGENDA 2015 20-21 April, 2015, Johannesburg n Project Risk Assessment Training. For more details email nicoleg@irmsa.org.za 23-24 April, 2015, Sandton, Johannesburg n Management Skills for New Managers and Supervisors prudence@archipaxbsolutions. co.za 23 April, London, UK n Africa Confidential is hosting Nigeria After the 2015 Elections: Which way forward. For details: enquiries@nigeriaconference2015.com 5 May, 2015, Johannesburg, South Africa n Risk Reporting Training. For more details email nicoleg@irmsa.org.za 7-8 May, 2015, Johannesburg, South Africa n IRMSA Business Continuity Management Training. nicoleg@irmsa.org.za 12-13 May, 2015, Brighton, UK n 3rd Africa Financial Services Investment Conference (AFSIC) 2015. For more information please contact event@afsic.net

14-15 May, 2015, Cape Town, South Africa n Project Risk Assessment Training—Cape Town. For more details email nicoleg@irmsa. org.za 19 May, 2015, Johannesburg, South Africa n Managing Risk Management Training. For more details email nicoleg@irmsa.org.za 24 May, Tunis, Tunisia n As part of the AIO conference, Africa Re will be presenting its first Insurance Awards, with three categories covering The Insurance Company of the Year; the CEO of the Year; and the Innovation of the Year.

24-27 May, Tunis, Tunisia: n The African Insurance Organisation will be holding the 42nd Conference and Annual General Assembly of the African Insurance Organisation. For more information: http://www.african-insurance.org/newseventseventitem.php?intID=301 25-29 May, 2015, Johannesburg, South Africa n CSR Strategies, PR & Reputation Management Workshop. info@hundfold.co.za 28 May, 2015, Johannesburg, SA n Compliance, A strategic Toolkit. For more

“So often banks will offer people a loan but will want a 10% or 20% deposit. A borrower can afford the repayments but does not have a cash deposit. We allow the banks to offer 100% loans because we guarantee the deposits,” said Mrs Matenge-Sebesho.

The company has operated in South Africa for more than 20 years but has recently expanded into more African countries. It launched into Ghana, Rwanda and Kenya two years ago and has just launched into Zambia.

“Our system helps increase access to finance but it also helps develop housing stock for developers,” she said.

—Liz Booth

details email nicoleg@irmsa.org.za 2-3 June, 2015, Bloemfontein, South Africa n Introduction to Risk Management Training - Bloemfontein. For more details email nicoleg@irmsa.org.za 8-9 June, 2015, Johannesburg, South Africa n Operational Risk Management Training.

For more details email nicoleg@irmsa.org.za 12 June, 2015, Johannesburg, South Africa n The Governance of Risk Training. For more details email nicoleg@irmsa.org.za 19 June, 2015, Johannesburg, South Africa n IRMSA Annual General Meeting (AGM).

For more details email nicoleg@irmsa.org.za 23-24 June, 2015, Nairobi, Kenya n 5th Annual Africa Insurance & Reinsurance Conference 2015. http://aidembs.com/ insurance_conference/ 23-24 June, 2015, Cape Town, South Africa n Business Continuity Management Training—Cape Town. For more details email nicoleg@irmsa.org.za

by delivering training sessions in fast-developing regions in Africa. In 2015, CPERS will conduct training in Harare, Lagos, Maputo, Nairobi, Gaborone and Lusaka.

More than 200 delegates from insurance companies have already attended training sessions delivered

by Continental Reinsurance on engineering and property risk services in 2014, in key regions across Africa, including Lagos, Harare and Addis Ababa.

CPERS is registered in South Africa and will operate as a full subsidiary of Continental Reinsurance.

Continental Reinsurance is one of a few reinsurance companies in Africa committed to sustainable business and corporate responsibility by signing up to the United Nations Principles for Sustainable Insurance.

Signatories to this accord commit to integrating environmental, social and governance issues into their core business strategies and operations. n For more news from Continental Re’s CEO Summit please see p20 & 22

23 July, 2015, Gaborone, Botswana: n Commercial Risk Africa will be holding a one-day seminar for risk managers from across southern Africa. Contact: events@ commercialriskafrica.com 26-29 July, Sun City, SOUTH AFRICA: n The Insurance Institute of South Africa will hold its annual conference with the theme ‘Risky business—the insurance solution’. For early bird registrations: http://www.redballoon. biz/ticsa2015/delegate 17-18 September, Johannesburg, South Africa: n The Institute of Risk Management South Africa will be holding its annual two-day conference. For details, email: admin@irmsa. org.za 16 November, 2015, Nairobi, Kenya: n Commercial Risk Africa will be holding a one-day conference for risk managers from across east Africa. Contact: events@ commercialriskafrica.com DECember, 2015, LAGOS, NIGERIA: n Commercial Risk Africa will be holding a one-day conference for risk managers from across west Africa. Contact: events@ commercialriskafrica.com

6

Takeovers

BEHIND THE NEWS

Trend for Kenyan mergers and acquisitions continues to escalate

Steve Mbogo reports from a Kenyan insurance market buzzing with takeovers and new entrants

B

arclays Life and Allianz are the latest new entrants into Kenya’s now-enthusiastic insurance sector, in a move expected to lighten the market for consumers with innovative and competitively-priced products.

Speaking off-record, a senior official of Kenyan regulatory agency, the Insurance Regulatory Authority (IRA), said that Barclays Life has already been given a licence to start operations while Allianz is in the advanced stages of being granted a licence.

“The two have opted for Greenfield entry,” said the official.

Their entry is expected to further fuel the ongoing mergers and acquisitions in Kenya’s insurance industry, which started in 2013 but accelerated towards the end of 2014 and early in 2015.

Kenyan insurers have been chided in the past for being elitist, concentrating more on selling products that are statutory in nature and focusing on group life insurance to tap into the employee market, but giving less attention to individual life and low income earners.

This focus has cost the industry, which is the smallest compared to other financial sectors in Kenya and has enjoyed the least consumer confidence compared to others, according to successive studies.

Global players

The entry of the two additional firms has caused excitement because they are globally renowned players coming to a market that is still considered a virgin in terms of insurance penetration, which now stands at 3.5%, according to industry statistics.

However, the insurance market has been growing at an impressive rate of 20% in the past five years, based on premium growth, according to the IRA—riding on economic growth, an expanding middle class, improving business environment, better regulation and rising awareness of the importance of insurance.

The two new entrants will join another global player, Prudential Assurance, which has wholly acquired Blue Shield Insurance.

The deal, completed this year, marks the re-entry of Prudential Assurance after it exited Kenya in the 1990s, citing a bad operating environment.

Although the value of the Blue Shield acquisition was not disclosed, Prudential said it would spend $17m to finance its operations in Kenya in the next year.

Another global player that made a recent entry into Kenya is Swiss Re, which bought a 26.9% stake in Apollo Investments, the holding company of APA Insurance, in the last quarter of 2014. That stake had previously been owned by LeapFrog Investments.

LeapFrog Investments has in turn invested $18.6m to gain control of Kenya’s Resolution Insurance, a specialist health insurer.

LeapFrog will invest through Resolution Health East Africa, the holding company for the Nairobi-based insurer.

Yet another globally significant player, Old Mutual, announced in January that it has bought a 60.7% stake in Kenyan insurer UAP for $253m.

UAP is the third-largest general insurer in Kenya and the second-largest health insurance business. It is also the secondlargest general and health insurance business in Uganda.

Old Mutual Kenya chief executive officer Peter Mwangi said in an interview that UAP would be merged with the Old Mutual business in Kenya, indicating possible rebranding.

“We are currently awaiting regulatory approvals in respect of the transaction and hence are not able to discuss much about the acquisition,” said Mr Mwangi.

“Old Mutual’s ambition on the continent is to become an African financial services champion and this entails having an integrated financial services offering in the key markets in which we operate. The UAP business that we have acquired is pivotal to us realising this ambition,” he added.

He said the acquisition is based on the positive outlook of insurance business in east Africa.

“Our outlook is positive. The economies in the region are expected to experience strong growth in the medium term.

Kenya is actually expected to be the third-best performing economy in the world in 2015. Growing national income is a key driver of growth in our businesses so we are very optimistic in this regard. We are also encouraged by increased economic collaboration under the EAC, which we believe will further drive growth in the region. The opening up of the region is great news for us and makes it easier to do business,” said Mr Mwangi.

Attractive proposition

Analysts say Africa’s fast-growing economies, improving insurance sector regulation and an expanding middle class are some of the biggest drivers of new foreign direct investment into the industry.

Jubilee Holdings, Kenya’s largest insurer, announced earlier this year that it plans to buy out smaller insurance companies to expand its business.

“We shall be making announcements soon,” said Nizar Juma, Jubilee Group Chairman. “Our aim is to remain number one, particularly in Kenya, where mergers and acquisitions have been happening. We are looking for companies to acquire in the country and region because insurance is dynamic,” he said.

Corneille Karekezi, Chief Executive Officer of Africa Re, said the improving ease of doing business in Africa is pulling in investors.

“There is a growing middle class with higher revenues, political and economic governance is improving, and there are regulatory changes in insurance that require openness for business,” said Mr Karekezi.

Other drivers of new capital inflow into the industry include disposal of assets by first generation entrepreneurs and divestments by development finance institutions and investment funds, which have reached their investment horizon time.

The latest activity comes ahead of the expected approval

of the Draft Insurance Bill 2014, which requires composite insurance companies to split their general insurance business from their life business and restricts individual ownership to a maximum of 25%, the latter being meant to shake off family ownership of insurance companies, which has partly been blamed for the poor management of some insurers.

Analysts from the Standard Investment Bank say a likely change will also be the revision of minimum capital requirements for insurance businesses and that low penetration in Kenya is being seen as an opportunity by the new entrants.

“We believe the low penetration rates present headroom for growth in the insurance business. Furthermore, anticipated developments in insurance regulations on ownership and capitalisation are set to improve the business environment for insurers. The advancement of technology and distribution channels has also enabled insurers to collect payments more efficiently, as well as widen their customer base,” notes the Standard Investment Bank in an update.

Further activity

There have been more deals in the past 12 months.

Pan Africa Insurance Holdings has bought a majority stake in general insurance underwriter Gateway Insurance.

The listed life insurer, majority owned by South African Sanlam, exited the non-life business three years ago when it sold a 40% share in APA Insurance. APA was formed in 2003 by merging the short-term business arms of Apollo and Pan Africa.

Saham group director general Giancula Marcopoli said the acquisition of the insurance company is part of the company’s growth strategy to increase its footprint on the continent and consolidate market share in the insurance industry.

Britam acquired 99% of Real Insurance in December 2013 in a cash-and-share swap deal valued at $16.4m.

Metropolitan International, a division of JSE-listed life insurer MMI Holdings, bought an undisclosed shareholding in the Kenyan insurer Cannon Assurance for $27.3m. MMI has operations in 12 African countries outside South Africa, including in Kenya through Metropolitan Life Kenya.

