Commercial Risk Africa - March 2014

Commercial Risk AFRICA

African Risk & Insurance Management News

MARCH 2014

www.commercialriskafrica.com

INDUSTRY FOCUS—Aviation:

COUNTRY REPORT—Tanzania: CRA explores energy discoveries & sees a country open for business ......................10-12

Pricing African aviation risks at multiples of developed market premiums is down to ‘lazy brokering’ CRA learns ........................................................................6-8

Talent shortage set to be growing risk for businesses across Africa Liz Booth

news@commercialriskafrica.com

[johannesburg]—The pool of ‘true’ risk managers in Africa may be much smaller than realised, increasing the risk for businesses operating in the region, according to a group of risk managers who met recently in Johannesburg.

Talking to Commercial Risk Africa, Gert Cruywagen, Director of Risk at Tsogo Sun, said many risk managers are, in fact, ‘insurance experts, auditors or safety people and there may not be more than 15 to 20 ‘proper’ risk managers in South Africa’.

DIFFERENCE OF OPINION Others around the table felt that figure may be higher but agreed with the principle that relatively few risk managers have the complete set of skills needed to be a true professional.

The concern is that risk managers need to have skills crossing so many different areas of business,

from operational safety to senior management issues, and that these will vary depending on the industrial sector involved.

However, they agreed there is a core of skills required for all risk managers and equally there is a need to drive up standards. As Leonard Radzuma, Chief Risk Officer at TCTA, the South African state-owned water suppliers, explained: “Too often I meet risk managers from small organisations who are still struggling to put together a simple risk register. We have really moved far beyond the risk register phase and risk managers need to be all-rounders—they need to understand insurance, the business, IT and they need to understand the space in which they operate as well as what is happening outside which may impact the business.”

The risk managers voiced their concerns just as EY launched its inaugural Sub Saharan Africa Talent Trends and Practices Survey 2013, which warns the war on talent in Africa is just beginning. The report suggests that African firms

Gert Cruywagen

are increasingly employing personnel from other African states rather than relying on the use of expatriates from further afield.

A major risk is that talent management skills are relatively weak across the continent, according to EY. The results from the survey mirrored concerns

among the risk managers that the talent pool in the continent is still relatively small and there are few systems in place to improve that situation.

There are still also questions about how seriously risk managers are taken by the senior boards.

Volker von Widdern, Managing Director Marsh Risk Consulting, said: “The acid test is to what extent his is a senior risk manager able to influence change and mould decisions of the organisation. To what extent does a risk manager have a seat at the table when strategic decisions are being made.”

They agreed that risk management has an increasingly important part to play in any organisation and that the role of a risk manager is evolving. They also agreed that flexibility is key for risk managers to do the job properly and that they need to be able to evolve as demanded by business.

Having a single qualification that the TALENT: Turn to page 2

Ghana cracks down on foreign exchange to support the cedi Billie McTernan

news@commercialriskafrica.com

[accra]—Financial instability and a depreciating currency has pushed government to take immediate measures to rescue the Ghanaian cedi.

Concerns about Ghana’s currency came to a head in February when the governor of the Bank of Ghana, Henry Kofi Wampah, took the move to implement foreign exchange reforms in a bid to restrict the country’s dollar transactions.

In the last six months the cedi has gone from Ghc2.17 to the dollar at the end of September to Ghc2.55 in

February. In the same period compared to the pound sterling it went from Ghc3.51 to Ghc4.27.

President John Dramani Mahama and minister of finance Seth Terkper have promised that Ghana was not alone in this phenomenon and that other emerging markets including South Africa, India and Argentina are also suffering as a result of the US Federal Reserve’s recovery on tapering.

DENYING THE DOLLAR It is not uncommon in Ghana for house rentals, hotel rooms and car prices to be quoted in dollars and President Mahama said this practice needs to come to an end. But

Accra-based risk manager Akwasi Anane said that the transition will not be easy.

“The short-term [effect could] lend itself to more of an opening for the black market,” Mr Anane told Commercial Risk Africa. “It might be counterproductive.”

Mr Anane points out that there is no effective monitoring system to ensure these regulations are adhered to. Under the new reforms transactions by financial institutions have been limited. Though deposits can be made in a foreign currency withdrawals will only been in cedis.

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FOREX: Turn to page 2

Continued from page one NEWS

2

Cybercrime continues to climb risk agenda in Kenya Liz Booth

lizbooth@commercialriskafrica.com

[nairobi]—Fraud is one of the top three risks facing Kenyan businesses today, according to a group of risk managers who say the crime continues to hamper development.

Speaking to Commercial Risk Africa, they all said fraud was a major issue and, as part of that, cybercrime is of increasing concern as criminals find new ways to access systems.

Their fears emerged as PricewaterhouseCoopers produced a major report on economic crime globally, which included a report from Kenya which detailed the cost to business of economic crime, which includes fraud and corruption.

Joan Kirika, Head, Internal Audit and Risk Management, Insurance Regulatory Authority, explained: “There is a requirement by government to digitalise information across all departments. The idea is to make departments accountable and to increase transparency for the public.

“But it has also increased the risk of a cyber attack and has become a real threat for us as we make the transition from manual input to digital.”

Patrick Gitau, a Director of Ashford Financial Consultants, admitted that fraud and corruption are a ‘rampant’ problem in Kenya but believes risk management has a real role to pay in reducing the opportunity for fraudsters.

Meanwhile, Paul Kaminchia, Senior Manager IT Risk Management at Diamond Trust Bank, warned: “Fraud

risk is something that has really hit our industry.” He placed fraud at the top of the three largest risks facing businesses in Kenya today, above other issues such as compliance and credit risk.

He explained that banks are under constant attack from fraudsters and hackers eager to access the banking system.

One major problem for Kenya, he said, is that while the penalties on organisations for non-compliance are hefty, fraudsters do not face the same level of punishment.

“The numbers we are losing from fraud are high. It is a lot of money and the impact is tangible,” he warned.

Mr Kaminchia added: “One problem is that we know the reported figures are bad but we have no idea of the true scale of the problem because we don’t know how much of this crime is unreported—because those people are simply not being caught.”

He said that the penalties for convicted criminals are not high enough either. “We have a fixed maximum penalty or a year in jail. But the problem is that we don’t have any system for reclaiming the stolen money. So these criminals don’t mind getting their name in the papers—after all, they have just stolen millions, which more than covers the cost of the fine. Effectively they have just got away with the money scot free so what’s the harm in a bit of a bad reputation.

“We need the government to impose tougher sentencing guidelines so there is a disincentive to try this type of crime,” he urged. n S ee page 18 for more on the PricewaterhouseCoopers report on economic crime

TALENT: Need for clarity CONTINUED FROM PAGE ONE market recognised would help the profession, they agreed, however, there were concerns about how such a qualification could evolve and whether, if it was developed in South Africa, it

would be recognised elsewhere.

Sheralee Morland, GM: EnterpriseWide Risk Management at Nedbank and President of the Institute of Risk Management South Africa (IRMSA),

FOREX: Dollar defiance CONTINUED FROM PAGE ONE Foreign currency chequebooks have also been banned and restrictions have been placed on foreign exchange operators.

A maximum of $10,000 or its equivalent can be exchanged in any given transaction.

The move, Mr Anane says, could see fewer people deposit money and create a lack of trust

in the financial system.

As to whether or not the reforms were the best option for the current climate Mr Anane said: “we might have just put a band-aid on a big sore”.

Ghanaian consumers’ fondness for foreign goods is a large contributor to the fall in the value of the cedi. Last year US$17bn

confirmed plans are afoot to develop guidance and a framework for risk managers in South Africa. She said IRMSA is working on proposals and hopes to have an announcement later this year.

Mr Cruywagen said: “The principles of risk management remain universal, which is why risk managers are able to move from one organisation to another.

Experienced risk managers are able to take something like ISO 31000 and use it in their own context.”

Ms Morland agreed, adding that it was important to have some sort of framework available so new entrants could get onto a career path. She believed it was in the interests of all risk managers to do what they could to encourage more people into the sector

and drive up professionalism.

Acknowledging that many risk managers have moved over from the audit functions in their businesses, the risk managers said it was key to show that risk management is more than a tick box exercise and should be at the heart of all business functions. n For more on the EY survey on talent, please see page 16

was spent on imports, $1.4bn of which were for consumable goods that are produced locally.

Government spending remained high in 2013 with the fiscal deficit 10.9% compared to the 9% target for the year. The ministry of finance hopes to get it down to 8.5% this year.

When it comes to interest from foreign investors Mr Anane suspects that some investors will keep away, but pointed out that investors have a number of considerations when looking to

invest in any given market.

Political stability, ease of doing business and currency are just three of the many factors that contribute to investors’ decision making.

While Ghana operates in a stable political environment its ease of doing business is less favourable. The country slid five places in the World Bank’s Doing Business ranking from 62 in 2013 to 67 this year.

