RISKAFRICA - Issue 13 by COSA Media

RISKAFRICA Issue 13 | 2014

ISSN 1812-5964

THE AFRICAN CONSUMER BOOM – SET TO TAPER? TALKING POWER AND INFRASTRUCTURE WITH ALLIANZ

Flat premium adjustments for 2014 renewals GROWTH AND OPPORTUNITY: INDUSTRY INDICATORS

POOR CONTROLS SEE FINANCIAL CRIME ON THE RISE MAKING SOUTHERN STRIDES

MICRO INSURANCE PROJECT FOR SMALL-SCALE FARMERS IN EAC

A TALE OF TWIN PEAKS

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CONTENTS

04 The African consumer boom â&#x20AC;&#x201C; set to taper?

08 Growth and opportunity: industry indicators

12 Talking power and infrastructure with Allianz

14 Flat premium adjustments for 2014 renewals

Dear Reader

EAST AFRICA 16 Poor controls see financial crime on the rise

18 Micro insurance project for small-scale farmers in EAC

SOUTHERN AFRICA 20 Making southern strides 22 A tale of twin peaks 24 New legislation drives Angolan banking sector

WEST AFRICA 26 No premium, no cover 28 Nigerian firms switch to IFRS

I write to you from the bustling hub that is beautiful Nairobi. A city emerging from a tropical forest, it feels like a glorious mix of old, new and luscious green, with construction, progress and development everywhere. I am visiting our friends at Aon Kenya for the week, meeting with insurers and industry folk and learning all I can about the dynamics of this rapidly evolving and fascinating market and region. I look forward to sharing these insights with you in our next issue. But to matters at hand, I am excited to bring you this issue, with a fresh look and structure. Our new regional sections divide stories across southern, eastern and western Africa, allowing us to explore each regionâ&#x20AC;&#x2122;s markets in depth. We take a look at the impact of the United States Federal Bank decision to harden monetary policy and taper quantitative easing. What will this mean for our emerging economies? And will this impact the celebrated rise of the African middle-class consumer? And as African markets move to align with the international accounting standards, the International Financial Reporting Standards (IFRS), we find out how insurers have managed the transition in Nigeria. Enjoy the read.

32 International news

Publisher Andy Mark Editor Sarah Bassett Production Nicky Mark Proofreader Margy Beves-Gibson Feature writers Neesa Moodley-Isaacs; Dominic Uys Design and layout Dave Androliakos; Herman Dorfling

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The

african consumer boom

-set to taper ? By Sarah Bassett

A key narrative to the African growth story is that of the rise of the African consumer – a new and rapidly growing middle class in need of a multitude consumer products and services they never previously had access to.

any in financial services have named this as a key growth driver, right after infrastructure development and mining. But is this a long-term, sustainable consumer growth story? And can our developing markets withstand the end of the extraordinary easy-money policies that central banks have offered up for five years. According to Chris Becker, Africa strategist at economic and investment consultancy ETM Analytics, sub-Saharan African markets’ dependence on quantitative easing (QE) Eurobonds to finance this consumer boom will see an inevitable crash follow. QE, as it is known, is the practice which has seen the central banks of the US, UK, Europe and Japan buying up huge quantities of bonds from banks, increasing the cash in circulation. In January, the US Federal Reserve recommitted to tapering, voting to reduce the monthly stimulus programme by another $10 billion.

“While gross domestic product (GDP) is an indicator of growth within an economy, it is not an indicator of the quality of that growth. We saw the housing boom that played out in the United States and, globally we had GDP growth, but the nature of that growth meant it ended in a fairly dramatic bust,” he comments. “An economy does not grow from consumer spending, but from capital accumulation and saving, invested in productive enterprise.” Incentivising saving continues to be a weak point for many of Africa’s economies. Across key sub-Saharan markets, including Zambia, Kenya and Ghana, manufacturing as a percentage of GDP remains low, with growth driven instead by consumption. “In recent years, the bulk of investment into Africa has been directed at infrastructure (mostly power and transport), energy and agriculture. For the most part, these investments have been debt financed by foreigners. There has been little, if any, news of major international industrial companies moving into Africa to build factories for export.