Kenyan insurance industry leaders say they expect more mergers and acquisitions this year. “We are anticipating more acquisitions,” said Sammy Makove, Chief Executive Officer of the IRA. “Insurance is seen as the next frontier for growth because penetration is still low, so there is potential for the market to grow.”

He said activities in the industry are being driven by the improving ease of doing business in Kenya and the discovery of oil and gas. “Going forward, premium growth is likely to accelerate as well as capitalisation, supported by capital inflows from multinational insurance corporations,” said Mr Makove.

Tom Gichuhi, Chief Executive Officer of the Association of Kenya Insurers, is also optimistic about more activities in the industry this year. “In 2015 we are anticipating more acquisitions. There is potential for the market to grow,” he said.

Kenya has 47 insurance companies. While some analysts said the number is too high for a population of 40 million Kenyans, the regulator, IRA, has declined to force consolidation of the industry but instead introduced a riskbased supervision model that enables the insurer to take on risks that can only be supported by its capitalisation.

BEHIND THE NEWS Takeovers

7

trail

On the expansion South Africa’s Liberty Group has been growing fast across the continent.

Liz Booth meets Mike du Toit, who has spent the past four years as regional managing director [Strategic Growth] for Liberty/Stanlib

L

iberty has been growing rapidly across Africa in recent years, following the expansion trail of its parent bank, Stanbic.

Mike du Toit, Regional Managing Director (Strategic Growth) for Liberty/ Stanlib, explains the moves have always been part of a coordinated approach between the banking and insurance arms of the business.

It creates synergies and access to markets for the insurance and has allowed the group as a whole to develop solid institutions, Mr du Toit says.

“We break ourselves into three zones and fundamentally we are looking at five pillars—life, health, short term, asset management and property. Each area has an institutional or retail structure. Clearly, South Africa is the most developed part of the business.”

Mr du Toit believes it is very difficult to break into new markets without that core strength and distribution opportunity.

He is also clear that the group cannot take the same model and expect it to work in every market. “We are quite clear about the fact that every country has to be governed by what will work in that country,” he stresses.

Another key is the company’s determination not to be “imperialistic” about its continental spread. “If what we are doing is not relevant to the market, then we don’t do it,” says Mr du Toit. “And where we do operate, we use the business model best suited to the local market.

“For example, in Kenya there are 500 agents but in Uganda we use bancassurance to access our customers and distribute through other bulk suppliers.”

Local identity

Mr du Toit’s role has been to reorganise businesses in east Africa. Liberty maintains the local names of firms, such as Heritage in Kenya, rather than using the Liberty name throughout.

“We are always looking for ways to grow the business strategically,” says Mr du Toit, “and we have formulated 15 tactical approaches. One is acquisition, another is brown field, and we have joint ventures and fronting arrangements. There are a whole host of ways to do this.”

He says the bank’s presence in markets gives the short-term insurance business an advantage in terms of accessing markets and with geographical spread.

“Insurance can support the proposition of the bank too, so it works both ways. It also helps in terms of manpower if we can centralise some of the services, such as human resources and communication.

“In some cases we might also have centralised actuarial services or risk management,” he adds.

Looking more broadly at opportunities, Mr du Toit says it is hard to ignore the opportunities emerging across the continent at the moment. “Sometimes you may have liberalisation of a market, for example, and you can’t ignore that opportunity to build in the market.

“You have to take advantage as and when it appears but, strategically, we are not trying to go out and paint the continent blue.”

Liberty has no such ambition, not least, says Mr du Toit, because it would be impossible to have sufficient resource in play to do that. “Countries with low insurance penetration rates are particularly difficult,” he says.

Competition comes from the large domestic players. “It is not necessarily a question of their size,” he explains, “but of their capacity to be locally relevant. Of course, there are large foreign players moving into markets with their large balance sheets and distribution networks but if they are not locally relevant it will come to naught.”

Expansion challenges

Speaking personally, Mr du Toit outlines the risks associated with expanding into new regions: “Each territory comes with its own risks, those that are ‘normal’ such as market, operating, legal, fraud etc. And I would say that the two biggest risks an expanding business faces are strategic and execution: a) does one have the right strategy for the specific territory? and b) the right people to execute the strategy with a sense of urgency and focus?

“I would suggest that one should look at each country and not regions, since even neighbouring countries can often be very different environments in terms of customer, regulation etc.”

He admits there are plenty of other challenges too. Among those, he says the following would be “top of mind”: n Lack of available targets for acquisition, which has to be the fastest way to expand; n In most territories, a shortage of technically experienced executive-level resources; n Local shareholding requirements and finding the right local partners can also be a challenge as they may often already be invested in a similar line of business; n At this point, there is a way to go in consumer understanding of the suite of products offered at retail level in the non-banking financial institution space, so it is hard work getting volume and economies of scale to invest.

Mr du Toit adds: “And from my experience, I think one of the biggest mistakes some make is assessing market size and opportunity using macroeconomic statistics. The size of a population is unlikely to be proxy for the scale of a retail prospect, if that population is significantly undereducated on financial services, difficult to reach or has very low disposable income.”

He continues: “Data at the micro level is often not available and one has to combine proxy information with experience or a gut feel. That can be a challenge to sell to international investors, which is why we often see local businesses move so much quicker to grasp opportunities.”

Considering how easy it is to overcome those, Mr du Toit says: “Evidently, it’s not easy, otherwise everyone would probably be rolling out networks a lot quicker. Therein lies a fantastic challenge and opportunity for organisations that have an abundance of passion and a long-term outlook, like ours.

“Like any territorial expansion, the key is to take time to listen to local guides in whatever shape and form they may come—i.e. customers, local shareholders, industry players, suppliers, boards and experienced executives. ‘Learn to listen and listen to learn’ has to be the strapline for anyone wishing to expand. Don’t confuse urgency with impatience as retracing steps to fix and then move forward again comes at an enormous cost.”

Territorial differences

Looking from country to country, Mr du Toit sums up: “As I mentioned above, some are very similar, especially in similar lines of business going through similar channels. Some are uniform to the extent that they may not occur to the same extent, same speed or timing (e.g. a reaction to an international market risk event, as was the case in 2009).

“And then some may be very unique to a country, or region of a country. For example, does the product or the risk resonate as a priority with the consumer? Is the subject (e.g. funeral/death) one that folk are prepared to even discuss?

These cultural sensitivities are very important as they can derail strategic execution.

“Certain countries clearly have a much quicker take-up of new technologies and the industry has to be able to keep up, which is a real challenge when one is looking at how and where to spend the next investment.”

So often, the message is that Sub Saharan Africa is home to nearly 50 countries—a message that Mr du Toit says you forget at your peril if you are embarking on regional expansion.

Keeping you up to date with the latest Sub Saharan African election news http://www.commercialriskafrica.com/africaelections

Microinsurance

8

BEHIND THE NEWS

From small acorns grow mighty oaks Steve Mbogo explores microinsurance in Kenya—a form of cover that paves the way for the development of corporate insurance in the country

M

icroinsurance is the next big growth

area for Kenya’s insurance industry, as formerly risk-averse low income earners become more aware of the need to secure their assets and lives, opening a new opportunity for insurance companies to improve their cashflow.

A significant number of the country’s 45 insurance companies have started microinsurance departments, with those that have not either making acquisitions of pro-low income finance institutions as an entry point or going back to the boardroom with consultants to lay a strategy for entry into this emerging class of business.

Among the most recent entrants is Old Mutual Kenya, which has acquired Faulu Microfinance, a microfinance bank lending to low income earners. The intention is to enable the company make entry into low income financial services offerings including microinsurance, says Old Mutual Kenya CEO Peter Mwangi.

“We acquired Faulu Microfinance with the intention of selling insurance to Faulu’s customer base. Faulu’s roots in microfinance allow us to develop our microinsurance capability with a partner that has a lot of experience in this market segment having been in it for many years,” says Mr Mwangi.

“Currently, we are working on financial education initiatives to make Faulu customers aware of our insurance offerings. We are quite encouraged given the level of sales that has come through so far,” he adds.

Mr Mwangi sees the growth of microinsurance as being in tandem with the growing economic fortunes of the country.

“People are earning more and hence saving more. The country is expected to experience economic growth of between 6% and 7% over the medium term so we expect to continue experiencing strong growth,” he says.

Meeting demand

Leading insurance companies like UAP, CIC, APA, Britam and UAP have fully fledged microinsurance departments and are currently engaged in research and development that will enable them to release products that meet the specific needs of the target market.

Key sectors that promise to drive microinsurance penetration in Kenya include the transport industry, in particular the motorbike transport sector locally referred to as Boda Boda.

CIC Insurance has come up with a product that retails for one Kenyan shilling a day, or about $4 a year, that offers personal accident cover to the motorbike riders, among other benefits.

Another sector driving the growth of microinsurance is small scale commercial farming, which has taken root in Kenya as the majority of farmers with smaller holdings opt to undertake farming as a business, unlike previously when they farmed primarily to provide food for the family.

For instance, in Kirinyaga County in the central region of Kenya, a dairy cooperative society has taken insurance for all its supplier farmers. Premiums are deducted from the farmers’ milk delivery payments to pay for insurance of their cows.

Chairman of Kirima Dairy Cooperative Society, Samuel Gachoki Kabiru, says the decision had been made after farmers lost 60 cows last year, worth about $67,000, because of various diseases.

“We want to ensure that our farmers make financial recovery after loss of their cows so that they are able to purchase new cows

and continue delivering milk and therefore maintain their income from milk,” says Mr Kabiru.

The society partnered with Majani Insurance Brokers.

The policy covers cattle, goats, pigs, poultry and sheep due to death arising from: lightning, internal and external injury, calving and pregnancy complications, fire, windstorm, snake bites and flooding.

It also covers deaths resulting from diseases of a terminal nature certified by a veterinary officer, emergency slaughter on a veterinary officer’s advice, theft of stock in premises housing the insured livestock or in paddocks or when the animals are in transit to market, or to a new farm, animal shows and exhibitions.

Marketing manager of Majani Insurance Brokers, Pauline Mwangi, says more farmers are recognising the value of insurance and this is driving sales.

“We have noticed a surge in demand for microinsurance among small scale farmers as they increase their understanding of the value of buying an insurance policy. This has been done through education and awareness but, more importantly, meeting farmers’ expectations regarding efficiency in the compensation process,” she explains.

Other drivers

Savings and Credit Cooperative Societies (SACCOs) provide another growth frontier for microinsurance products. Some SACCOs have now been allowed to sell microinsurance products. The SACCO concept is very popular in Kenya across all income classes. SACCOs have an estimated membership of nine million people, providing a base for mass uptake of microinsurance products.

The rise of mobile phone-enabled payment systems is also another growth driver of microinsurance. Most of the microinsurance vendors have chosen mobile money payment systems as the main premium and claims payment platform, because it has helped lower transactions costs.

The high penetration of mobile phones including among low income earners means microinsurance product vendors are able to serve the mass market without incurring lots of operational costs.