Growth too has slowed, standing at 5.5% in 2013 with an

IMF projection of 4.8% this year.

In February in its annual credit rating analysis, Moody’s said that the country’s B1 bond rating has a negative outlook.

However despite its susceptibility to external financial shocks Ghana still has enhanced creditworthiness.

And Mr Anane too is confident that the current economic instability is just a temporary blip in the road for the country.

“Ghana is still a good place to invest,” he concluded.

NEWS Kenya | News in brief

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SME lending gap filled by NIC bank /ATI partnership Liz Booth

news@commercialriskafrica.com

[nairobi]—trade credit insurer African Trade Insurance Agency (ATI) and NIC Bank have announced a partnership to address the lending gap for small and medium enterprises (SMEs) in Kenya.

John Gachora, Group Managing Director of NIC Bank and ATI’s CEO, George Otieno, announced what they believe is a unique partnership aimed at addressing the lending gap that exists most notably in the SME sector. Under the transaction, NIC Bank will be the first bank to take up ATI’s new insurance cover that will protect NIC’s entire portfolio of trade finance borrowers against the risks of insolvency and non-payment—risks that have traditionally inhibited most African banks from lending to SMEs. “A need has arisen in the ordinary course of SME business where good trading business and credible contracts are won by performing companies but financial strength and/or credit access by the same companies is considered inadequate,” said Mr Gachora.

The ATI product will help banks extend credit facilities such as shortterm loans, invoice discounting, bank guarantees and letters of credit without the requirement of the standard tangible securities as is the current practice by banks. This stands to have a positive impact particularly on the SME sector, which has historically been hindered from accessing working capital due to insufficient security.

In the past few years, international institutions have made efforts to provide solutions to mitigate the gap.

Organisations such as the newly-

[from left] John Gachora Group MD of NIC and George Otieno CEO of ATI

formed African Guarantee Fund are helping to encourage banks to support the sector but the main challenge is that demand tends to outstrip their resources. Last year approximately Ksh1.6tn was loaned out to the private sector with only a nominal percentage of that figure going to the SME sector.

While banks recognise the potential opportunities this sector presents, many have found it difficult to capitalise on the SME opportunity because of the challenges in obtaining financial information from the stakeholders in the sector. The ATI

product stands to impact the financial industry because it provides a mitigant against credit default risk, thereby opening up a window of opportunity for both the SMEs and the banks to benefit.

“Our approach to finding an effective solution started with the idea that we wanted to help banks lend safely to as many clients as possible.

We hope this product will continue to evolve to help them spread their financing to under-served populations, such as SMEs, with the objective of bringing them into the formal financial arena,” noted Mr Otieno.

ATI also intends to tap into the growing demand by banks interested in expanding into the Sub Saharan region, where risk diversification and portfolio management are essential criteria. The product is geared at helping banks get their risk houses in order, building a natural synergy for institutions in expansion mode.

Financial institutions continued to account for the majority of ATI’s client base in 2013.

“The product was primarily created as a result of our clients disclosing to us their most pressing challenges,” added Mr Otieno. “We anticipate

that this will be a much sought after product in Kenya and in other markets where we operate simply because the opportunities for companies to trade in the region have opened up tremendously in the last few years— with this product, companies can now access bank financing that will help them achieve their expansion targets.”

ATI’s product, under the terms of the NIC Bank agreement, will have an aggregate limit of Ksh430m (US$5m) protecting NIC’s trade finance facilities comprised of short-term loans, letters of credit, bank guarantees and invoice discounting.

NEWS IN BRIEF Nigeria bank rating [lagos]—Fitch Ratings has affirmed the Long-Term Issuer Default Ratings of Zenith Bank Plc, FBN Holdings plc, First Bank of Nigeria Ltd, United Bank for Africa Plc, Guaranty Trust Bank Plc, Access Bank Plc, Diamond Bank Plc, Fidelity Bank Plc, Union Bank Plc and the long-term national rating of Stanbic IBTC Bank Plc. Fitch has also assigned Standard Bank IBTC Holdings Plc a long-term national rating of ‘AAA(nga)’, which is in line with the rating of its 100% owned and primary operating entity, SIBTC. Fitch says support for the banking sector by the Nigerian authorities has been clearly demonstrated, most recently since the 2008/2009 banking crisis. Despite the market volatility and uncertainty created by the suspension of

the governor of the Central Bank of Nigeria, the agency does not believe there is any weakening in support for the Fitch-rated banks, which together form 70% of banking sector assets.

ACE launches casualty practice [johannesburg]—ACE has launched a new casualty insurance practice in South Africa and appointed Lee Stacey to the role of Head of Casualty, South Africa, as it continues to build its underwriting proposition for corporate clients across the country.

ACE will enter the casualty market providing insurance solutions for companies across a wide variety of industry sectors. As Head of Casualty, Ms Stacey will increase

ACE’s presence in the local insurance market focusing on public liability, products liability and pollution coverages.

She joins from Zurich Insurance in London, bringing with her 20 years of insurance industry experience. Ms Stacey started her career at Gallagher Heath’s broking motor, A&H, terrorism and casualty risks.

Utility issues [accra & harare]—Utility supplies have become major issues in two of Africa’s largest cities. Firstly a fault shut down one of Zimbabwe’s biggest power stations.

The Zimbabwe Electricity Supply Authority said it would result in more blackouts. Meanwhile in Accra, large parts of the capital were without water for four days following the shutdown of the main water treatment plant.

Surveys COMMENT

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Commercial Risk AFRICA Have your voice heard

I

Editor t has been a very busy start to

the year for everyone. Africa remains the place to be doing business in 2014, with investors’ interest continuing as the return on equity is still worth the risk.

However, there are risks out there. As we see in this issue, risk managers themselves are worried about the levels of compliance required by local regulators and legislators but also about the risk of financial crime. A new report from PricewaterhouseCoopers shows the problem is far from sorted and, even where the reported incidences are falling, there is little evidence that firms or governments have truly got to grips with the problem.

PricewaterhouseCoopers itself believes improved risk management can go a long way to reducing the risk of financial crime, which all adds up to an increasing demand for professional and experienced risk managers across the continent.

Another major concern, however, that is increasingly being voiced is that there are simply not enough good risk managers in Africa today. In fact, there is a serious issue with talent at any level and in any organisation. According to EY, a war on talent may be about to erupt in Africa as organisations fight to attract and then retain the right people.

For risk managers themselves, this may seem good news—your skills are in demand and people will pay ‘top dollar’ for your services. But there are some longer-term concerns. Are the right systems in place to attract new recruits to the sector?

Would a single global standard help not only to drive up professionalism, but also to benchmark risk managers?

These are big questions and clearly the

sector is some way from finding the answer.

But what is common across the continent is the desire for risk management to be taken seriously both as a profession and as a tool to aid business.

In the past couple of weeks, risk managers in Kenya and South Africa have very kindly been taking part in what is the start of a major survey of risk managers across the continent.

Commercial Risk Africa is planning to produce a survey of your views, which will eventually become part of the annual Global Risk Frontiers Survey, conducted by our sister paper Commercial Risk Europe.

This is your chance to have a voice in a global context and I hope many more of you will be joining me in further round tables across the continent as the year progresses.

It is already evident that risk managers in Africa are passionately committed to improving the sector for the future, both to help fellow professionals and also the businesses they serve. Our role is to give voice to that passion and make sure it is heard on a global basis. It has been a pleasure meeting so many of you in the past few weeks and I look forward to meeting many more of you in the months ahead.

And finally, I would like to pass on the congratulations of the whole Commercial Risk Africa team to our senior correspondent Steve Mbogo who recently received an award for Excellence in Climate Change Reporting in Sub Saharan Africa from the former President of Ireland, Mary Robinson, at a special awards ceremony in Norway.

Liz Booth Editor Commercial Risk Africa lizbooth@commercialriskafrica.com

Liz Booth +44 (0) 1263 861676 [w] lizbooth@commercialriskafrica.com

Business Development Director Christine Chalopet-Pirzl +353 [0] 1443 4400 [direct] cpirzl@commercialriskafrica.com

MANAGING Editor Adrian Ladbury +44 (0)7818 451 882 [m] aladbury@commercialriskafrica.com

SENIOR REPORTER East Africa Steve Mbogo + 254 (0) 722 214 261 smbogo@commercialriskafrica.com Publishing Director: Hugo Foster +44 (0)7894 718 724 [m] hfoster@commercialriskafrica.com Art Director: Alan Booth www.calixa.biz +44 (0)7817 671 973[m] abooth@commercialriskafrica.com REPORTERS: Antony Ireland, Billie McTernan, Ben Norris, Stuart Collins, Tony Dowding, Nicholas Pratt, Rodrigo Amaral For commercial opportunities email hfoster@commercialriskafrica.com To subscribe email subs@commercialriskafrica.com

Commercial Risk Africa is published ten times a year, by Rubicon Media Ltd.— Registered office 7 Granard Business Centre, Bunns Lane, Mill Hill, London NW7 2DQ Rubicon Media Ltd. © 2014 All rights reserved. Reproduction or transmission of any content is prohibited without prior written agreement from the publisher Whilst 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.