This is because the African business and regulatory environment is too challenging, and savings rates are too low to enable a sophisticated division of labour to develop what could compete with Asia or the West. It is easier to take raw commodities out of Africa in exchange for final products, rather than to attempt to produce these products within,” Becker comments. For these reasons, the boom is not translating into the development of manufacturing and production industries. Instead, it is finding expression as a consumer boom, financed by foreign debt and, as capital flows out of the continent again with the end of QE, it could end in bust.

The deficit drive The International Monetary Fund (IMF) predicts that sub-Saharan African current account deficits are going to average between three and four per cent of GDP in 2014, which is reflective of the financing that’s required to drive growth. And fiscal budget deficits will also average around

three to four per cent of GDP. Between 2004 and 2008, these averages were, on balance, marginally positive. It is since the advent of post-financial crisis easing money chasing high yield that these averages have trended strongly towards deficit. “My sense is that this is an unsustainable inflationary boom. If we are having to run such big deficits to fuel it, I don’t think it is going to be that sustainable,” notes Becker. “Low interest rates have meant little incentive to save and every incentive to spend. There is widely held economic stance that low interest rates are good for growth, but if governments raised interest rates, this would drive capital into productive use and drive sustainable growth in the long run. In the current scenario, I think subSaharan African economies will be able to continue financing themselves only for as long as capital continues to flow into Africa. Qualitatively, when you delve into the data, this is a bad boom,” he says.

NATURAL CATASTROPHES

Perhaps all is not lost Not all analysts make quite such bleak predictions for the future. According to Konrad Reuss, managing director of Standard and Poor’s for sub-Saharan Africa, an improvement in credit fundamentals over the past decade should make most sub-Saharan countries resilient. Nonetheless, the agency acknowledges that current account and budget deficits pose a threat of instability. “Countries like South Africa and Ghana, which run large current account deficits and have become increasingly dependent on foreign inflows to fund both the budget and the current account, will be most at risk,” says Reuss. “We do expect some money to flow out of African debt markets, but fairly limited in the context of global debt flows,” says Joseph Rohm, Portfolio manager at Investec Asset Management. “To what extent it will impact performance of debt markets in Africa remains somewhat uncertain, but we suspect in the global debt context that African debt markets will perform much better than other emerging markets. “In the past, between 2008 and 2011, the continent attracted a significant amount of speculator money that was chasing high yields and could easily be withdrawn. But investors in the continent have changed. Nowadays we are seeing more long-only funds, as well as more African regional funds like our own Pan Africa and Africa Opportunities funds and global emerging market funds. These are long-term investors with a long investment horizon which we think is important for investing in Africa,” he continues.

however, have clearly slowed under the cloud of tapering. The Nigerian Central Bank claims that investor outflows were mostly ‘hot money’, that is, investments from speculators on stock exchanges and other capital markets liable to be rapidly withdrawn when market conditions change.” he says. But this is not a problem for most subSaharan markets, according to Martyn Davis, CEO of South Africa-based Frontier Advisory. “So-called hot money from the US has largely negatively affected leading emerging markets with open capital markets rather than frontier market economies. The impact of QE tapering has thus little or no impact in many of these economies. Rather than external fiscal stimulus, commodity prices and private/sovereign financing has been underpinning their robust economic growth. “The corporate thrust into Africa is largely in consumer-facing sectors,” continues Davis. “It is often all about demographics – capturing consumers and consolidating the nascent markets. Capital seeks yield and this is often driven by growth. The increasingly challenging environment for foreign business in China may lead to multinational corporations beginning to look towards Africa with greater interest,” he tells Think Africa Press. Terry Behan, the EMEA CEO of global experience marketing specialists, VWV, and author of African consumer trends book, Connect with the continent, suggests that economies in the early stages of development, such as Ghana, may be susceptible to such a consumer burst in the wake of QE tapering; but for many, he thinks the prospect unlikely.

According to Rohm, greater domestic investment in these markets has been a stabiliser and will help reduce volatility looking ahead. “These investors are also there for the long term and are typically institutional investors, as a result of the growing pension fund industry, particularly in Nigeria and Kenya.”