Growth potential

Currently, it is estimated that there are at least one million users of microinsurance products in Kenya, representing about 2.5% of the entire population. Insurance penetration in Kenya as a whole is 3.9% according to the Insurance Regulatory Authority (IRA).

Immediate former CEO of CIC Insurance, Nelson Kuria, who is considered the father of microinsurance in the east Africa region, says the growth potential for microinsurance is enormous but product pricing and high administrative costs are major impediments to the development of the industry.

“Innovation to address the pricing and product relevance will be the game-changer in microinsurance growth because demand is there,” he says.

During a recent educational and awareness workshop on microinsurance in rural Kenya, insurers that participated in the event expressed surprise at the level of demand for the products but it emerged that there is disconnect between some of the products in the market and what the market really requires.

The workshops were sponsored by Continental Reinsurance, a

leading reinsurance company in Africa, and organised by ruralbased media house Kirinyaga Star and Embu Star newspapers under the Champions of MicroInsurance initiative.

“As lead sponsor, Continental Reinsurance will continue to be associated with the initiative, which we trust will go a long way to accelerating the uptake of microinsurance products at grassroot levels,” says Continental Re’s CEO, Calisto Ogaye.

Other sponsors are CIC Insurance, UAP Insurance, APA Insurance and Majani Insurance Brokers.

“This is a good initiative,” says Tom Gichuhi, CEO of the Association of Kenya Insurers.

Global interest

The growth of microinsurance in Kenya has also attracted global players. US-based firms Grameen Foundation, Opportunity International and Clifford Chance, along with Kenya’s Penda Health and MicroEnsure from the UK, recently launched an initiative called the ‘Uzima Project’ in Kenya, with the aim of providing health microinsurance solutions. In addition to receiving financing and insurance, the insured will also receive mobile phone reminders and messages promoting good health practices.

Jubilee Insurance Company of Kenya recently partnered with UmandeTrust and CITADEL Microinsurance to provide microinsurance solutions for low income earners in Kenya. The move is expected to boost Jubilee’s life portfolio and increase insurance penetration in Kenya.

Swiss Re also made an entry into Kenya’s microinsurance sector when it recently acquired LeapFrog Investments’ stake in Apollo Investments Limited, the parent company of APA Insurance of Kenya.

LeapFrog had invested $14m in APA in 2011, money that helped the Kenyan company launch health microinsurance products.

Societal benefits

The growing use of health microinsurance products in Kenya has helped reduce maternal and child mortality rates, according to a recent report by the United Nations.

“As a result of this system, more mothers in Kenya are now attending more antenatal visits and are able to opt for a skilled birth procedure through microinsurance schemes,” says the report—Saving Lives, Protecting Futures.

Kenya’s under-five mortality for every 1,000 births has reduced by 11.1%, while maternal mortality reduced by 13% between 2010 and 2015.

The growth of microinsurance has also prompted the IRA to release the draft Kenya Microinsurance Policy Paper, which will form the basis of regulation of the sector.

Among the recommendations of the policy are that compensation should not take more than 10 days once the relevant documents are provided by the claimant. Compensation for funeral claims should be completed within 48 hours.

It also recommends that minimum capital for the microinsurance companies should be Ksh50m. SACCOs will be allowed to own microinsurance companies as well as licensed aggregators. In addition, it recommends the setting up of a Microinsurance Compensation Fund.

People.

Insurance isn’t about numbers. It’s about people. In our case, 63,000 people coming together to take on the impossible challenges. Because we believe that with the right people and the right attitude you can turn even the toughest today into the brightest of tomorrows. Learn more at www.aig.com

Southern Africa: Silicosis

10

CONFERENCE

Clyde & Co recently held a seminar in Johannesburg looking at the emerging risk of silicosis claims against the South African mining industry, as Liz Booth reports

Disease claims spread to South Africa

D

isease claims worldwide have been a major issue for employers and their insurers for many years.

Asbestos-related illnesses have become the most infamous, with such poor prognoses for many sufferers.

While African countries have so far avoided the massive scale of claims seen in the US and Europe, notably the UK, it is not immune from the threat of hundreds of thousands of claims.

Most recently, key rulings in South Africa have brought the very real risk of claims from thousands of mine workers suffering from some form of silicosis.

Max Ebrahim, a partner in Clyde & Co’s Cape Town office, says: “The South African gold mining industry faces a number of challenges including falling gold prices, sticky labour pricing, the increasing costs of production, inconsistent energy supply and policy dithering on the part of the African National Congressled government, to name but a few.”

However, the recent legal developments could mean billions of dollars at risk as current and former miners allege they contracted silicosis while working in the gold mines.

“Dark clouds are gathering,” he says, “occasioned by the threat of class actions.” Speaking at a seminar held by Clyde & Co in Johannesburg last month, Mr Ebrahim adds: “The real game-changer has been the seminal judgment of Mankayi v AngloGold Ashanti.”

Mine owners are potentially facing claims of billions of dollars as, at least 33,000 miners bring claims against 82 different mines.

Mr Ebrahim warns the total value of the claims could amount to some $5bn, adding that the South African Medical Journal warned back in 2012 that there could be some 300,000 claimants, which may result in nearer $50bn of claims.

Case for the defence The mining companies’ defence appears to rely on several factors, including the available training schemes for mine workers; regular monitoring of dust levels; the measures to control dust and the risk management approach.

Mr Ebrahim believes swing factors in any litigation will include expert witnesses and evidence as arguments continue around how silicosis is contracted in terms of exposure. He says the plaintiff bar is well organised and in South Africa has the support of some international law firms, including some experts from the US and UK used to handling large-scale workers’ compensation claims.

The amount of money being spent by the plaintiff firms—one company is said to be spending some R600,000 a month funding these claims—is an indication of the seriousness of the situation and the potential value, according to Mr Ebrahim.

Another challenge for the mine owners is that courts worldwide are increasingly ‘pro-poor’ and the South African courts have been fairly open that they agree with that stance.

Although the class action involves miners with silicosis, the mine companies themselves all operated under slightly different rules and each mine shaft is individual, so defence lawyers have questioned whether the class action represents a common group. Another challenge for the plaintiff bar is that tuberculosis, commonly found in silicosis sufferers, is endemic in South Africa and is often cited on death certificates.

The plaintiff bar will need to show that the illness is related to working in a cited mine and was linked to silicosis.

However the key challenge, as one leading lawyer recently said, is: “Nobody knows how many people are suffering from silicosis in southern Africa. Claims are dating from 1958 up to the present day and how many firms keep records for up to 58 years?”

Issues for South Africa-based businesses and their insurers to consider is that: n T he local landscape, and with it insurance, has been breached by the Mankayi decision; n T he South African courts are likely to extend the use of class actions up to a point; n T he courts are likely to re-examine strict liability; and n T he courts are not going to adopt any form of conservative approach.

Global experience South African risk managers and insurers may also want to take a look at the experience in other parts of the world. David Wynn, Partner and Head of Disease Claims in Clyde & Co’s Manchester office, ran delegates through the experience in the US and the UK around other work-related disease claims.

He says: “At the moment, the US is over its asbestos peak and the UK is at a peak in terms of claims, with an expectation that it will be over it in the next five years.” However, Mr Wynn warns that asbestos-related claims are not the only concern, with noise-induced hearing loss claims climbing rapidly.

In an African context, Leon Rossouw, of Marsh, warns that not only is noise-induced hearing loss an issue but he fears platinum-related sickness will also be on the agenda soon—possibly very soon if the silicosis class action succeeds.

His concerns were echoed by Adrian Reed, of Willis, who adds: “Manganese has proved to be quite hazardous. Vibration white finger and also noiseinduced hearing loss claims are also rising.

“I think it is all coming down the track,” he warns. “The only question is whether the train can be diverted.”

Mr Ebrahim warned of more change to come in the legal regime. “I guess prior to 1994 there was not much scope to pursue class actions. But now I think the proverbial horse has bolted.”

Pre-emptive action The speakers also suggested that business sectors might want to develop their own compensation system or scheme before the courts make rulings.

He points to the asbestos scheme and says that industry has already developed such schemes, working with insurers. Although under any new scheme, the quantum might be different as there is at least a precedent for working out a solution.

Mr Reed points out the problems in affording such a scheme in relation to silicosis, particularly in a sector where there is a diminishing profit to be made. “One has to think the cost of compensation would be huge in relation to the net worth of the industry today, which is a lot less than 15 years ago. It is a good idea, but…”

The government would most likely want to be involved in the construction of any scheme, according to Mr Ebrahim, because of the continuing importance of the sector to the country’s GDP, as well as the importance of the number of jobs still dependent on the sector.

A partner in the Johannesburg office of Clyde & Co, Daniel le Roux, says he is aware of at least one mining house that is actively engaged in conversation around the concept.

He also warns insurers that if the plaintiff bar proves successful in winning compensation for silicosis sufferers, mining houses are likely to turn to their insurance policies for possible recovery.

The impact of that should not be underestimated, according to Mr Reed, who points to the asbestos experience in the UK and the way it impacted Lloyd’s.

“If you apply that to silicosis, one would not be surprised it might be coming on the horizon,” he says.

Insurance solution?

There was disagreement on whether the mining houses should look to insurance for a solution. “I don’t think an insurance solution will make the problem go away,” said one observer. “If there is an insurance contribution, so be it, but I don’t see a huge payout from the insurance market. The key is to admit there is an issue and do something about it.”

Where Mr Roussouw saw more of an issue for the insurance market is around the use of contractors in the mining sector. “I think there is a real possibility of something lurking there, opening all sorts of doors,” he believes. “I am a little more pessimistic about insurance involvement in that and insurers need to look at their wordings.”

Like Mr Reed, he sees inevitability about claims coming in the future and he is more concerned about the position of insurers in relation to the use of contractors and their exposure to silicosis claims.

Asked about the possibility of claims against directors’ and officers’ policies, Mr Roussouw did not believe they would respond, given that silicosis claims were personal injury claims. He also questioned whether the plaintiff bar would worry about that because the pot of money would be relatively small, however he warns that insurers may have to face defence costs related to any such claims, regardless of their merit.

Another concern raised by Mr le Roux was the capability of smaller mining houses to survive an onslaught of silicosis claims. “Companies like Anglo may be able to afford this,” he says, “but what about smaller companies? They have a risk of going insolvent and then claimants may turn to the insurers as they would be entitled to do in terms of the South African Insolvency Act. Given the claimant bar, there is certainly scope for claims directly against insurers.”

One Team. One Dream.

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With you from A-Z Suguru Tsuzaki, Vice President San Roque Power Plant

12

Southern Africa: Silicosis

CONFERENCE

Understanding the issues from a claimant perspective While South African risk managers continue to grapple with the issue of industrial disease claims, as the law continues to evolve, Commercial Risk Africa, supported by Clyde & Co, had an opportunity to discuss the claimants’ position with leading South African claimant lawyer, Richard Spoor With a possible need for legislative reform at the back of his mind, Richard Spoor, of Richard Spoor Inc. Attorneys, is firstly concentrating on winning adequate compensation for the thousands of miners affected by silicosis.