NEWS Uganda | Agenda

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Uganda’s anti-homosexuality law threatens its economic expansion Liz Booth

news@commerialriskafrica.com

[london]—ChanginG legislation and regulation dominate the risk landscape in four of Africa’s key economies, with anti-homosexuality legislation in Uganda attracting the attention of the world’s media and increasing the risks for investors.

According to Maplecroft’s latest country risk report for Uganda, rising international condemnation of Uganda’s new anti-homosexuality law means the country’s aid budget will likely be hit, which in turn may lead to anti-western sentiments and accusations of interference. The report says Uganda has experienced a robust economic expansion in the past five years. “The country continues to offer a relatively liberal economic climate, which has supported growth in financial services and other sectors. Attracting foreign investment has been a key priority for the government, and there are no restrictions on the remittance of profits,” according to Maplecroft. A privatisation programme has seen the state divest from public enterprises and progressively withdraw from direct involvement in business. Nevertheless, underdeveloped infrastructure, a shortage of highly skilled workers, high levels of bureaucracy and a complex framework for governing land rights will remain challenging issues for investors.

SUCCESSION Uganda has been largely successful at maintaining political stability under the rule of President Yoweri Museveni. However, political tensions are growing over the succession process to President Museveni. Leading figures within the National Resistance Movement are already manoeuvring for position. For instance, the recently approved anti-homosexuality law was pushed forward by

parliamentary speaker Rebecca Kadaga, a leading candidate to succeed President Museveni. The law has already resulted in international notoriety and several donor governments have signalled that they intend to suspend aid payments to the Ugandan government, a move that could seriously impact the country’s macroeconomic position.

Meanwhile, Maplecroft’s Country Risk Report for Zimbabwe warns President Robert Mugabe is unlikely to remain in office for another full five-year term due to his advanced age of 90 and concerns over his health. Uncertainty over President Mugabe’s succession is likely to trigger intense power struggles within ZANU-PF and it is likely that the transition of power will be chaotic, heightening political uncertainty for investors.

Hostile domestic investment policies seriously undermine the business environment in Zimbabwe. In particular, the Indigenisation Act, which stipulates 51% of shares in all companies operating in Zimbabwe must be owned by black Zimbabweans, constitutes the key risk faced by investors and poses a mounting threat to western

businesses. After commercial agriculture and mining, the banking sector has become the latest target for indigenisation. Although enforcement has remained uneven, the government is likely to accelerate the implementation of the indigenisation programme in the coming years.

Maplecroft’s Country Risk Report for DR Congo warns underdeveloped regulation, endemic corruption and extremely poor physical infrastructure all contribute to a highly unpredictable business environment in DR Congo.

Moreover, persistent insecurity affecting part of the country will likely dampen investor confidence and delay much needed infrastructure upgrades. In particular, inadequate power supply will continue to constrain output. Investors therefore face a highly unstable environment, with major shortcomings likely to persist for the foreseeable future.

Yet the economy continues to experience high rates of growth, with the International Monetary Fund (IMF) forecasting real GDP to grow by 10.4% in 2014. However, the country’s reliance on the mining sector exposes the economy to

macroeconomic volatility. Indeed, production levels and the government’s fiscal position both remain highly vulnerable to volatile global commodities prices. Furthermore, widespread poverty continues to present businesses with challenges in accessing skilled labour, while also hindering the growth of consumer markets.

Finally, Maplecroft has released a human rights and social development report to provide investors with an in-depth analysis of the socioeconomic landscape in Ghana. According to the report, Ghana eclipses most African countries in terms of governance, democratic norms and respect for the rule of law. Improvements to the governance framework have resulted in a reduction in poverty and increased economic opportunities. Ghana is one of the few countries to be on-track to achieve most of its Millennium Development Goals. However, a lack of vocational training and technological readiness prevent the country from realising its full potential.

VULNERABILITY The benefits of rapid economic growth have largely failed to reach the north of Ghana, which continues to suffer from structural economic disadvantages.

The north has historically been neglected by the government and incidences of poverty remain stubbornly high. Growth in agriculture is of central importance to ensure socioeconomic development, yet government resources are commonly allocated to extractive industries. Despite a stated commitment to supporting agriculture, the sector appears to have received just 2% of government spending under the 2013 budget.

Over-dependence on primary commodity exports makes Ghana’s economic performance vulnerable to external price and demand shocks and will impact the realisation of socioeconomic rights in the long-term.

AGENDA 2014 12-14 March, Accra, Ghana: n A Microinsurance West Africa Summit 2014 will be held at the African Regent Hotel, Accra.

Ghana. Email: nancy@amc-intsa. co.ke 24-25 March, Lagos, Nigeria: n The Economist will be holding a Nigeria summit. For details: http:// cemea.economistconferences. com/event/nigeria-summit-2014#.

UkQUrclwaPI 1-4 June, Kigali, Rwanda: n The 41st Conference and Annual General Assembly of the African Insurance Organisation will be held in Rwanda. For

more information: http://www. african-insurance.org/newseventseventitem.php?intID=211 10-11 June, Nairobi, Kenya: n The 4th Annual Insurance and Reinsurance will be held at the Laico Hotel in Nairobi. For details: http://aidembs.com/ insurance_conference/index. php?option=com_content&view= article&id=48&Itemid=57 19 June, Johannesburg, South Africa: n Annual general meeting of Institute of Risk Management South Africa. For more details: http://www.irmsa.sa

27-30 July, Sun City, South Africa: n The Insurance Institute of South Africa will be holding its annual event, The Insurance Conference Southern Africa—Rendezvous 2014. Registration is now open.

For more details, see: http:// www.redballoon.biz/TICSA2014/ delegate 18-19 September, Johannesburg, South Africa: n Institute of Risk Management South Africa will hold its annual conference.

For more details: http://www.irmsa.sa

14 November: Lagos, Nigeria: n The 2014 Risk Awards will be held in Lagos once more.

Entry opens August 2014, closes September 2014. For details, see: http://www.nigerianriskawards. com/ 21 November , Johannesburg, South Africa: n Institute of Risk Management South Africa will hold its annual dinner and awards.

For more details: http://www.irmsa.sa

n If you would like to promote your insurance event in Commercial Risk Africa, please email details to news@commercialriskafrica.com

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A

frica is not for the fainthearted. Before you write commercial aviation insurance for cross-border operators on the continent you must have an intimate knowledge of individual country markets, political regimes and conflict zones. Only then can you consider the day-to-day risks associated with managing and running a fleet of aeroplanes or helicopters.

The assessment of on-the-ground risk for aviation businesses into Africa is by way of a complex interaction between the insured (operators), aviation brokers, underwriters, insurers and reinsurers. Each of these stakeholders interprets and assesses risk differently, despite the actual risk being exactly the same.

‘VITAL ROLE’ As Graham Speller, Technical Director, Dennis Jankelow & Associates, aviation specialists in South Africa, explained: “We are brokers, not underwriters—so our risk assessment is confined to gathering relevant information from the insured to enable an underwriter to assess the risk and apply a price to the coverage.”

He could be downplaying the vital role that brokers play both in assessing the risk environment and in informing the rates that underwriters set.

“The aviation broker is the primary liaison between the client and the underwriter,” said Scott Smith, Managing Director and founder of Airborne Insurance Consultants in South Africa. He pointed

Aviation

INDUSTRY SECTOR

A COMPLEX RISK Pricing African aviation risks at multiples of developed market premiums is down to ‘lazy brokering’, Gareth Stokes was told as he talked to brokers about the considerations they make in handling their clients’ aviation business out that everything the underwriter knows about the insured—and therefore the risk—is thanks to the brokers’ feedback.

Brokers have a unique opportunity to gather intelligence about the risks involved in aviation businesses by way of their interactions with potential clients. “It is a bit of a balancing act because although we want the business, we cannot afford to throw a hospital pass to our underwriters—so we keep the underwriter informed of any concerns and let them quote appropriately for the risk,” said Mr Smith.

The old insurance saying that ‘there’s no such thing as a bad risk, only a bad rate’ certainly applies to the aviation sector. While individual risks may present a risk profile that even the most desperate underwriter couldn’t ignore, there are very few types of risk that cannot be insured, provided the insured is

prepared to pay the required price.

What risks inform the premium in the aviation insurance market? “The information that we gather for aviation underwriters is not that different to that which we obtain for any other risk,” said Mr Speller.

Important data includes type of aircraft, where the aircraft is based, areas of operation (routes), pilot experience and repair and maintenance arrangements.