“A massive consumer base like that of Nigeria simply isn’t going anywhere. Global brands and companies, as well as those originating in the continent are only just beginning to learn the dynamics of the market and to tap the potential. They won’t turn their backs on it quickly.”

According to Becker, not all market will necessarily be affected equally. For instance, markets such as Kenya have moved to enable the private sector to control capital expenditure more than the state – ensuring investment in productive areas – which may see the boom develop in a more sustainable manner.

Ultimately, for sub-Saharan Africa to maintain its consumer boom, economies in the region will need to diversify away from primary extractive industries and move decisively towards investing in manufacturing and industry. It is only through production that a consumer boom can be sustained for very long, but whether QE tapering will stunt this development seemingly remains unclear.

Similarly, the healthy current account balances of Nigeria, Angola and Equatorial Guinea have allowed their currencies to stand strong in the face of the federal taper, notes Bunmi Asaolu, strategists at FBN Capital. “Investor inflows into Nigeria,

“Though tapering has begun, this is a reduction and not an end. There will likely still be easy monetary policies in place for a while yet,” Becker suggests. “But it is our view that this is an inflationary boom and that there are major risks on the horizon.”

riskAFRICA

GROWTH AND Industry indicators By Sarah Bassett

According to the World Bank’s latest economic outlook, the sub-Saharan African (SSA) prospects for 2014 have been enhanced by the economic recovery of Europe and the higher growth being forecast for the US economy.

OPPORTUNITY Sub-Saharan African countries with high potential for insurance sector growth

Population millions South Africa

51.7

GDP

$ billions

Per capita GDP $

353.9

6 847

Angola

20.8

124

5 955

Ghana

25.6

45.5

1 781

Nigeria

169.3

292

1 725

Zambia

14.5

22.2

1 529

Cameroon

22.0

27.9

1 267

Chad

11.0

13.6

1 234

Côte d’Ivoire

24.1

28.3

1 175

Senegal

13.5

15.4

1 140

Kenya

43.3

45.3

1 045

ccording to Dr Roelof Botha, economic adviser to global advisory PricewaterhouseCoopers (PwC), this recovery has seen a number of key drivers of economic activity in the insurance industry re-activated, most notably rising real levels of per-capita income. World Bank projections place the region’s growth performance at 5.3 per cent in 2014, rising further to 5.5 per cent by

Source: IMF; PwC

2016. “The long-term insurance industry traditionally lags an economic recovery by several quarters due to its close correlation with formal-sector employment. Consumption expenditure on durables and private sector capital formation often also suffer a recovery lag, which directly affects short-term insurance business,” writes Roelof in PwC latest Insurance Industry Analysis report, released in March.

In addition to South Africa, Roelof identifies nine sub-Saharan markets with exceptionally strong growth potential, ranking them according to per-capita gross domestic product (GDP), the sizes of the respective populations and their economies.

Market for retail growth Retail market growth and opportunity is another valuable indicator for insurance opportunity, both as a marker of economic growth and market sophistication. They say dynamite comes in small packages, and certainly that seems the case for Rwanda. Though it doesn’t yet make it on to the top 10 list for insurance growth opportunity, the small East African country is the continent’s most attractive market for retailers looking to seize opportunities in the fast-growing continent, according to a report by global management consultancy AT Kearney. The inaugural African Retail Development Index, to be compiled annually, ranks the 20 African countries identified as having the greatest potential for retailers. After Rwanda, the index lists Nigeria, Namibia, Tanzania and Gabon as the next most attractive markets.