Reports on how many southern African miners are affected by the disease vary widely, with the South African Medical Journal talking in terms of some potential 200,000 sufferers. Other figures suggest one in four miners are affected by the condition, which can prove fatal. Mr Spoor himself is driving a class action through the South African courts with a view to representing more than 24,000 class members.

The class action certification process is currently underway and a decision should be made in October this year. Mr Spoor says his firm has 30 proposed class representatives from the Eastern Cape, Lesotho and Botswana.

The litigation names 32 mining companies, alleging they knew of the danger to miners for more than a century and that they are liable for 12 specific forms of neglect and endangerment.

Mr Spoor says he would be happy to sit down with the mining companies and work out a solution but also warns that if the mining companies start to lobby government for legislative change, then he will follow suit.

In a more conciliatory tone, he also says that he would be happy to work with the mining houses and with actuaries to gauge the true extent of the potential liability. “We know there have been up to 500,000 active miners in the past but this number has fallen dramatically in more recent times,” he says. “Miners generally have a working life in the mines of about 17 years and we know that, of these mine workers, between 20% and 30% have silicosis.”

Proving the case The class action includes dependants of mine workers, although Mr Spoor admits that proving the case for dependants is often much harder as the cause of death will not necessarily have been fully recorded.

“A lot of these miners come from rural areas,” says Mr Spoor. “It is very rare you have medical evidence. And South African law is quite prejudicial to the claims of widows. Also many of the claimants are old.

“Their working life seldom continues beyond the 20 years, which brings them into their 50s.

After that, most miners are probably not well enough to continue working. The time spent in the mines is often split—workers may spend a year in a mine then have a gap before returning to the sector a couple of years later.”

He says that, with such a high mortality rate among the miners and the sporadic nature of their employment, it all adds to the increased difficulty in bringing claims. “Death does extinguish liability,” he says, while another challenge comes in establishing exactly who is liable.

Another complicating factor has been the sale of the various mining houses. Mr Spoor believes there are two types of defendants—the mine owners, who have a statutory liability, and then the

parent companies.

“The parent liability issue has not been tested in the South African courts,” he says, whereas the UK courts have made a judgment in Chandler v Cape PLC. However, even if the parent companies are brought into the litigation, Mr Spoor acknowledges there remain issues around causation and contribution.

“Mine workers may spend four years with one mine and then 11 years with another—should compensation be pro rata or should one employer take on the whole liability?”

Silicosis questions Even though silicosis has been identified as a disease for around 100 years, there is still little evidence about contracting the condition. It is agreed that silicosis can only be contracted by inhaling silica dust, generated in the mining process, however arguments continue to rage over whether a miner will be affected by brief exposure or whether it requires long-term exposure. There are also questions around why some miners are affected very rapidly on starting work and others spend years in the mines and remain well.

Mr Spoor says: “There is a lot of bluster about this. We are talking about deep level mining where people are working in enclosed spaces and it is very dusty. The case is about how you should protect workers, assess risk and take measures and then monitor the steps you have taken.”

He argues that insufficient measures were taken and, even where they were, information was not fed back into the risk management systems.

“Business and the risk management system is what this is about,” Mr Spoor stresses.

Looking to the UK’s compensation for mesothelioma sufferers, Mr Spoor acknowledged the South African system did not have anything comparable. He believes there is a strong case for mine owners to avoid the courts and settle.

He says the courts may well adopt the position that miners do not get sick unless they have been exposed to harmful quantities of silica dust and the onus is on companies to prevent that happening and to ensure the workplace is as safe as possible.

Why now?

Looking at why these claims can be brought now, Mr Spoor says much of it lies in the history of the country and the attitude of government to the importance of the mining sector and the value of employees.

Successive apartheid-era governments were not prepared to “kill the goose laying the golden egg” and did not want to upset one of the few, and major, contributors to GDP and foreign exchange.

South Africa does have a compensation system, established under the Occupational Diseases in Mines and Works Act (ODIMWA). The mining industry pays a levy to the compensation fund but the levels of compensation have remained low. Mr Spoor also believes the system has been fairly ineffective and only some 5% of affected mine workers were actually receiving compensation at all.

Another problem for the scheme is that it is based on the number of workers in the industry, however sufferers may not be identified for up to 10 or 15 years after leaving the sector. In the past, the industry had many more workers.

Comparing it to the problems in Europe with pension systems, the ODIMWA faces the same issues of a diminishing pot faced with increasing demands.

Combining that with a couple of key court decisions, the time is right, he says, to bring the class action. In March 2011, the Constitutional Court of South Africa issued a landmark ruling in Mankayi v AngloGold Ashanti. The claimant had been given a limited payout for his injuries under ODIMWA but filed under common law for his lost wages, damages and medical expenses. By winning in the Constitutional Court, it has paved the way for other cases to follow.

While everyone is waiting to see the decision of the South African judiciary in terms of the class action, Mr Spoor remains confident that the mining companies will want to settle—not least to achieve certainty on the balance sheet and to be able to draw a line in the sand in terms of the future.

Future claims Looking to the future more generally, Mr Spoor sees an increasing number of victims of noiseinduced hearing loss. He argues that today most people with such problems are given analogue hearing aids, costing around R3,000, however Mr Spoor says it may not be too difficult to persuade the courts that sufferers should receive digital hearing aids, costing nearer R15,000. Sufferers should also be entitled to batteries for the devices.

“People are entitled to be properly treated,” he says. At the moment, the difference between statutory benefits and the actual financial loss can be quite significant, he believes, and that gap should be closed.

More broadly, he believes the compensation scheme governed by the Compensation for Occupational Injuries and Diseases Act is too rigid—sufferers are entitled to set payments for the loss of an eye, for example, but they are not truly being compensated on the impact of the disability.

Mr Spoor explains: “The loss of an eye for a lawyer would not have the same impact on their ability to work as, say, for a pilot. It is that kind of thing that needs to be addressed.”

Ultimately, he believes there could be a role for insurers in helping develop a more equitable system, by encouraging employers to take more responsibility in driving up standards and also in providing a system where injured workers are properly compensated.

In the meantime, it is a case of waiting to see how the courts view the prospect of a class action for silicosis sufferers—and that will not be known until October this year.

INDUSTRY SECTOR

Transport

13

Time to take the brakes off Increased investment in transport infrastructure can facilitate cross-border trade and drive regional integration, as Gareth Stokes explores

Skyward bound

T

he World Economic Forum 2014/2015 Global Competitiveness Report (GCR) paints a gloomy picture for cross-border transport in Africa.

There are only a handful of countries where overall transport infrastructure rankings are better than the global ‘mean’, with the best prospects located in north and southern Africa—in countries such as Tunisia and South Africa.

The Programme for Infrastructure Development in Africa (PIDA) estimates that $360bn in infrastructure investments is required in Africa between 2011 and 2040. PIDA outlines 51 priority ‘backbone’ infrastructure projects that would cost $68bn by 2020, with almost 40% of this total ring-fenced for transport infrastructure.

This unflattering overview of the African transport infrastructure landscape does not detract from the potential in transportation businesses. Although the outlook for transport and logistics companies in South Africa and Africa is mixed, persistently lower global fuel prices and the projected positive economic growth rates for many countries in Africa will impact positively on the industry.

But lower energy prices present challenges too. Threats to companies operating crossborder in Africa include volatility in fuel costs, concerns over carbon emissions and environmental impact, shortfalls in rail capacity, corruption and overloading of road networks.

Road reliance

The bulk of cross-border transport in Africa is completed by road—with rail (from mine to port) dominating the space for commodity exports out of Africa. Whether goods are shipped by air, rail or road is less important than ensuring that the various categories of goods are being transported by the most appropriate, efficient and sustainable mode of transport.

There is consensus that Africa relies too heavily on its road infrastructure for bulk freight. The volume of bulk freight transported over long distances by road remains too high and has an adverse impact on safety, the environment and the road infrastructure.

A glaring challenge in the industry is the obvious underinvestment in road and rail infrastructure throughout Africa. Governments will have to increase their expenditure on transport services and the related infrastructure if they hope to create much-needed jobs and enable greater economic growth.

Brakes on growth

While demand for logistics and freight services will remain robust, there are concerns about the slump in global commodity prices, which have placed strain on bulk freight transport businesses as African miners curtail production and exports.

A programme aired on CNBC Africa last year—Invest Africa: Transport Infrastructure Investment in Africa—acknowledges that Africa’s poor transport infrastructure is limiting its economic growth. Richard Matchett, Divisional Director, WSP Civil & Structural Engineers—who participated in the television debate—observes that transport infrastructure is the key to unlocking a country’s potential.

Investment is desperately needed as transport infrastructure is integral to facilitating cross-border trade and improving regional

integration. It is also widely accepted that poor transport infrastructure is an impediment to economic growth. The consensus is that intraAfrica freight volumes will improve markedly and play a part in enhancing regional trade if this investment is given priority.

Funding improvements

One of the major hiccups for Africa-wide infrastructure projects is financing. As governments come under increasing strain to fund non-transport socio-economic promises to their electorate, they have no choice but to seek out private-public-partnerships (PPPs) to build air, rail and road infrastructure.

The transport infrastructure investment challenge has created a great opportunity for the Africa region to develop and implement progressive PPP investment strategies and to implement projects that will ensure that the obligation to fundraise and the risks and rewards of investments are shared by all relevant stakeholders.

Estimates state that as much as 40% of existing highway infrastructure in Africa is not up to scratch, with only a handful of countries boasting road infrastructure ratings (according to the GCR 2015) that are better than the global average. The best ranked African countries include Namibia (28th), South Africa (37th) and Rwanda (46th), while the worst ranked include Guinea (143rd), Libya (142nd) and Mozambique (141st).

The New Partnership for Africa’s Development (Nepad) outlined some of Africa’s largest road infrastructure projects at the recent Dakar Financing Summit for Africa’s Infrastructure. One of these is the upgrading of the Serenje-Nakonde road, covering a total of 614.7km at a cost of $674m. The solution will improve the overall road transport infrastructure that accounts for more than 80% of cargo in the Dar es Salaam Corridor.

Another is the Abidjan-Lagos Coastal Corridor, which is the most travelled west African corridor on the African Regional

Transport Infrastructure Network. The upgrade, budgeted at just short of $70m, will increase regional trade and contribute to regional integration involving five countries –Ghana, Ivory Coast, Togo, Benin and Nigeria.

On the rails

But the salvation for Africa could lie in improved utilisation of the existing rail infrastructure. More freight needs to move by rail on the continent and more countries need to commit to upgrading their existing rail infrastructure, building new railway lines and investing in rolling stock.

Rail is seen as a relatively safer mode of transport than road and it is best placed to provide significant cost savings for long-haul bulk transportation. The risk of theft on trains is lower than road and, by design, cross-border movements should be seamless.