But when it comes to flying cross-border in Africa a whole range of additional risk factors need to be considered. These include political interference by local authorities; the readiness of aviation infrastructure (air traffic control, navigational aids and radar coverage); the state of airport facilities (condition of runways and perimeter fencing) and the availability of maintenance and repair facilities.

The perception of Africa as a risky region in

INDUSTRY SECTOR Aviation

which to operate aircraft has led to numerous misrepresentations re risk pricing. Among these is the suggestion that insuring aircraft that are based in or operating in Africa costs on average four times more than it would cost to insure the same assets in South Africa or any of its neighbouring states.

Both aviation brokers and underwriters appreciate that ratings are higher in Africa; but dispute the ‘four times’ claim, except in exceptional cases. “To say that this rating applies to Africa as a whole is a bit of a generalisation,” says James Godden, Head of Santam Aviation. “In fact, the rates in most neighbouring countries and countries south of the equator are only marginally higher than those in South Africa.”

What then are the main risk considerations that lead to higher aviation insurance rates in Africa versus Europe or the US?

COST PUSH One consideration is the structuring of insurance deals in small and developing countries. Insurance business (including aviation) must be placed via the local domestic market even if that market retains little of the risk. This is of particular relevance to the African aviation market because covers are typically underwritten by multiple underwriters, mostly based in foreign markets.

Mr Speller explained: “The business will usually be placed as a ‘reinsurance’ of a local company, such as the State Insurance Corporation of Botswana (say).

Local insurer fees plus local taxes soon push the net cost of the reinsurance as quoted by the ultimate insurer—in SA or internationally—higher. So, where

the cost of the reinsurance is, say, US$1,000 the local insurer may charge $1,200 or, in some countries, even more.”

Another technical risk is that reinsurers limit insurance capacity. If only one insurer is prepared to offer coverage for risks domiciled in a particular country, it follows that the price will be higher simply because the supply is restricted. Insurance is a market-driven commodity and prices will fluctuate according to the demand for coverage and the available supply of insurers willing to sell the coverage.

Infrastructure remains a major bugbear for commercial aircraft fleet operators in Africa. South Africa has approximately 200 paved runways and an extensive road network, making recovery far easier and less expensive, whereas certain African countries have as few as seven paved runways with non-existent road infrastructure.

“While the risk profile is improving in Africa the fact remains that the infrastructure to support aviation on the continent is less established than that in South Africa and other countries globally,” said Shaun Scandling, Head Underwriter: Aviation at AIG South Africa.

He added that operators on the African continent face different challenges in terms of operating hazards: “If we consider that the central and west Africa regions are subject to extreme weather as well as how few airports have instrument landing systems you can understand that the window for operating is at times narrow.

“In addition, many operations in Africa are linked

7

to mining, construction and relief activities where the aircraft are flying into some of the most rural and undeveloped countries in the world—many contingent considerations need to be thought of before taking on certain operations, such as line maintenance or repair facilities.”

By way of explanation consider something as minor as a burst tyre on landing. In Africa you might require a new tyre be flown in with an engineer to fit it. In contrast a first world country has established road networks and infrastructure and simple tasks like changing a tyre are far less of an issue and far less expensive.

Airborne Insurance Consultants agreed that poor airport infrastructure is a major contributor to Africaspecific aviation risk; but added that inadequate communication is an even greater problem. “Your aircraft could be in great condition—and the runway adequate—but if you’re not speaking the same language as the air traffic controller you will not know that there is someone on the runway or that they are sending a Boeing-737 to take off in your approach path,” says Mr Smith.

According to Mr Godden, underwriters can address this issue by insisting that their clients make use of a good interpreter when flying to non-English destinations. He also believes that the situation on the ground, such as security threats, is an important consideration: “The weather in many African countries can be severe, especially those countries near the equator—while poor fuel quality and the lack

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Aviation

8

INDUSTRY SECTOR James Godden

Continued FROM PREVIOUS page of maintenance facilities also factor into higher risk premiums.”

Limited access to the parts required for routine repairs and maintenance can have costly consequences for operators and their underwriters. “One of our client’s helicopters crashed because it didn’t have a fuel cap—they were flying with an improvised ‘fix’ because a replacement part could not be sourced,” said Mr Smith.

Another issue is the cost of post-accident recovery.

“If an aircraft is operating in South Africa and lands on paved runways only and the same type of aircraft is operating in a rural part of Africa on unpaved strips, where little or no road access exists, the cost of recovery will be far more expensive,” said Mr Scandling. Insurers need to factor those costs into the premium.

The recovery issue crops up more often than one imagines. There are reports of aircraft being abandoned after landing in mine fields or touching down on strips that are too short for subsequent takeoff. In such instances underwriters incur additional costs such as guarding stranded aircraft and flying out and accommodating assessors and recovery crews to name but a few.

“The repatriation of an aircraft wreck is expensive enough without the additional costs related to assessing the claim,” said Mr Smith. He added that the sheer size of the African territories and the remoteness of some of the locations his clients trade in make assessing a crash expensive and difficult.

Last, but not least, insurers and underwriters must price for political risk. “We must consider the stability of a country, which includes the likelihood of an aircraft being seized by the government or losses due

to any violent event,” noted Mr Scandling.

“In the past three years we have seen uprisings in Libya, Egypt and the CAR—and more recently the mall attack in Kenya. Similar incidents could occur in the future and are risks that operators and insurers need to consider.”

Speller highlights another mistruth that seems to blight Africa’s aviation risk environment. “If accident rates for the same type of aircraft were to be compared, I do not believe Africa would rank as significantly worse than other regions,” he said.

He believes that Africa’s crash statistics are skewed by the fact that aircraft which are no longer permitted to fly in Europe, for example, find their way into Africa where they are operated under bogus certificates of airworthiness, issued by countries offering ‘registrations of convenience’. The high accident rate is due to poor maintenance being carried out by operators!

OLD STOCK “We have a large population of elderly aircraft, including Russian-built, which should have been scrapped years ago but are still flying in some parts of Africa,” he said. “This is not a flying environment risk, except to the extent that the aircraft concerned are permitted, by local aviation authorities, to fly in the airspace of the country concerned.”

Anecdotal evidence suggests that brokers, underwriters and insurers have their work cut out to get a handle on aviation risk in Africa. And they have to be prepared for myriad ‘Africa only’ situations.

Santam Aviation observed that it had two aircraft within two weeks that both struck and killed giraffe while landing. And when one of Airborne Aviation’s clients crashed in a remote part of Africa while doing survey work the only way to retrieve the repairable

asset was to build a road into the jungle.

But nothing compares to Denis Jankelow & Associates’ ‘helicopter ravaged by elephant’ event.

“We once received a claim involving a helicopter that had landed in a game reserve following an engine problem,” says Mr Speller. “There was no damage upon landing; but when the pilot returned the next day an elephant had taken a fancy to the helicopter, which was completely destroyed by its attentions.”

All stakeholders seem to agree that the win-win situation for Africa-based cross-border commercial aviation is a proper analysis of the operator’s risk exposures. They also agree that reduced premiums for cross-border operators in Africa are achievable with sensible risk management.

“The African industry has become more attractive to insurers due to global competitive conditions,” concluded Mr Speller. “Notwithstanding the underwriting considerations, more capacity is available for African aviation risks and the days of insurers being able to charge twice the price ‘because they can’ are largely over.”

Mr Scandling’s parting thought was that risk assessors should know the risk exposures that their clients face and appreciate that the insured is able to mitigate any potential losses through their operational ability. “Providing we have collected all the necessary information we can determine the best price and coverage or limitations as the case may be,” he said.

Mr Scott concluded that there are still too few brokers operating in the aviation space in Africa.

“You have to go in on the ground and actually visit countries such as the DRC because there is a real risk in trying to write business without local knowledge,” he said. “Airborne has been to all the places that we write business—we’ve seen all of our clients—and we have intimate knowledge of how they operate.”

COUNTRY FOCUS

Tanzania

An International Network covering over 100 countries Sound knowledge of regulations, local market practices and legal & financial constraints

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COUNTRY FOCUS Tanzania

11

Tanzania is open for (oil) business Steve Mbogo explores the east African state of Tanzania where new opportunities are emerging thanks to recent gas and oil discoveries

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arine, engineering and fire risks are some of the fastest growing in Tanzania as the country enters a crucial stage of gas production that is expected to have a positive impact on insurance growth in the country.

The most recent data by the Tanzania Insurance Regulatory Authority (TIRA) for 2012 indicates that demand for marine insurance grew 52%, engineering insurance by 45% and fire insurance rose 27%.

Amani Tuntufye, Senior Underwriter at Tanzania National Reinsurance Corporation, added that other prominent risks include property damage, terrorism, floods and pandemic diseases.

“Like in many African countries, there is also political risk especially relating to abrupt changes in laws and policies. But there have been improvements in several countries now including Tanzania where governments have become more predictable,” he said.

He added that the existing capacity to underwrite risks like terrorism and political is inadequate and the country has to depend on foreign companies.