To compile the rankings, the firm considered the current state of each country’s retail environment, as well as its future potential. The ARDI is based on four elements: market size, market saturation, country risk and time pressure, and ranks the potential and urgency of moving into each country accordingly. “Rwanda has an efficient government and strong macroeconomic indicators that reveal many opportunities for international retailers that can offer basic packaged goods,” comments Marieke Witjes, manager at AT Kearney Africa and coauthor of the index. Once synonymous with unspeakable violence under President Paul Kagame, Rwanda has made great leaps in rebuilding through infrastructure development, economic reform and a business-friendly agenda. Nigeria’s ranking is given citing its rapid

urbanisation, youthful population and rising middle class. But the think-tank said the West African giant was the toughest market in the index to master due to its opaque regulations, congestion at its ports and a lack of land on which to build shopping malls. Gabon takes its fifth place ranking for the opportunity presented by the low modern grocery retail penetration. Only four per cent of grocery retail in the country is currently done through modern outlets. Companies looking to establish a presence in Gabon will need to “move quickly”, according to the firm. It says the country’s retail dynamics and demographics are rapidly evolving, and first movers will have an advantage. South Africa, though Africa’s biggest economy and consumer market, came in at seventh, with the report’s authors saying

the market is already well penetrated, with slow growth. Also in the top 10 are Ghana, Ethiopia and Tanzania.

Shifting distribution channels The PwC report notes the increasing variety of distribution channels used by insurers expanding in Africa. A common and growing model is bancassurance, where insurers partner with a bank to distribute products to banking clients. Other insurers continue with intermediarydriven distribution channels. According to the report, broker domination is reducing as technology and smart devices increase direct channel opportunities, often increasing reach to rural populations that require nontraditional channels. Money transfer and insurance innovations are a key example, notes the report,

2361 SSP Risk AFRICA 1.pdf

Increasing value to business For South African firms expanding in the continent, the contribution to value of new business (VNB) written from African countries has increased over the past three years, driven by increased product offerings, higher new business volumes and cost controls, the report reveals. Overall, VNB of African business ranged between

four per cent and 35 per cent of overall business for long-term insurers and 18 per cent on a combined basis. The VNB margins at which new business is being written in the rest of Africa is greater than the average margin achieved in South Africa, primarily due to differences in product mix. The types of risk products sold in the rest of Africa, like funeral policies, attract higher margins, says PwC.

Insurance market penetration in Africa

Insurance penetration: Premiums as a % of GDP in 2012

South Africa Namibia Mauritius Kenya Morocco Tunisia Angola Egypt Nigeria Algeria

World ranking 2 15 23 45 47 63 78 81 84 85

Total business 14.16 8.00 5.94 3.05 2.95 1.80 0.99 0.73 0.68 0.67

Life business Non-life business 11.56 2.60 5.50 2.50 4.00 1.93 1.03 2.02 0.96 1.99 0.27 1.53 0.05 0.94 0.31 0.41 0.18 0.51 0.05 0.62 CM

CMY

Source: Swiss Re

Low penetration provides opportunity With populations in Africa growing faster than any other continent and incomes on the rise, low penetration rates present tremendous opportunity, suggests A.M. Best in its latest report titled Africa’s Insurance Markets: gearing up for sustained growth. All combined, sub-Saharan Africa accounts for only 0.2 per cent of total global premiums written and has the fastest growth rate globally. “Insurance penetration, while growing, is low at less than one per cent overall, and insurers have faced challenges that include political risks, greater competition

Experience insurance in a box

On the short-term side, business from the rest of Africa contributed between two per cent and eight per cent as a percentage of South African business and five per cent to total combined business.

Country

2012/10/12

and increases in minimum capital levels. However, from June 2011 to June 2012, 28 out of 46 governments in sub-Saharan Africa implemented at least one regulatory reform, making it easier to do business,” comments Deniese Imoukhuede, associate director of analytics at A.M. Best

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“There are significant opportunities for direct insurers and reinsurers in key markets in Africa, particularly in fast-developing sub-Saharan markets such as Kenya, Nigeria and Ghana. However, companies need to stay focused on the economic and regulatory environment, given the diversity of markets on the continent,” adds associate director of market development and communications, Dr Edem Kuenyehia.

2361 TheCheeseHasMoved

suggesting that Internet, mobility and social networking could also result in a fundamental redefinition of the role of advice in the African insurance value as a new generation of customers demand simplicity, speed and convenience in their interactions.