South Africa, for example, has invested heavily in its passenger rail rolling stock to replace its ageing fleet. Associated signalling infrastructure and station and marshalling yard upgrades have are also being procured by the Passenger Rail Agency of South Africa— but major track upgrades on the manganese line, Waterberg coal line and the new Lothair link are yet to go to tender.

Although there are no major new build projects underway, rail operator Transnet has embarked on a highly-publicised Market Demand Strategy, which will see the introduction of new rolling stock and infrastructure upgrades to the network.

National rail operators in the rest of Africa have been adopting a corridor-specific approach to enhancing cross-border freight movements. The north-south rail corridor in particular has been very successful in recent times and has seen a more predictable and efficient rail service between customers and mines in northern Zambia transporting freight to the ports of Durban and Richards Bay. The operational efficiencies have been achieved through extensive collaborative efforts across country networks including Zambia Railways, Beitbridge Bulawayo Railway and Transnet.

The fact that many African countries are landlocked and the vast majority of countries have poor rail and road infrastructures is also a factor that contributes to air transport being a viable option to certain destinations.

Airfreight out of Kenya, for instance, is a very big market due to the export of fresh flowers—as much as 200 tons per day—for the European market. It is not uncommon for airlines such as KLM and Lufthansa to depart out of Johannesburg and stop over in Nairobi specifically to pick up flowers. Heavy investments have therefore been made in airport infrastructure in Nairobi. A further example of this is animal vaccines, which are exported out of South Africa to a number of African countries.

Of course there are risks, though the reduced transit times certainly reduce the extent to which the cargo is exposed. The largest risk with moving cargo via airfreight is the continual change in local laws at destination—laws are changed without much notice and the policing of the regulations can be extremely inconsistent.

The high level of bureaucracy and rapid changes in laws result in increased costs in the form of penalties, delays, product damages and pilferage.

The long-term effects of civil wars and the lack of investment in infrastructure have led to a situation where airport infrastructure in much of Africa is far below the required standards.

Airport operators are often unable to handle the various products correctly and struggle to meet turnaround times and correctly handle modern aircraft. But the fact that Africa has developed into a key market in the global commodities context should serve as motivation for the upgrading of airport facilities in various African countries during the next few decades.

Cause for optimism

There is a bright future for Africa transport infrastructure projects through to 2020 and beyond. “The African Union and NEPAD have a wish list of what needs to be done regarding ensuring sustainable and affordable cross-border trade,” says Vishaal Lutchman, Divisional Director, WSP, Parsons Brinckerhoff, Development, Transportation and Infrastructure, Africa.

To succeed, governments will have to implement fundamental reforms and address the sticking points including cumbersome customs and trade regulations and the prevalence of corruption at border posts, to name a few. “All stakeholders will have to develop clear country strategies on how to facilitate cross-border trade with due consideration for the many challenges already identified,” Mr Lutchman says. Regulation is one such stumbling block, as is political interference in state-controlled transportation assets.

Many African economies are also encumbered by the legacy of colonialism, which saw them inherit infrastructure that was designed to specifically serve the interests of ‘occupying’ countries such as France, Portugal, Spain or the UK. Historical affiliations with western powers often hinder negotiations between African countries, as evidenced by the close alignment between African trading blocks and their former ‘occupiers’.

Andrew Maggs, an independent research analyst, offers some insightful comments in the Invest Africa insert. He observes that air, road or rail infrastructure development has to occur as a coordinated effort—and that it does not help for individual countries to pursue their development agendas in isolation. Africa has to adopt a more coordinated approach to crossborder planning, development and installation of infrastructure.

COUNTRY FOCUS ethiopia at a glance n

CAPITAL CITY:

n

Type of government:

n

Head of government: Prime Minister Desalegn Hailemariam

n

Population:

n

Land area:

1.104m km2

n

Coastline:

Landlocked

n

Neighbouring countries:

Addis Ababa Federal Republic 96.6m ( July 2014 est.)

Djibouti, Eritrea, Kenya, Somalia, South Sudan & Sudan n

GDP: US$139.4bn (2014 est.)

n

GDP growth rate:

8.2% (2014 est.)

n

Inflation rate:

7.8% (2014 est.)

source: CIA World Factbook

Ethiopia Ethiopia has been a fairly closed book in terms of foreign investment but things are changing. Here are some facts about the Ethiopian economy

Ethiopia factbook

K

ey growth drivers in Sub-Saharan Africa (SSA) will continue to be natural resource exports and investment in commodities.

The service sector is also making an increasing contribution to the region’s growth, particularly finance and telecoms.

Ethiopia is the fastest growing non-oil-producing economy in Africa.

The Ethiopian economy has experienced spectacular growth during the past decade, with an average GDP growth rate of 11%, about double the average growth for SSA (UNDP Policy Advisory Unit, Analysis Issue, February 2014).

A genuine agricultural transformation articulated by the proliferation of modern commercial farms, as well as a leap in the productivity of smallholder agriculture, is a very realistic possibility in the next few years, and will hence be a key driver of nationwide growth.

Moreover, emerging export industries in mining, manufacturing and services are already making their mark as sources of economic growth and will soon overtake traditional foreign exchange earners such as coffee and other agricultural commodities.

Massive public investments are set to deliver a wide range of public goods—roads, railways, sugar factories, power plants, metal industries, schools, and hospitals—while simultaneously buttressing thousands of private companies involved in building and maintaining these brand new facilities.

Public investment has in recent years been one of the major drivers of economic growth in Ethiopia. Total government spending, passing Birr100bn for the first time, has doubled in the past three years and quadrupled in the past six years. Among the notable plans in this area are: Roads: Building 71,000km of new highways, including all-weather roads providing access to virtually all Kebele administrations.

Railways: Construction of 2,395km of new railways linking Addis Ababa with Djibouti, Awash-Woldiya-Mekelle and the Addis Ababa light railway network, to mention just a few.

Air Infrastructure: Increasing Ethiopian Airlines’ fleet by 35 additional aircraft, including four new cargo carriers, and building a huge new cargo hub at Bole Airport with capacity to handle 125,000 tons.

Power: Addition of 8000MW of new power generation capacity.

Rapid growth Ethiopia has registered remarkable economic performance, with annual growth averaging 10.9% in the past 10 years. This is double the SSA average and triple the world average during this period and has led to Ethiopia being rated as one of the fastest growing economies in the world.

Huge public investments with a focus on infrastructure and pro-poor sectors explain much of the economic performance from the expenditure

CONTINUED ON PAGE 16

Ethiopia

16

COUNTRY FOCUS

Insurance to play increasing role in Ethiopian development Ethiopia has been growing rapidly for more than a decade. Liz Booth visited the country to take a look

The Lion of Judah, Addis Ababa

T

he Ethiopian economy has been growing rapidly for the past 11 years, towards its vision for 2025.

The Honourable Ahmed Shide, Minister of Finance and Economic Development for Ethiopia, says the whole philosophy of the vision is to support development of the nation, with financial services leading the way in enabling that progress.

“The banking sector has a tremendous responsibility,” he says, “and the insurance sector will play a significant role in this.”

Referring to the Common Market for Eastern and Southern Africa (Comesa) heads of state conference in Addis Ababa late last month, the minister says: “The conference comes at a time when we are trying to improve economic conditions for our people. It is true Africa is emerging as a continent to watch and Comesa is encouraging business.

“We are all aware of the economic opportunities in Africa,” he adds, saying much of the rest of the world, and financial services in particular, are still smarting from the challenges of the financial downturn.

Mr Shide stresses: “We appreciate the important role that insurance plays in the development of our country.

The industry addresses employment issues and contributes towards the economy directly. The Ethiopian government will strive to provide attractive conditions for local and foreign investments and this will encourage insurance—on a national level, a regional level and internationally.”

He stresses that his main message is that the insurance industry will shortly be able to take advantage of opportunities in Ethiopia.

Investment needed Speaking exclusively to Commercial Risk Africa, Mr Shide says the Ethiopian economy to date has been heavily based on smallholder agriculture and he says the country needs a lot of investment.

The minister sees the banking sector, supported by the insurance industry, as a way to mobilise resources locally and deliver it into development areas.

“Insurance is a key player in the financial sector. The banking sector, including insurance, will become even more important in the near future as the country moves into the manufacturing sector,” he says.

The minister says the development of manufacturing—something Africa as a whole is weak on— will start by developing manufacturing around adding value to the agriculture sector.

“It will transform the economy from smallholder agriculture to manufacturing,” he says. Ethiopia, with the help of insurance, he adds, is ready to “unleash the opportunities”.

Mr Shide stresses: “Our agriculture will remain a source of development but we need to add value to the sector.”

CONTINUED FROM PAGE 14 side. Government investments have mainly been carried out from domestic resource mobilisation and augmented by external resource inflows.

Domestic savings have been growing significantly in the past few years—from 12.8% of GDP in 2010/2011 to 17.7% of GDP in 2012/2013.

The Ethiopian economy grew by about 9.7% in 2013 as macroeconomic conditions were expected to continue. This represents rapid growth, compared with 5.5% for SSA and 4.4% for the entire world in the same period.

Within the 2013 overall real GDP growth rate of 9.7%, annual growth rates of the major sectors—agriculture, industry

In terms of manufacturing, Ethiopia will start by looking to the textile sector, which can develop on the back of the country’s agricultural base. Other areas include chemical and laser processing.

The government plans to develop seven or eight manufacturing focuses, which it will promote in terms of foreign direct investment. The government itself, says the minister, will continue to invest in infrastructure and on building institutions.

“But the real wealth generation has to happen both by the Ethiopian government, the private sector and international investment,” he says.

Primed for funding Mr Shide adds that the government would be promoting foreign direct investment and the use of the strengthening banking sector to enable the business sector. He sees investment coming from all corners of the globe. “Ethiopia is set to attract investment,” he says.

Ethiopia is primed for foreign investment, he believes, thanks to strong infrastructure, including railway and road links, as well as a good power supply and investment in the economy.

Not only does Ethiopia now have a direct rail link to the east coast, allowing for exports and imports, but it also has sufficient power to sell to its neighbours after already

and service—were 7.1%, 18.5% and 9.9% respectively.

According to MOFED, the country’s GDP growth rate for 2014 was expected to reach 11.2%.

Industrial expansion Growth in the industrial sector was very strong in the past three years. This sector was the highest performer in 2013/2014— registering 21.2% annual growth, which was about 2.8% lower than a year earlier. Its share in the total domestic output, however, stood at 14.2%—a 1.3% increase over the preceding year.

Despite its faster growth rate compared with the other two major sectors, the industrial sector’s share of GDP remained low.

meeting its own needs.

The minister is aware of the skills shortage across the region and says the government is determined to address the issue. It is already investing heavily in health and employment but has developed a 70:30 strategy for its universities. This means universities will have courses that deliver 70% of its students directly into the areas of the economy where skilled labour is most needed. The other 30% will graduate with social-related degrees.

“We will align education to the demands of the economy,” he says, “and that will help reduce the scarcity of skilled labour.”

Alongside investment in the economy and education, the minister says the government is determined to “build its institutions to ensure they deliver good government to the people of Ethiopia”.