“Even though bodies like Africa Trade Insurance (ATI) agency exist, not many people are aware of their existence. There is a need for more public education to know exactly how insurers and businesses can benefit from ATI,” he said.

Risk managers like Jacinta Karita, Group Managing Director at FirstRe, see risks in Tanzania being similar to those in the rest of the East Africa Community (EAC) region.

“Risks are the same across the region because of the uninformed way of doing business,” she said.

She sees demand for insurance in Tanzania being driven by the emerging sectors like mining which includes gas exploration and production, the same activities that are expected to drive demand for insurance in countries like Kenya and Uganda where mining and oil exploration are ongoing.

Also like the rest of the region, construction is booming for commercial and residential property driven by growing economy, at an average annual rate of seven per cent, and rising incomes enabling more people to afford homes.

Ms Karita said disaster management is a major risk facing enterprises in Tanzania and the local capacity to insure it is lacking.

“Local expertise for some complex insurance needs is not available just like in many other African countries and there is dependence on foreigners,” she said.

Tusekile Kibonde, Resident Underwriter for Tanzania for Africa Trade Insurance (ATI), said since 2012, Tanzania has prioritised projects in the energy and infrastructure sectors and that the two sectors form the agency’s main portfolio.

“They constitute more than 50% of our portfolio. Other major sectors that we cover include manufacturing and banking,” she said.

For credit risk, ATI’s capacity in Tanzania can cover up to US$84.5m. For political risks, it can cover up to $169m. “Beyond these values, we reinsure with our partners,” said Ms Kibonde.

“Ideally, ATI is able to offer credit risk insurance up to $5m per project. We are able to reinsure an additional $45m with our

partners. For political risks, we can do up to $10m per project and beyond this, we can reinsure an additional $90m,” she added.

Resource curse It is estimated that the country’s recoverable gas deposits are more than 40 trillion cubic feet. The country has already taken measures to avoid resource curse disease that could result in civil conflict.

Tanzania became compliant under the Extractive Industries Transparency Initiative (EITI) in December 2012, reducing the scope for misuse of oil and gas revenues.

Tanzania, alongside Kenya and Rwanda, is receiving support on how to negotiate and structure natural resource contracts from the African Legal Support Facility (ALSF) in a broader effort meant to manage public expectations and avoid resource curse phenomenon, according to Stephen Karangizi, Director and Chief Executive Officer of the ALSF. But according to Maplecroft’s Country Risk Report for Tanzania released mid-last year, oil and gas companies will continue to face high corruption risks, with the problem remaining endemic within Tanzania’s bureaucracy and society.

The report also noted that Tanzania is facing growing political and religious tensions, fuelled by very high levels of youth unemployment. The report forecasts that societal unrest is likely to grow in the long term, which could pose operational and security risks to oil and gas investors.

Another risk report from the Coface Group noted that relations with Zanzibar are expected to be less tense due to the agreement signed at the end of 2012 allowing the archipelago to control the surrounding gas reserves and to grant exploration licences.

There has also been a growing threat from Muslim radicals under a group known as Uamsho in Kiswahili (or ‘awakening’) that has been inciting violence, especially in Zanzibar. The most recent Kenya police report said Muslim preachers from Tanzania

are involved in radicalisation efforts in Kenya’s coastal city of Mombasa.

Tanzania has a Muslim population estimated at 35% while Kenya’s Muslim population is estimated at 11%.

Elections Tanzania is facing twin political issues of the ongoing constitutional review and the national elections planned for 2015.

The most recent draft released in December by Tanzania’s Constitutional Review Committee proposes a three-tiered government with separate administrations for the mainland and Zanzibar and an umbrella unity government.

Unlike neighbouring Kenya, elections in Tanzania are generally peaceful. But calls for total autonomy of Zanzibar may ignite violence, which aided by the growing radicalisation of the Muslim youth in the Archipelago, could increase political risk.

President Jakaya Kikwete recently blamed the opposition parties for inciting the youth to violence across the country as political emotions boil ahead of the constitutional review process and next year’s elections.

“There is a limit to tolerance. Party members will not continue taking a low profile while members of the opposition parties continue to preach the politics of violence,” said President Kikwete.

Local content Israel Kamuzora, Commissioner of Insurance in Tanzania, said lack of adequate capacity by local insurers will not be an inhibitor to taking emerging opportunities as the country is working on a policy to ensure that oil and gas insurance business pass through local insurance companies.

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Tanzania COUNTRY FOCUS

12

Africa provides template

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earning lessons from other

African countries is helping Tanzania develop its potential, according to Calisto Ogaye, of Continental Re. Mr Ogaye, who is Managing Director (Nairobi subsidiary) of the pan African reinsurer, said that Tanzania has been looking at other countries to build up its regulatory framework. Some of the local content legislation, for example, closely mirrors the rules in Nigeria where such legislation has been working well. So insurance companies need to approach local players and only when that capacity is exhausted are they able to access overseas markets.

Tanzania, he said, is a fast-growing market and is becoming a stronger regional player in terms of insurance. A number of South African companies operate in Tanzania and more are expected to open branches in the country.

potential Mr Ogaye explained: “Historically, Tanzania was disadvantaged for a long time because it was a closed shop with the government owning all businesses. In the 1990s the market was opened up for the first time so it is still a relatively new open market economy. From the 1990s when there was one government-owned insurer, there are now almost 25 insurance players, of which four or five are locally owned.”

He added: “It is a vibrant market. The

CONTINUED FROM PREVIOUS PAGE “The local insurers may not have the capacity to take these huge risks but they can act as agents and therefore earn some commission. This is one way of creating capacity for local insurers and expanding their role in economic growth,” he said.

Across east Africa, the insurance regulators are pursuing the idea of creating an oil and gas insurance pool. The pool will not retain risks but will act as an agency.

But growth for the insurance industry is also being driven by consumer demand.

According to Mr Kamuzora, premiums have been growing at an average of 20% in the past decade. Competition has also increased among the companies as their number has grown from less than 20 a decade ago to the current 30.

“We have embarked on a national public education strategy meant to explain to people what are the benefits of insurance and also create confidence about insurance among our people. We are finalising developing regulations on micro insurance,” said Mr Kamuzora.

Seeing the successes and failures elsewhere in the continent is helping Tanzania as it opens up for business, particularly as an oil boom looms, as Liz Booth heard main issue is how to harness the opportunities there without stepping on the toes of the local interests.”

It is also a highly competitive environment for insurance, with so many players competing for a relatively small insured pot. Mr Ogaye points to South Africa where the value of premium is some ten times greater but the number of insurers is much the same. “The top five insurers have about 70% of the gross written premium in Tanzania,” he said, “leaving the others to compete for about 30% of the pot.”

The development of oil may well bring change and it will certainly bring opportunity, according to Mr Ogaye, who expects rapidly increasing interest from overseas investors. He believes there will be a real opportunity for development across the country.

Like many other African countries, power supply will be critical as projects develop and that remains one of the greatest risks for any investor. Christian Ramamonjiarisoa, a Director at reinsurance brokerage Afro-Asian

“We are also about to establish the office of insurance ombudsman to facilitate faster and less costly dispute resolution processes to prevent disputants from going through the expensive and tedious court system,” he added.

There is also a proposal to make it compulsory for every Tanzanian to have health insurance, said Dr Seif Rashid, Minister of Health and Social Welfare.

“Our economy cannot allow us to give our people free health services, the only reliable means here is to make sure that people get access to health insurance.

We want the National Health Insurance Fund to carry out research that will enable the ministry to introduce a compulsory health insurance law,” he said.

The country is currently engaged in the formulation of a national insurance policy with the assistance of the World Bank.

The policy is expected to come up with suggestions on how the country will deepen penetration. Currently, only about 19% of Tanzanians are covered by any form of insurance.

In 2012, TIRA conducted a diagnostic study on the insurance industry. Among

Across east Africa, the insurance regulators are pursuing the idea of creating an oil and gas insurance pool

Insurance Services, agrees that there are plenty of large projects in Tanzania which will need plenty of insurance and reinsurance capacity.

“We focus on treaty reinsurance and have a lot of success doing that. But one of the things that we make sure of is that we review all the insurance programmes in detail. We want to see the risk management thinking behind these projects before we will place the business.

“If we can see strong risk management programmes, it will help us take the risk to the underwriters.”

As a specialist in non-traditional risks, Afro-Asian has seen an increase in demand for certain products such as political violence and terrorism covers, particularly in the wake of the attack on the Westgate shopping mall in Nairobi last year.

As markets mature, and particularly in the wake of the oil discoveries, demand for more complex insurances is increasing, said Mr Ramamonjiarisoa. “Tanzania is a fast-growing market and there is a lot of new demand for cover such as liability covers. They want

the prominent findings was that the lack of micro‐insurance law and regulatory framework is slowing progress of the industry as it locks out low income earners from buying insurance.