For example, he says the government has upgraded the investment authority into an investment commission to be able to deliver one-stop shipping to investors. The Prime Minister is chairing the commission to ensure everyone sees how vital this is to the future of the country. Investment will be centred around Addis Ababa and selected regional hubs, with the construction of industrial zones.

Overall, says the minister, the message is that the country is ready for the next phase of its transformation and is looking to attract quality investment into the country to give another boost to its GDP.

The agriculture sector’s contribution to GDP growth in 2014 was down by 9% to 21.9% against the previous year, highlighting a structural shift in the economy from agriculture to the service sector.

In 2013/2014 the service sector registered year-on-year growth of 11.9%, which was 2.9% higher than the previous year. The service sector’s share of GDP was about 45.9%—up from 38% in the past 10 years. Agriculture’s share of GDP declined from 52% to 39.9% in the same period. However, agriculture will continue to be the main source of employment as the service sector has not yet been able to generate much in the way of jobs.

Source: Yewondwossen Etteffa, CEO, Ethiopian Insurance Corporation

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Ethiopia

18

COUNTRY FOCUS

Too many people remember Ethiopia of the 1980s and 1990s when famine struck. Agriculture remains the mainstay of the economy, although the government is looking for change. Earlier this year, the World Bank issued a series of reports on the current situation within the agricultural sector and the prospects for development

International agencies have confidence in Ethiopia, politically and economically

A

gricultural growth

has been the main driver of poverty reduction in Ethiopia since 2000, according to the World Bank Group’s (WBG) latest Poverty Assessment.

Poverty in Ethiopia fell from 44% in 2000 to 30% in 2011, which translated to a 33% reduction in the share of people living in poverty.

This decline was underpinned by high and consistent economic growth.

Since 2005, agricultural growth has been responsible for a reduction in poverty of 4% a year, suggesting that the agricultural growth strategy pursued by the government of Ethiopia has paid off. The WBG says high food prices and good weather ensured that increased use of fertilizer was translated into higher incomes for poor farmers with access to markets.

Government spending on basic services and effective rural safety nets has also helped the least well-off in Ethiopia. The Productive Safety Net Program alone has pushed 1.5 million people out of poverty.

“Although Ethiopia started from a low base, its investment in pro-poor sectors and agriculture has paid off and led to tremendous achievements in economic growth and poverty reduction, which in turn have helped improve the economic prospects of its citizens,” says Guang Zhe Chen, WBG Country Director for Ethiopia.

The pace of poverty reduction in Ethiopia has been impressive, especially when compared with other African countries; only Uganda has had higher annual poverty reduction during the same period. Health, education and living standards have also improved, with undernourishment down from 75% to 35% since 1990 and infant and child mortality rates falling considerably since 2000.

New financing As part of its bid to help Ethiopians out of poverty, last month the WBG’s board of executive directors approved $350m to help the Ethiopian government increase agricultural productivity and enhance market access for smallholder farmers in more than 150 of its rural districts.

The new financing, from the WBG’s highly concessional lending agency the International Development Association, will further boost the development potential of Ethiopia’s agriculture industry, which accounts for 45% of the country’s total output and occupies nearly 80% of the nation’s labour force. It is also a major contributor to export earnings.

The Second Agricultural Growth Project (AGP2) will operate in 157 woredas (districts) in Amhara, Oromia, SNNPR, Tigray, BenishangulGumuz, Gambella and Harari regional states, as well as Dire Dawa city administration.

The project will directly benefit 1.6 million smallholder farmers, who live in areas with the highest potential for agricultural growth.

The project builds upon the impact of the ongoing AGP1 by increasing its geographical coverage and incorporating the lessons from the original project. AGP1 has benefited communities in 96 woredas, including through the construction of irrigation, feeder roads, footbridges and market centres, the establishment and support to farmer groups, strengthening public agricultural services, and improving smallholder farmers’ access to markets.

“We are encouraged by the positive results achieved under AGP1, which is helping to improve the livelihood of smallholder farmers

and their communities. The new financing will further empower smallholder farmers, especially women and young people, to define the support they need to raise their productivity and get better access to markets,” says Mr Chen.

AGP2 will support the government in increasing productivity and commercial opportunities for smallholder farmers by: n Increasing access to agricultural public support services; n I ncreasing the supply of agricultural technologies through support to agricultural research; n Increasing access to and efficient use of irrigated water; n Better connecting smallholder farmers to markets; n Improving project management, capacity building and monitoring and evaluation.

The WBG’s support for AGP2 is expected to leverage additional support from other development partners to create well coordinated donor support for Ethiopian agriculture.

“Achieving transformation in agriculture will further fortify Ethiopia’s ambition to become a middle income country by 2025. This latest project will support this vision through its special focus on smallholder farmers, providing them with the production and marketing services and

infrastructure they will need to thrive,” says Andrew Goodland, WBG Program Leader.

Private sector key to future success

The private sector is expected to play a key role in Ethiopia’s journey to become a middle income country in the next decade. However, Ethiopian firms face significant financial constraints, because financial institutions do not accommodate their needs, a new WBG study has found.

The report—SME Finance in Ethiopia: Addressing the Missing Middle Challenge—reveals that without adequate support from financial institutions, small and medium-sized (SME) businesses are not able to grow, or create more job opportunities.

This gives origin to the so-called ‘missing middle’ phenomenon whereby small enterprises are more credit constrained than either micro or medium/large enterprises,” says Francesco Strobbe, WBG senior financial economist.

The study used both supply and demand research to offer a complete picture of SME’s finance practices in Ethiopia. While there was already anecdotal evidence that small firms were lacking suitable access to finance, the study was able to provide empirical evidence of the existence

RATING AGENCIES remain confident Ethiopia’s economic growth continues to outpace the average for its peers, and its large service exports and remittances support the current account position, according to Standard & Poor’s (S&P) as it affirms its B/B ratings on Ethiopia.

It says: “Public sector borrowing by state-owned enterprises is rising, straining government debt metrics and contingent liabilities. The stable outlook on Ethiopia reflects our view that, in the next year, the economy will sustain strong growth, current account deficits will not rise significantly, and the debt burden will not increase substantially above our current expectations.”

The rating agency adds: “The ratings are constrained by Ethiopia’s low GDP per capita, our estimate of large public sector contingent liabilities, and a lack of monetary policy flexibility. The ratings are supported by Ethiopia’s brisk economic growth rates that exceed that of peers. Ethiopia’s ratings also reflect the country’s moderate external deficits and fiscal debt, post-debt relief.”

Excluding borrowings by state-owned enterprises, it estimates net general government debt will rise to 26% of GDP by 2017, from 21% of GDP in 2013. In addition, Ethiopia’s foreign exchange reserves are low, at approximately two months of import cover.

“The decline in international commodity prices—mainly coffee, gold and, to a lesser extent, horticulture (flowers, fruit, and vegetables), which are the main export items—continue to weaken Ethiopia’s trade balance,” warns S&P. At the same time imports have been rising, predominantly due to capital goods for construction projects and fuel imports. Ethiopia benefits from a services account surplus largely linked to Ethiopian Airlines’ revenues and large current account transfers, mainly remittances that S&P estimates at about 10% of GDP. “The agriculture sector, alongside sizeable government spending in public sector infrastructure, has delivered high economic growth rates averaging at least 9% for the past decade. We estimate real GDP per capita growth will average 6.4% in 2014-2017. The government, through its state-owned enterprises, continues to invest in roads, rail, and hydropower projects. However, despite these investments, we estimate Ethiopia’s GDP per capita wealth levels will remain low at $630 in 2014,” adds the agency.

The $4bn-$5bn Grand Renaissance Dam hydropower project, currently 40% complete, is expected to start providing energy (just 750 megawatts) in the next 12-18 months. The dam will be completed and at full capacity in three to five years. S&P expects this will further boost Ethiopia’s economic growth and exports. “In our view, Ethiopia faces geopolitical risks from four of its six unstable neighbouring countries: Somalia, Eritrea, Sudan and South Sudan, which are currently involved in domestic conflicts. However, Ethiopia has been at the forefront of finding peaceful solutions for its neighbours through the Intergovernmental Authority on Development in member states around the Horn of Africa and east Africa,” it concludes.

Meanwhile, Fitch Ratings has affirmed Ethiopia’s Long-term foreign and local currency Issuer Default Ratings (IDRs) at ‘B’. The issue ratings on senior unsecured foreign currency bonds are also affirmed at ‘B’, with a stable outlook. The Country Ceiling and the Short-term foreign currency IDR are also affirmed at ‘B’.

Fitch says “Ethiopia’s ‘B’ IDRs reflects a balance between the economy’s high exposure to weather and commodity price shocks, as illustrated by particularly weak development and governance indicators, and strong economic growth associated with improved public and external debt ratios.” Key rating drivers include: n Development and World Bank governance indicators remain weak despite achievements in the last decade. n Macroeconomic performance is broadly in line with peers. n General government’s fiscal stance has remained cautious. n The banking sector is sound with NPLs of around 3% of gross loans; however, risks could emerge. n Weak FX generation is a constraint on the ratings given the rising foreign-currency indebtedness of the government.

of a “missing middle phenomenon”.

The study also offers recommendations to help reduce financial challenges and promote the growth of SMEs. Those recommendations were discussed after the launch of the study during a two-day forum with high level policymakers and stakeholders. The forum also enabled participants to learn from global best practices from Nigeria and Ghana, which were able to successfully implement financing activities for SMEs. The WBG says it supports the Ethiopian government’s efforts to create jobs through analytical studies and investment operations.

The Ethiopian government has prepared a private sector development strategy to improve the productivity and modernisation of the agricultural sector, and boost the technological sophistication and economic input of the industrial sector.

It has also identified the development of micro, small and medium-sized enterprises (MSMEs) as a key industrial policy direction for creating employment opportunities for millions of Ethiopians. However, all this is not sufficient and much more remains to be done to unleash the full potential of SMEs, says Mr Chen.

“To help fill in some of the gap through microfinance institutions, the World Bank Group, in cooperation with DFID and CIDA, is supporting the Women.s Entrepreneurship Development Project,” Mr Chen says. “In addition, through the $250m Competitiveness and Job Creation Project, the WBG is also helping to create dedicated industrial zones.”

The government’s second Growth and Transformation Plan (GTPII), currently under preparation, will place even more emphasis on the importance of private sector development and therefore on easing access to finance for SMEs. The government has put in place helpful public support programmes but much more is needed to properly address the missing middle challenge.

“By increasing the capacity of the financial sector to properly serve the segment of small enterprises with adequate financial products, we hope to address lack of access to finance, which is a key obstacle that is currently preventing small enterprises from fully playing their role in the industrialisation process of Ethiopia and in contributing to the job creation agenda envisaged in the GTP I and GTP II,” says H E Ato Desalegn, State Minister Of Urban Development Housing And Construction.

Private sector ecosystem

Taking into consideration the findings and recommendations of the study, the WBG will help support the government in designing new initiatives to better serve the financial needs of SMEs and create an “SME finance culture”.