“There is a lack of insurance products designed with the poor people in mind.

Insurance for the poor needs to be widely inclusive with few exclusions and premium rates based on mutualism,” said Mr Kamuzora.

The other finding was that insurance policies in Tanzania are not designed with straightforward conditions and then there is a lack of alternative channels of selling insurance which would guarantee that micro-insurance products reach low income people.

Performance 2012 The most recent data by TIRA for 2012 shows that the insurance market in Tanzania grew by 18% in gross premiums written compared to the previous year’s performance.

The industry’s contribution to the gross domestic product increased to 0.92%, compared to a contribution of 0.89% in 2011.

General insurance business showed a growth of 17.7% in gross premium income while life assurance business volume increased by 20.4%.

directors & officers cover and they also want things like kidnap and ransom.”

One of the other major threats to any project is what Mr Ogaye terms ‘moral hazard’.

He admits the region has a major problem with white collar crime (see p18) for more on financial crime in Africa) and in some ways Tanzania is worse than Kenya in terms of financial fraud.

SUFFICIENT COVER The increasing amount of white collar crime is seen as a major risk, particularly as much of it appears to stem from management levels.

Bankers’ blanket cover is available, along with some fidelity covers, to protect business. Mr Ogaye also believes it is better to work from within and offer the cover. “You can’t afford to say you are not offering this cover just because you know there is a problem. It is better to be there in the market and try to manage the risk.”

As Mr Ramamonjiarisoa added: “The challenge is not so much in terms of capacity for these special insurances because the market can handle those but more in terms of having the experts who know how to properly write these covers.

“You need someone who understands the risks properly and who can devise the right insurance product to match the market. For me, the challenge is not about the capacity, it is about the products.”

Motor insurance business took the biggest share of general insurance at 32% followed by fire at 20%, health at 17% and accident at 12%.

Life assurance, on the other hand, was dominated by group life class at 65%, followed by individual life at 30%. The insurers recorded a combined loss ratio of 107% in 2012.

“The underwriting result has consistently deteriorated over the last three years, suggesting a need for insurers to improve their underwriting practices, including considering reviewing the applicable premium rates not only in motor but all classes of general insurance,” noted the TIRA report.

KPMG’s insurance report for 2012 concludes that rising competition has created an environment where premium rates are uneconomic, risk inceptions are insufficient, underwriting is inadequate and policy wordings are widely inappropriate.

The TIRA report identifies key challenges being the absence of a national policy on insurance, premium rate undercutting, poor claims servicing practices by some insurers, shortage of insurance professionals in the industry especially in certain key disciplines including actuarial science, lack of local training institutions which offer relevant qualifications, and a delay in adoption of banc assurance as an alternative distribution channel for insurance services.

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Axa PROFILE

14

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TAKING IT ONE STEP AT A TIME uilding business

relationships that will stand the test of time is key to the philosophy of AXA in Africa, but that does not stop it from having ambitious goals and being eager to explore new markets.

Yves de Mestier, Head of International Networks for AXA Corporate Solutions, explained: “We have had a long history in Africa and have four main Sub Saharan bases—Cameroon, Gabon, Ivory Coast and Senegal and two north African bases—Morocco and Algeria.

“Algeria is a good example of how we approach a new market. AXA has launched the first foreign property and casualty company in Algeria. We launched with ambitious goals and already it is doing tremendously well.

We went into Algeria because our clients were there and it made sense but we are also ambitious and want it to grow.”

Mr de Mestier is hopeful that AXA will soon open its doors elsewhere on the continent, including in Englishspeaking countries. Thierry Kepeden, [pictured, top-right] General Manager of the Cameroon office, added: “Our CEO Henri de Castries was in Africa recently and he said the AXA Group was considering its strategy. That means that today it is in six countries, tomorrow it will be in more.

“However, it is very important to have judicial security. The group is looking for countries where there is good governance and a secure environment for investment.”

BY THE RULES Mr de Mestier added: “It is key and is true for all companies in the whole AXA network. We need to know all the legal and regulatory systems are in place. Sometimes this is hard to explain to our customers but it can be the case that it is alright for a company from another sector to invest somewhere but it is not alright for an insurance company.”

AXA’s west and central African operations are all non-life. Mr Kepeden said the company’s four Sub Saharan operations had enjoyed a 15% increase (€74m) in activity in 2013 and are set for further growth this year. The firm works via brokers, with general agents and also direct to the insured so offers three ways in which to conduct business.

In terms of areas of business, AXA offers support to manufacturing sectors, motor, health and cargo—which is particularly important in Senegal.

Construction too is another key class for the African businesses.

Mr Kepeden explained: “The IMF

With more than 50 years’ experience in Africa, AXA is firmly committed to the continent but, as some of the African team explain to Liz Booth, that does not mean the firm is resting on its laurels cancelled the state debt, taking the pressure off our governments but the debt relief was conditional that the countries invested more heavily in large infrastructure projects. This has given construction insurance even greater importance in the region.”

Gabon is the richest of the four territories in terms of oil wealth, but, as Mr Kepeden said, “The whole continent has a wealth of minerals. We not only have oil but mines, forestry and agriculture. We are a continent full of raw materials.

“We also know that Africa will be a huge market in the future. The experts predict that within 20 to 25 years, Africa will account for around 20% of the world’s population. This is not only important in terms of numbers but also because it gives the continent a huge opportunity in terms of human resources.”

He went on to say that several African nations are already seeing an explosion in the size of their middle classes—key for insurers because they are the people who will need insurance in the future. All investors should benefit from that emerging middle class, believes Mr Kepeden, because they will also be the consumers of the future.

In terms of insurance that investors are demanding as they make inroads into the continent, political risk remains top of the list. “Stability in the country is still the number one concern,” said Mr Kepeden. “It is about judicial security but also about the existing political framework and also the tax regime. These all build up to large political risks—investors need to know there is a regulatory framework in place, the right political support and the right tax system to allow them to export profits and benefits out of the country, for example.”

Human resource is another key

concern for investors. Mr Kepeden said they need to know that they will find the right people in place, properly trained and able to do the job. Investors also have to consider any local rules on the use of expatriate workers.

However, while the risk of expropriation may also be high on the list of foreign investors’ concerns, Mr Kepeden said: “Expropriation can happen anywhere at any time. It is a risk whenever and wherever you do business. Perhaps it is more important in Africa but really it is no different to elsewhere.

LARGE RETURNS “Something that is important to remember is that in Africa investors are generally enjoying a large return on their investment—much larger than in many other places. However, investors

must accept that to get those returns, risks will also exist.”

One of the challenges for many foreign investors is learning the culture of doing business in Africa. As Mr Kepeden said: “We do have customers who have not considered that it is a different culture and a different way of doing things. Companies need to commit to the markets.

They must be convinced that doing business in Africa is what they want to do and to work with confidence.”

Competition for business is hotting up across the continent. “It is not just about European firms, but about the Chinese and Indians who are all investing heavily in the region. There is also a growing community of Turkish investors in Gabon, for example,” said Joël Muller [pictured, bottom-left], Directeur Général for the Gabon office.

He stressed: “It is important to be optimistic because if you watch TV you see another side to Africa. For many investors it is a shock to arrive in the continent and find it so very different to those TV images. It is important to have vision.

The future is very exciting and it is possible to put a business in place now.

But you do have to put precautions in place too. Key to that is having the right people on the ground—risk managers included. It is no good trying to risk manage the operations from your office somewhere in Europe.

People need to put their feet on the ground.”

Mr de Mestier said those lessons are as important for insurers as for any other type of business. In terms of spreading across the region, he said: “Developing in the French-speaking countries is helped enormously because there is one regulatory system for all 14 of the francophone countries.

“There are also organisations designed to help investment regionally and, importantly, there is a single

currency for all countries which is pegged to the euro. This gives enormous stability but also confidence because investors know that the French central bank stands behind these countries.”

Added to that, he said: “There are a lot of synergies and similarities in approaches to business between them.

We are seeing the growth of global relationships between regulators and other authorities—it is not the same in every country but there is a certain consistency. It is the same law for some 14 African countries but the business law is consistent across 20 countries.

“If you compare Africa with Latin America, these countries don’t have the same currency or the same regulatory framework. This makes it harder work for investors who want to cross-border with their business. Africa has some key advantages.”

TURF WAR While the Chinese and Indian investors may be seen by some to have ‘stolen a march’ on European investors by moving quickly into the region through the global financial crisis, there is definitely hugely increased interest now from Europe and the US. Mr Kepeden pointed to the impending meeting of 40 African states with the US White House later this year—a clear sign, he believes, that the US wants to emphasis its interest in the continent.

But he also said that future growth will not just be about bigger markets ‘moving in on’ less mature or experienced African states, but also about growth between emerging markets. Those opportunities, said Mr Kepeden, open up a whole new raft of possibilities for commerce and for the insurance market.

Pointing to the recent initiative by the French risk management association AMRAE to launch a collaboration with risk managers in francophone countries, all three men said it has to be a good idea.

“Risk management in most of Africa is in its infancy,” said Mr Kepeden, “I think there are plenty of ways to cooperate—in areas such as training, for example. It will help risk managers in the region develop with the same rigorous approach to risk management as elsewhere.

“I also believe it will benefit the broader risk environment—brokers and insurers too can benefit from this kind of collaboration.”

As Mr de Mestier concluded: “Today risk management is not recognised across much of the region. This needs to be refocused and this is an opportunity to help achieve just that.”

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Employment FOCUS

16

TALENT SCOUTS

Finding the right person for the job is never easy but, as a new survey from EY shows, the battle for talent is only just beginning to hot up.

Liz Booth takes a look at the report

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CHECKLIST

he war on talent is just beginning, according a new survey on employment trends in Africa, which also warns that the use of expatriates is problematic and likely to create greater tensions in the future.

EY’s inaugural Sub Saharan Africa Talent Trends and Practices Survey 2013 also revealed an increasing trend towards employing from other African countries and, worryingly for risk managers, that talent management skills are relatively weak across the continent.

The survey has four major conclusions: 1. The war for talent in Africa is just beginning.

Global studies and long business experience both demonstrate that a company’s success is directly linked to its ability to attract and retain the right skills. African business is no exception—indeed, the continent’s relative shortage of skills more or less guarantees fierce conflict for the right skills. This survey shows that two skills categories will be most in demand: technical/ operational and professional.

2. The reliance on expatriates is problematic and needs to be rethought. Traditionally, the easiest way for companies to source scarce skills is to rely on global talent pools—not surprisingly, this is particularly true for global companies who are in a position to redeploy staff. However, the high premium that expatriates attract becomes a source of tension within companies. At the same time, political pressure for localisation is growing across the region. For these reasons, EY believes that companies need to build the capability to facilitate skills transfer from expatriates to local employees as this will become a vital competitive differentiator.

At present, however, it is clear that companies across the region lack this capability.

3. There is an increased desire to source skills from other African countries or the returning African diaspora. As a consequence of the desire to reduce their dependence on expatriates, some companies are looking to source skills from other African countries or from members of the returning African diaspora. Whilst this could be an innovative and cost-effective way of addressing the expatriate dilemma, EY believes this needs to be managed sensitively and should not disregard the importance for organisations to ‘grow their own timber’ by improving their ability to transfer and build local skills.

4. Organisations in Sub Saharan Africa are currently weak in those talent management skills they deem to be a high priority. As will be clear from the previous three points, the capability of an organisation’s HR function is vital to its

EY provides this checklist of questions companies active in Sub Saharan Africa should consider: n W hat is the role of HR in achieving competitive differentiation? What people practices need to change to support the organisation’s strategy, whether it is to consolidate or to grow? n How will organisations in Sub Saharan Africa improve their talent-management practices to ensure the human potential of their staff is fully realised? n How will organisations in Sub Saharan Africa achieve greater levels of employee engagement and thus improve their ability to compete? What are the cultural and organisational obstacles to more effective engagement? n What aspects of an organisation’s current HR operating model require reexamination—especially when growing across borders? n Expatriates are an important constituent of the Sub Saharan talent pool, yet they represent a potentially damaging issue for organisations as localisation pressures build. What is the organisation doing to ensure expatriate skills are properly transferred to locals? n How can expatriates be better managed for long-term growth and value? n Has the full spectrum of resourcing solutions been considered; what is the real potential of the returning diaspora and what is that value proposition? n How is skills transfer from expatriates to local employees practically and sustainably managed? n How can the leadership pipeline for executive and management skills be deepened and sustained?

success. HR has to be able to identify the skills needed and to source them; it also has to have excellent retention and performance management strategies to ensure maximum benefit from those skills. And, in particular, HR professionals within the organisation must provide the capability to facilitate skills transfer from expatriates, be they from the developed world, other African countries or the African diaspora.

David Storey, a partner in Ernst & Young Advisory Services, said the survey ‘represents the confluence of two of our fundamental beliefs: a deep sense of optimism about Africa’s enormous potential and our commitment to building a better working world’.

He said it is important to acknowledge the use of human capital as a key enabler of growth. He added: “Africa is emerging as a significant point of growth, making it an attractive expansion target for companies in search of new markets. The EY attractiveness index 2013 for Africa shows that Africa’s growth is real and sustainable, with the economic output of Sub Saharan Africa having grown strongly from US$344.1bn in 2000 to US$1334.2bn in 2012. Sub Saharan economic output is projected to reach US$1844.6 by 2017.”

Mr Storey stressed: “Many other statistics can be cited to describe the nature and extent of Africa’s growth—but perhaps the most important measure of its potential is its effectiveness in harnessing its

most important resource: its people.”

But he warned a shotgun approach to human capital management practices on the continent is short-sighted; organisational and regional differences point to nuances that require differentiated and contextually appropriate responses. “Success in Africa,” he said, “therefore requires a detailed understanding of the HR milieu and an authentic commitment and investment in human capital.”

Despite the overall optimism, there are clear areas of concern. The report says that aligning HR, business strategies, management and leadership development stand out as high priorities. Other high-priority items are employee engagement, as well as sourcing scarce and critical skills.

The survey revealed that the priorities do not change substantially when data for local, multinational and public sector organisations are compared. All share capacity gaps in people development, it says. Employee engagement is a priority for the private sector but not the public sector, where performance and reward is an important focus area.

3%

Much Higher

13%

Higher

Expatriate trends

40%

Much Lower

31%

Same

13%

Lower

Another major finding was that it appears as though organisations in Sub Saharan Africa are set to reduce their dependence on expatriate skills. 53% anticipate hiring fewer expatriates and only 16% anticipate hiring more. This trend is particularly clear in the professional and technical/ operational staffing categories—the skills most in demand.

In line with the expected decline in appetite for hiring expatriates, organisations are clearly looking to other labour markets as potential talent pools for sourcing skills. The likelihood of recruiting from other African countries is expected to increase from the current level (10%) to 17%, and from

CONTINUED ON NEXT PAGE

FOCUS Talent

BY THE NUMBERS Expatriates make up 5% of the workforce while managers and supervisors average just higher than 11% of the workforce.

Regionally the Western African region has the lowest management/supervisor spans (ie number of staff per manager) of control and the smallest proportion of expatriates in the workforce, said EY.

17 Supervisor and expatriate workforce composition

57

38

26 18

20

19

17 14 9

Central Africa

Eastern Africa

8

9

7

French Speaking Southern Africa Sub-Sahara Africa

Western Africa

Total

Manager/supervisor

Expatriate

Expected recruitment needs—next 12 months 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% Much Higher

Higher

Same Local

CONTINUED FROM PREVIOUS PAGE the returning African diaspora (currently 18% and expected to rise to 27%). One in four multinationals expect to increase recruitment from other African countries in contrast to one in nine indigenous companies; possibly because of concerns of the tensions this might invoke with local labour markets.

One third of respondents in eastern Sub Saharan Africa expect future recruitment to come from the returning African diaspora. Recruitment from other African countries is expected to double for eastern Africa, with only a marginal increase in the francophone region.

Slightly more than 90% of South African respondents were less bullish about future recruitment from the returning African diaspora and other African countries but is nonetheless expecting to increase its hiring from both talent pools. The survey concluded labour legislation may be a contributing factor in those figures.

Two in three respondents in the central African region also expected recruitment from other African countries and the returning African diaspora to remain low/very low in the future, however, respondents from the west African region are bullish about recruitment from the returning African diaspora, believing it will almost double. One in 20 respondents currently recruits from other African countries with one in six respondents expected to do so in the future.

The top four factors for retaining local talent are fixed and variable pay, employee benefits, greater

levels of independence and employer brand. For South African organisations job security is one of the four top retention factors; reflecting possibly on South Africa’s experience of low economic growth.

Employer brand is one of the top three retention factors for multinationals, perhaps reflecting on the perceived status of working for an international organisation.

Workforce planning, according to the report, is a critical tool for both strategic sourcing and the planning/implementation of internal development.

78% of respondents currently have a short-term focus, while 70% intend or desire to shift to a longerterm forecasting model. EY believes this longer-term focus will become more important as demand—and competition—for skills increases.

The research indicates that the African labour relations environment is comparatively calm. In the main, regulations are expected to increase but this will not affect hiring decisions. Overall, most organisations demonstrate high compliance with labour market institutions and report a relatively good experience with them. Trade unions are recognised by the majority and increased trade union activity is expected. Relatively little industrial action has been experienced in the past 12 months (except in South Africa), but much more is expected in the coming year. When it comes to resolving labour disputes, indigenous companies tend to have basic dispute resolution procedures in place, while multinationals are more likely to have more sophisticated processes at their disposal.