These interventions will complement the positive results of ongoing operations such as the Women’s Entrepreneurship Development Project and the Competitiveness and Job Creation Project by linking SMEs with larger enterprises in the industrial zones and contributing to the creation of a “private sector ecosystem” around the industrial zones.

“The SME finance study contains important policy recommendations that will need to be taken into account in the design of a new SME Finance project,” Mr Desalegn adds. “I’m confident that the inputs will help promote an SME finance culture in Ethiopia that will greatly contribute to the industrial policy objectives of the GTP and ultimately to the wellbeing of our country.”

COUNTRY FOCUS Ethiopia

19

Time is ripe for Ethiopian insurance sector Ethiopian insurers have an unparalleled opportunity to expand in what is effectively a closed market, as Yewondwossen Ettefa explains to Commercial Risk Africa

E

thiopia’s insurance industry is relatively undeveloped, which is exemplified by the low penetration—there were just 300,000 insurance clients in Ethiopia in 2014, according to Yewondwossen Ettefa, Chief Executive Officer of the Ethiopian Insurance Corporation.

He said that, according to the Center for Financial Inclusion’s latest figures, insurance premiums, including life and general insurance, totaled Birr4.9bn in the 2013/2014 financial year, accounting for a mere 0.2% of GDP. In 2014, there were 17 insurance companies with a total capital of Birr2.03bn operating a network of 332 branches throughout the country. General insurance dominates the sector, with motor vehicle insurance accounting for 43% of total insurance premiums. Life insurance accounted for 6% of total premiums.

developed more than half a century ago and continue to be sold with little or no modifications.”

Mr Ettefa also worried: “No one knows for sure the source of the rates being applied to compute premiums for the various classes of business, except that variations of the rate charts which were used by Ethiopian Insurance Corporation were put into use with little or no modification.

“As the pricing of products was not done in a scientific way there is no surprise that price continues to be highly volatile, making it the main challenge for the industry.”

He continued: “The fact that the market has never experienced any serious major loss towards which insurers were called to contribute their share partly explains why there had never been any bankruptcy— [more than] than the effectiveness of the regulatory regime acting proactively to stave off such events.”

A bit of history

Industry performance

Providing a history of insurance in Ethiopia, Mr Ettefa explains insurance as a risk transfer mechanism emerged at the beginning of the 20th century, although there was a wide range of schemes to share losses among members of a community.

Even today, burial societies, which are called ‘Idirs’, are still widely used to cover the funeral expenses of members from monthly contributions. Similarly, sellers of livestock used to give some form of guarantee, commonly known as ‘Medin’, to give protection if the animal was suffering from some form of ailment or infection that was not identified at the time of purchase.

The revolution of 1974 “caused sudden and profound changes in the political, economic and social landscape” according to Mr Ettefa. He explains all 13 insurance companies operating in the market were nationalised and subsequently merged into a single company. The companies were reorganised into six main branches under the Ethiopian Insurance Corporation, with 490 employees.

Twenty years later, the Proclamation for the Licensing and Supervision of Insurance Business (Proclamation No.86/1994) heralded the beginning of a new era. It effectively put an end to the monopoly enjoyed by the Ethiopian Insurance Corporation for nearly 18 years. Unlike the 1970 Proclamation, the new Proclamation stipulated only Ethiopian nationals and companies fully owned by Ethiopians were permitted to engage in insurance business.

In addition, both general and long-term insurance business was permitted and, currently, eight of the 17 companies operating in the market are composite insurers.

The total capital of the insurance companies had reached Birr2.03bn by June 2014, with the total number of branches at 332. According to Mr Ettefa, the industry’s gross written premium was Birr4.9bn, while total incurred claims amounted to Birr2.16bn at the end of the same period.

Gross written premium, which stood at Birr296.9m in 1994/1995 registered spectacular growth to reach Birr4.96bn in 2013/2014, while the cost of claims had increased at a lower rate during the same period.

The gross written premium of the industry has been increasing steadily during the past 15 years, showing an average increase rate of 22% (2003) to a maximum of 53% (2012) in respect of general insurance business, according to the National Bank of Ethiopia. Likewise, long-term business has also witnessed growth ranging from 10.24% (2003) to 39.97% (2011).

Net claims incurred and loss ratio are as follows: n The loss ratio for general insurance business fell from 56% in 2002 to 74% in 2011. n The average loss ratio amounted to 59%, showing an increasing trend in the past five years. n On the other hand, for the life sector, the loss ratio fell from 28% in 2008 to 75% in 2002.

The average loss ratio stands at 46%, in the years between 2001 and 2011.

Mr Ettefa said statistics have shown that the gross market premium has increased from Birr204.5m in 1992/93, when the corporation was a sole operator, to Birr4.9bn in 2013/2014.

In absolute terms, there was an increase of Birr4.7bn in the past 20 years. Nevertheless, the relative depreciation of the Birr against the US dollar, the upward movement in the general price of commodities and other factors had considerable impact on the growth in premium income.

Again he stressed: “It is also equally important to take into account the impact of the unbridled price competition on gross premium income. The impact of price cutting on premium costs insurers roughly 40% of the gross written premium, compared to the income they could have generated had they stuck to the rates applied to compute premiums before liberalisation.”

Opportunity knocks Mr Ettefa stressed: “Massive investment in infrastructure, coupled with the spectacular doubledigit growth the economy has enjoyed in the past decade, have created tremendous opportunity for the insurance industry.”

However, he has some warnings for the sector too.

“This is an industry which so far has done little to invest in human resource development and innovation aimed at making insurance accessible to the vast majority of the population.

“Unfortunately, no insurance company would venture on to develop new products and introduce a new service delivery method aimed at attracting more customers and thereby boosting its income.

“The majority of the products on the market were

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Sector challenges One of the conditions for a licence to carry an insurance business is capital. The minimum paid-up capital, according to the proclamation, should not be less than Birr3m for general insurance, Birr4m for life and Birr7m for both general and long-term insurance.

However, Proclamation No. 746/2012 and subsequent directive (Directive No. SIB/34/2013) issued by the National Bank pushed up the capital requirement to carry on both long-term and general insurance business to Birr75m.

Mr Ettefa said: “On the face of it, this increase could be said to be massive since it denoted more than a 1000% rise compared to the original requirement but it is still inadequate to enable insurers to write relatively large risks and to give them sufficient funds to invest.

The Ethiopian insurance industry has recognised the scarcity of manpower, both in number and quality, is a threat which endangers the development of the industry in both the short and long run, said Mr Ettefa.

“The industry had relied on the Ethiopian Institute of Banking and insurance for the supply of skilled technicians and managers for a long time. So the insurance industry needs to have a manpower development strategy to ensure a continuous supply of highly trained professional staff capable of maintaining the competitiveness of the industry,” he added.

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Continental Re Summit

20

CONFERENCE

Harnessing

R

the potential

isk managers across Africa will need the confidence to know they are insuring with the right company, one that will be able to deliver on claims payments and risk management support, delegates heard at the Continental Re Summit in South Africa on 9 April.

More than 70 delegates from 20 countries across the region heard Dr Femi Oyetunji, Group Managing Director and Chief Executive Officer of Continental Reinsurance, say it is imperative that Africa develops sustainable markets.

Speaking at the Changes and Challenges: Shaping the context of the African insurance landscape 2015 Summit and using the Ebola outbreak as an example, Dr Oyetunji says it is vital business leaders across the region communicate more often. “Our governments were slow to react,” he says, “but I believe as business leaders we should be communicating.”

He says the outbreak could have been picked up on day one and, managed properly, it would have been controlled quickly, saving lives and preventing the devastating impact on the economies of the affected region.

Crucially, Dr Oyetunji says, insurers and reinsurers must become risk managers as well as risk-takers and must pass that message on to insureds across the continent.

“As insurers, risk management should be as important as risk taking. We need to move the focus from the traditional role of risk taking to that of risk managers,” he adds.

Time to lead

Dr Oyetunji acknowledges that much of Africa remains in its infancy in terms of insurance. He points to the pan-African penetration rate of 3.5%, which compares to 5.4% in Asia or 7.4% in the US. He also cites the premium volume of $98bn generated by Allianz—a figure he says dwarfs African premium income.

However, he believes it places African insurers and reinsurers in a unique position. “It is time for us Africans to lead and not follow on sustainability,” he urges. Without suggesting the sector creates any form of cartel, Dr Oyetunji says there is a real opportunity for dialogue and ensuring the development of a sustainable industry.

Other key messages to emerge from the summit, entitled ‘The changes and challenges shaping the context to the African insurance landscape in 2015’, were around the challenges of retaining premium in Africa for the benefit of growing local markets, as well as the challenges of finding the right people to staff the businesses and in creating sufficient awareness of the benefits of insurance among the general population.

In terms of regulation, Dr Oyetunji says: “The regulators are asking ‘what do you want?’ so let’s make sure we engage with regulators across the region and make sure they understand the challenges we face as business leaders.”

He also urges regulators to help break down individual country boundaries so businesses can expand both regionally and across the continent. While concerns were raised about the number of European and US firms, as well as those from Asia and the Middle East, expanding into Africa, delegates agree there is still an opportunity for local insurers to make more of the opportunities.

“The bigger the cake we can bake, the more we can individually benefit from it. Let’s put competition to one side to make the overall cake better and then it is up to us individually how big a slice of the cake we get,” urges Dr Oyetunji.

Strategic approach

Keynote speaker Butch Bucani, Programme Leader for the

Visa barriers have become a business risk across Africa

Sustainability will be crucial for insurers and reinsurers looking to develop across Sub Saharan Africa, delegates heard at the recent Continental Re Summit

UNEP FI Principles for Sustainable Insurance Initiative, asks: “How can we harness the full potential of the African insurance industry—as risk managers, risk carriers and institutional investors—to promote economic, social and environmental sustainability?”

He explains that sustainable insurance is a strategic approach where all activities in the insurance value chain, including interactions with stakeholders, are done in a responsible and forward-looking way by identifying, assessing, managing and monitoring risks and opportunities associated with environmental, social and governance issues.

“Sustainable insurance aims to reduce risk, develop innovative solutions, improve business performance and contribute to environmental, social and economic sustainability,” he says, quoting the ‘Principles for Sustainable Insurance,’ UN Environment Programme Finance Initiative, 2012.

Mr Bucani says examples of insurance industry solutions for sustainable development can be split down into several areas. These include: As risk managers: n Research on health, disaster risk reduction and climate change adaptation and mitigation n Catastrophe risk analysis and models that integrate natural ecosystems, climate change and socioeconomic vulnerability factors n Risk management processes and insurance underwriting guidelines that promote better health, disaster risk reduction and climate change adaptation and mitigation n Literacy programmes on health, climate and disaster risks and insurance n Programmes that improve disaster awareness and preparedness in communities n Risk management tools for clients and suppliers to reduce climate and disaster risk.

As risk carriers: n Insurance for low income people, people with disabilities, people with HIV/AIDS, ageing populations n Insurance for climate risks and natural hazards

The difficulty of obtaining visas to travel across Sub Saharan Africa has become a major obstacle to business and should be included as a major risk.

Dr Femi Oyetunji, Group Managing Director/ Chief Executive Officer of Continental Reinsurance, called for an Africa without boundaries for business people to work and travel freely across Sub Saharan Africa. Citing the example of one delegate who failed to get a visa in time and another delegate who was faced with sitting at the international airport in Johannesburg for hours until the clock ticked round to midnight, he says

n Insurance for renewables, green buildings, zero and lowemission transportation, energy efficiency, green rebuilding n Insurance based on usage (e.g. pay-as-you-drive, pay-howyou-drive) n Insurance for forests n Insurance for environmental liabilities.

As institutional investors: n Investment in inclusive finance, healthcare n Investment in climate and disaster-resilient infrastructure n Investment in sustainable agriculture and forestry n Investment in renewables, green buildings, zero and lowemission transportation n Investment in sustainable water management, sustainable waste management.

Underpinning the economy

The importance of insurance in sustainable development, he says, hinges on the way insurance underpins the real economy across the continent.

“It is a very important conversation in Africa,” Mr Bucani says. He believes 2015 will be a critical year with the emergence of disaster reduction initiatives and with sustainable guidelines due to emerge from a meeting in New York in September.

“These big policy frameworks will set the trajectory for development of the entire world for the next 15 years,” he stresses. “We want to make sure insurance has a powerful voice in the development.”

Echoing Dr Oyetunji’s view that insurers should become risk managers as well as risk-takers, Mr Bucani admits a lot of people were not fully aware of the power of insurers as institutional investors.

He says many people see Africa as some kind of ‘safe haven’ with few major catastrophes, however, he warns environmental sustainability is not just about natural catastrophes. He points to the large volume of natural resources extracted across Africa and warns of the degradation of those natural resources—all part of sustainability.

governments must sort out this problem.

“We are business leaders but visas have become a business risk when you are unable to travel from one country to another.”

He stresses: “We want to identify such risks, discuss them in detail and consequently develop some kind of plan. Government officials are able to travel freely but are otherwise engaging in tit-for-tat visa requirements, which are stopping business.”

Delegates acknowledged governments have a responsibility to stop economic migration but

agreed business travellers, who are clearly attending meetings or an event, should not be subject to such stringent visa requirements.

They said the habit of holding passports for up to three weeks and then only providing a few hours of access was forcing business leaders to abandon plans to visit key markets or attend crucial events.

The problem is extreme between certain countries, such as South Africa and Nigeria, but is affecting travellers from a large number of African countries, as well as those travelling on European passports.

Continental Re Summit

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CONFERENCE

Potential to match

African lions with Asian tigerS

T

he opportunity to grow trade across Africa to compete with other regions of the world has never been better, according to Eyessus Zafu, Chairman of United Insurance Ethiopia.

He says there is a real chance to forge new business partnerships globally and to re-examine the Chinese model, in which investors come in, develop a project and then leave the continent with the profit.

Mr Zafu suggests the Indian model of building the domestic economy would work well for Africa as a region and business leaders across the continent should look to intra-African trade, as well as that with overseas investors.

Like other commentators, Mr Zafu points to the increasing African population and the growing middle class in particular as paving the way for new opportunities. Mr Zafu pointed to the number of Africans still living in poverty who could become the consumers of the future if given the right economic environment and the right opportunities.

“In 2010 some 48.5% of Africans were living on less than $1.25 a day, now that figure has reduced to 40%,” he says.

For the future, he says, governments should look for ways to diversify economies and make economic growth more inclusive, if it is to be sustainable.

The key, Mr Zafu says, “is building on our recent gains and not sitting on the laurels of past successes”. He says much of the past growth has come off the back of public projects and governments need to look for more sustainable growth models for the future.

Tinashe Mashoko, Associate Director at PwC, brought the debate to the insurance market. He believes the future is also bright for the insurance and reinsurance sector, identifying six key factors: 1. Resources boom and economic growth 2. Infrastructure development and industrialisation 3. Rapid urbanisation and rising employment levels 4. Demographic and social change 5. Environmental change and technology 6. Political stability and regulatory change Going into each of these in more detail, Mr Mashoko explains the basis of his optimism, offering these factors:

Resources boom and economic growth n N ew found wealth in resources driving RoA growth of 5%+ n Africa has: one-third of global mineral reserves; one-tenth of global oil reserves; two-thirds of the world’s diamonds; 27% of the world’s arable land; and 60% of the world’s uncultivated arable land n New oil and gas discoveries in Mozambique, Ghana, Kenya and Uganda n Agriculture output: $300m to increase to $500m by 2020; $1tn by 2050

n Industrialisation of agriculture an opportunity for crop cover n Nigeria has a strong economy and a large population with rising affluence n Kenya is central to the east African market, which is showing strong growth underpinned by combined population of 200 million n South African economy constrained—high energy costs, rising unemployment, unsettled labour markets, currency depreciation n Cross-border investment by multinationals and regional players.

Infrastructure development and industrialisation

savings products n I ncrease in working population encouraging for insurers n U nemployment worrisome but robust economic growth should overcome n Y oung population increasingly tech-savvy with powerful social networks n S ocial media plays a role in improving business models: awareness of products and benefits; improved data capture and analytics with more knowledge-driven businesses; rise of alternative distribution and disintermediation; rise in customer-centric business models.

n Africa’s infrastructure lags the rest of the world—for example, 30% of the African population has access to electricity, compared to 80% worldwide n PwC estimates infrastructure investment will reach $180bn per annum by 2025—Ethiopia is building Africa’s largest hydro-electric plant; Kenya is building the world’s largest single geothermal plant n Foreign direct investment increasing, with China expected to invest $1tn in the next decade n Demand for project insurance for infrastructure investments to increase n Insurers with strong balance sheets could underwrite projects against: events of default; breach of contracts; and currency inconvertibility n Increased Africa connectivity increases transport and logistics insurance n Strong inter-Africa trade: SA (35%), Kenya (16%), Nigeria (12%).

Environmental change and technology

Rapid urbanisation

Political stability and regulatory change

n Urbanisation estimated at the rate of 4% per annum—most rapidly urbanised region in the world n By 2050, Africa will account for 24% of the world’s population n Approximately 60% of Africa’s population will be in urban regions n 400 million Africans will have migrated from rural areas n Lagos will be the 12th largest city in the world n African workforce will surpass China by 2024 n Rise in insurable assets and positive economic growth n Rapid urbanisation will spur demand for: healthcare services; housing and urban infrastructure; infrastructure development and industrialisation; protection of assets; and increased savings.

n M aturing democracies and smooth transition of governments is positive n I mproved risk management and governance levels—adoption of ICPs n P romotion of better internal standards and controls n I ncreased capital requirements have created fewer, stronger insurers n R isk-based capital management creates capacity and clearer risk appetite n I mproved financial integrity and disclosure, e.g. IFRS adoption n I mproved financial stability, trust and market confidence n B etter consumer protection and tightening of market conduct n I ncreased access to insurance and promotion of financial inclusion n P ension reform increases compulsory private sector savings/ protection n C ompulsion of certain insurances—motor, oil and gas, workman’s comp n E mpowerment, indigenisation, local partnership requirements for foreign direct investment n N eed to guard against increased costs and complexity of compliance.

Demographic and social change n Urbanisation will lead to a rise in the middle class n Improving literacy levels aided by insurance education n Rest of African middle-class to double from 15 million to 30 million by 2030 n Impact of spending power on retirement funding, insurance and

n R ecent increase in intensity and frequency of cyclones, hailstorms, droughts and floods n N ew technology helping management of damage and costs, for example: predictive modelling; early warning sensors; weather trackers; on-board sensors; health monitors; better risk pricing (cat modelling); and (alternative risk) transfer n S ophistication and innovation required by insurers in structuring risk sharing and risk transfer deals n R ise in the use of technology across Africa: 70% of Africa’s population now has a mobile phone subscription; estimated 800 million mobile phones across Africa (from a 1 billion population); 20% of Africans were online in 2014—double 2010; more people have mobile banking than traditional bank accounts in nine countries; Nigeria e-commerce generating $2m in transactions per week n T echnology expected to be a big game-changer for business models.

Brain drain poses significant risk to business sustainability

A

frica’s brain drain is posing a significant risk to business, delegates were warned at Continental Re’s CEO Summit in South Africa last week.

Odunayo Bammeke, Group General Manager of the Nigerian National Petroleum Corporation, warns it is among Africa’s greatest risks, saying: “Why should any African youth want to come back and stay in Africa given the political and economic environments, if they have other opportunities

Africa’s first pan-African insurance and reinsurance journalism awards launched

outside the continent?”

He told delegates that young people were more enlightened and were aware of the choices they have but he says business leaders have a job to do in convincing young people of the value of staying or returning to Africa.

“We need to offer more training and help them enhance their careers here in Africa. We have a responsibility and a duty,” he says.

Young people bring fresh approaches and a much needed energy to business, Journalists from every African country across the continent have been invited to participate in the Continental Reinsurance Journalism Awards 2015.

The awards have been launched to improve and develop insurance and reinsurance reporting in Africa and to encourage journalists to develop their knowledge and expertise, as well as recognise the outstanding work of journalists from across Africa.

Dr Femi Oyetunji, Group Managing Director/ Chief Executive Officer of Continental Reinsurance, says: “The insurance and reinsurance sector has a valuable role to play in Africa’s economic growth and development and we want to recognise the

while encouraging innovation, he adds.

“We have an opportunity to create a bridge to the next generation. The critical skills are the capacity to think, manage change and innovate. Any business today that does not innovate will not survive.”

Identifying talent that already exists within the business is key. “It is important for us to attract and also to retain leaders in our sector.”

Mr Bammeke urges business leaders to do more themselves, not just in terms of identifying their successor but respected contribution of the media to the sector’s growth.”

The four categories in the 2015 awards are: 1. Best re/insurance feature article 2. Best re/insurance news reporting 3. B est re/insurance industry analysis and commentary 4. P an-African reinsurance journalist of the year award An international judging panel comprising industry experts and academics in journalism will judge the Continental Reinsurance Journalism Awards 2015 entries. It will evaluate all submitted

in mentoring young people within the business. He also believes the government has a responsibility in terms of improving the quality of education.

But, he says, all the initiatives will come to nothing if barriers across Africa are not eased to allow greater pan-African movement. Echoing the words of Dr Femi Oyetunji, Group Managing Director/ Chief Executive Officer of Continental Reinsurance, Mr Bammeke says visa restrictions are becoming a major barrier to business. material according to the quality of information and how it contributes to raising awareness of the insurance and reinsurance sector in Africa.

Each entrant must submit their published article together with their name, media organisation, the date the article was published, their brief profile and photo, together with a 250word motivation for writing their editorial article.

All submissions must be submitted by 31 December, 2015 to: CREJournalism@ brandcommsgroup.com The winners will be announced at a ceremony in April 2016.

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