Lower

Much Lower

Expatriate

Although expatriates make up a little more than 5% of the respondent employee base of the survey, they are likely to be in executive and senior management roles. The survey found, as a result, they are typically used to plug strategic skills gaps in labour markets, start up new businesses on greenfield sites and lead organisations. EY stressed: “Given the importance of these roles, understanding the dynamics of this market segment provides deeper insight into the employment situation and challenges of the continent.”

While one third of respondents expect the demand for expatriates to remain the same in the next year, slightly more than half expect to experience a lower/much lower demand for such employees with a move away from dependence on expatriate labour.

Cost is not the only issue relating to expatriates— or even necessarily the biggest, according to the report. It claims localisation is becoming more important on Sub Saharan Africa’s labour agenda and the consequences of ignoring this issue are escalating.

EY warned: “These consequences include an increase in anti-imperialism, cultural divisions and reduced employee engagement.

“In pursuing the localisation agenda, the survey found that the two biggest challenges appear to be skills transfer from expatriates to locals, and more employment of locals. One challenge here is that expatriates are not trained to spot and develop local talent. In fact, their presence can help exacerbate cultural dissonance.”

Fraud report BEHIND THE NEWS

18

Economic crime, encompassing corruption and fraud, is a complex issue across Africa. As part of a global look at this problem, PricewaterhouseCoopers has highlighted the issues in two of Africa’s key markets, South Africa and Kenya. Liz Booth surveys the facts

ECONOMIC CRIME REMAINS CRITICAL IN KEY MARKETS

E

conomic crime in two of Africa’s key markets is a tale of two halves, with South Africans more likely than ever to experience the problem but Kenyans enjoying a slight reduction in the risk.

Interestingly both South Africans and Kenyans admit the cost of economic crime continues to be a high price to pay for their businesses, but new reports out from PricewaterhouseCoopers (PwC) highlight solutions for risk managers and senior management.

The reports, which came out of PwC’s 2014 Global Economic Crime Survey, contain some new concerns for risk managers, however. One stark statistic that emerges is that senior management is now the main perpetrator of economic crimes committed by insiders in South Africa.

The respondents recorded an increase in reported fraud and the survey identified the most likely insider fraudster in South Africa is: n Male; n Aged between 31 and 40; n Has obtained a university degree; and n Has been with his employer for more than 10 years.

Major concern for South Africans South African risk managers also have another major concern—the country topped the list of states surveyed in terms of the numbers suffering an economic crime. This is not a statistic to be proud of with 69% of South African respondents indicating that they had experienced economic crime, which is nine percentage points higher than in 2011.

PwC has also warned bribery and corruption has been the fastest-growing economic crime category in South Africa since 2011, with 86% of South African CEOs ‘somewhat’ or ‘extremely’ concerned about corruption.

Globally, the construction, energy and mining sectors experience the most bribery, while South African organisations suffer significantly more procurement fraud, human resources fraud, bribery and financial statement fraud than organisations globally.

Firms are fighting back. PwC said: “Formal fraud risk management programmes have become the most effective fraud detection method.” But it also warned, despite this, a significant portion of South African organisations do not carry out fraud risk assessments.

Further to that, the survey asked respondents to indicate which regulatory enforcement-related risk they were most concerned about. Bribery & corruption was by far their greatest worry. This is further highlighted by the fact that more than a quarter of South African respondents reported that their organisations had been asked to pay a bribe in the last 24 months.

In addition, one fifth of South African respondents

THE WAY FORWARD

Regardless of industry or region of operation, PwC believes organisations should focus on these four areas to diminish the risk of bribery & corruption: n M anagement and tone at the top While compliance is everyone’s responsibility, setting the right tone must start at the top.

Senior management should have an understanding of anti-corruption statutes and give a clear and consistent message that bribery will not be tolerated and adequate resources will be allocated to combat the threat. n Control environment Staying on top of corruption risk requires a robust communication plan and vigilant internal enforcement procedures. A formal code of conduct, employee training (including on compliance-sensitive issues such as gifts and entertainment) and a system of controls monitoring suspicious transactions should be in place. Organisations are only as compliant as their weakest link so business partners, vendors and other third parties must be vetted and monitored. n Risk assessment Both the business and compliance environment are constantly evolving. That’s why it is essential that periodic risk assessments are conducted and that any previously identified risks have been addressed. n Evaluating effectiveness Risk assessment and control plans, of course, do not of themselves lead to compliance.

Due diligence reviews, periodic visits from management to high-risk locations, compliance reporting to the board, hotline follow-ups and business-partner audits should all be maintained and re-evaluated on an ongoing basis as part of an effective internal compliance programme.

believe they lost a business opportunity because a competitor had paid a bribe. In comparison, 36% of the respondents in Kenya indicated they had been asked to pay a bribe to get business. An additional 45% indicated they had lost business to a competitor who they believed paid a bribe. These figures are twice as high as the global responses where the figures were 18% and 22% respectively.

Corruption risk high for Kenyans 53% of Kenyan respondents stated they had actively pursued opportunities in markets with a high level of corruption risk. Out of these 38% indicated that they had to change their business strategy to pursue the opportunity.

For 68% of these respondents, this mainly involved carrying out additional due diligence whereas 42% indicated they altered their terms of business. Of respondents who pursued opportunities in markets which they perceived had a high level of corruption risk, 38% indicated they walked away from these opportunities.

While not the most prevalent economic crime, PwC says bribery and corruption may pose the greatest risk to organisations doing business across borders, especially if they are affiliated with the US or the UK. This is because offences are often pursued by regulators across borders and

laws such as the US Foreign Corrupt Practices Act and the UK Bribery Act have far-reaching ambits.

Overall, in Kenya, PwC found a reduced number of incidents compared to a similar survey in 2011, with 52% of respondents reporting an incident, compared to 66% in 2011. However, it says there are still areas of concern, because Kenyan respondents ‘continue to report relatively high rates of economic crime compared to other countries surveyed globally’. Furthermore, for the 52% of respondents in Kenya who reported experiencing economic crime in the last 24 months, the frequency of incidences has tended to increase and the cost impact tends to be greater.

PwC warns the nature of economic crime reported in Kenya is changing. Along with asset misappropriation, accounting fraud and bribery and corruption, the survey reveals high levels of cybercrime and procurement fraud.

The firm said: “We are also concerned that the frequency of Fraud Risk Assessments in Kenyan organisations has reduced since our last survey, and that 39% of respondents do not know what a Fraud Risk Assessment entails. Contributing factors could include a lack of sufficient knowledge and a poor understanding of the importance of proactive fraud risk management, costcuts and/ or a reactive culture of dealing with fraud risks.

We believe the changing trends and threats of economic crimes call for a serious rethink.”

The survey suggests effective risk management must be implemented holistically across an organisation to combat economic crime effectively. “Everyone has a responsibility for combating economic crime,” it stressed.

“Practical steps to combat economic crime include, at a minimum, adopting the mind-set of ‘a state of compromise’ (the point of view that internal systems have already been breached), identifying critical assets and recognising the vulnerabilities of your organisation.”

The report also asks: “How can organisations in Kenya manage the changing face of economic crime?

How can they effectively detect and deter cyber attacks?

Are procurement processes robust enough to ensure the integrity of procurement? Are organisational controls strong enough to mitigate the risk of asset misappropriation? Is there a no-tolerance culture to bribery and corruption? Is the management team incentivised to report accurate results? And above all, if an economic crime has occurred, will it be detected in a timely manner and do you have an appropriate response mechanism?”

PwC found the preferred action taken when dealing with internal fraudsters is still dismissal at 85% according to the respondents in Kenya, which mirrors global responses at 79% while Africa reported 76%. The rise in the tendency to dismissals as a response to incidences of internal fraud from 81% in 2011 to 85% in 2014 might suggest that organisations are taking firm stances against perpetrators of crime. Informing law enforcement agencies came second at 56%. There was a significant decline in the number of respondents taking civil action including recoveries from 54% in 2011 to 36% in 2014. PwC concluded this may be as a result of the dismal success rate in as far as civil proceedings are concerned.

It said: “The need to focus on suitable fraud response mechanisms and an investigation approach that would aid in effective gathering of credible evidence that would lead to successful civil and criminal proceedings cannot be over-emphasised. Alternatively the reduced tendency to seek civil action could also indicate unwillingness by organisations to start civil action that could lead to recovery due to the lengthy and costly legal processes in Kenya.”

When dealing with external perpetrators of fraud, notifying relevant regulatory authorities is important in Kenya for 58% of respondents while informing law enforcement agencies is key for 54%. Only 50% of respondents ended the business relationship with the external party that perpetrated the fraud. This appears low but may suggest alternative avenues of recovery from external parties or a reliance on them, said PwC. PwC concluded that the real story is not about the figures themselves, but ‘that economic crime is threatening business processes, eroding the integrity of employees and tarnishing reputations’.

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