Talking

power and infrastructure with Allianz

Seelan Naidoo Head of Engineering

What are the key trends and developments in the power and infrastructure industries in the African markets in which Allianz operate? Power requirements are directly linked to economic development, which in turn informs infrastructure development. Trends that are evident in the power industry follow a similar trajectory to that of infrastructure development where governments are principal funders in these industries. In addition to government involvement, private funding from across the world is increasing in the African continent where governments are selling some of their plants to independent producers with a confidence of improved efficiencies and access to expert resources in the power industry. Eskom generates approximately 95 per cent

Leuba Modiba, Engineering Underwriter

of the electricity used in South Africa and approximately 45 per cent of electricity used in Africa. It is a parastatal which is 100 per cent owned by the South African Government. This ownership enables Eskom to access funds to construct new power plants, perform refurbishments, and implement the return to service (RTS) of mothballed power station projects. Funding that is made available by Eskom then extends to infrastructural developments in other related areas. With an increasing involvement of independent power producers (IPP), cogeneration agreements are gaining momentum in supplying excess power into the respective national grids. This increase in cogeneration is a result of the added demand of power in the growing economies, which has put a strain on national producers. For this reason, large independent industrial customers opt

to construct their own power plants and sell excess power to governments. There is also a growing number of renewable power projects on the continent.

Which markets are seeing the greatest growth? There are several new and exciting infrastructure projects emerging across subSaharan Africa. The oil and mineral sectors account for most projects in the western and southern regions. There appears to be a focused investment in several countries across the continent with projections, excluding South Africa, averaging 5.5 per cent growth for the region. Projects range across the construction all risk and erection all risk space, with a greater concentration in the oil and mineral sector,

power and energy projects, buildings of every type, rail/roads/bridges, manufacturing, airports and so on.

What cover does Allianz offer the power and infrastructure sector; and how do these meet unique African market needs?

limit or decline cover if there is deviation from these standards. For sub-Saharan markets, there are factors that limit the practicality of some of the requirements. To address these deviations, a panel of experts across the globe decide on the level of participation and the level of deviations to the set standards, with the recommendation of local underwriters and engineers.. The availability of Allianz and AGCS personnel in the continent allows a better understanding of the region and a more informed assessment of the risks presented.

Allianz Global Corporate and Speciality (AGCS) covers engineering projects from cradle to grave. Construction and operational covers such as construction all risk, erection all risk, advance loss of profit/delay in startup, machinery breakdown, material damage, business interruption, and civil engineering completed risks are offered by AGCS.

What do brokers need to understand about the dynamics of the sector across different markets?

AGCS has agreed standards throughout the world. For power and infrastructure projects, there are measures in place to

The key thing to understand is that Africa is not one big village, and therefore energy and insurance legislative frameworks will

differ from country to country. Another consideration is that there is a combination of ageing and new plants in the power and infrastructure mix. This necessitates that brokers make an informed decision based on a balance between information from local on-the-ground input, and system or programme-based templates in enforcing technical requirements. The standard of technical requirements in the continent has to be viewed in line with the overall supporting infrastructure and cannot at all times fit the mould set in fully developed economies. This means it is not always practical or feasible to impose the standards as required 100 per centby the book. Being practical under the circumstances can help brokers better understand the environment in which these projects are implemented and optimally operated.

Flat premium adjustments for

2014 renewals By Sarah Bassett

As renewal negotiations for 2014 get underway, a report from Marsh Global Analytics suggests no drastic hardening in the African insurance market, with “stable insurance market conditions continuing for well-managed risks”. Marsh Global Analytics is the risk modelling arm for global brokerage, Marsh.

fter a year of insurance premiums increasing at a rate around inflation, the reduction in natural disasters both locally and globally means that corporates looking to renewal preparations this year-end can expect flat premium adjustments,” says Tom Healy, business unit manager at Marsh Africa. According to Healy, as a long-term trend, Africa is proving less susceptible to the increasing natural catastrophe numbers experienced in the United States, Asia and Europe. “Internationally, no catastrophe events caused major, widespread insured losses in 2013. Therefore policyholders can expect their premiums to rise by no more than the inflation rate when they renew their policies this year,” he says. Reinsurance giant, Munich Re, last month revealed that 2013 insured losses for global catastrophe events were moderate, totalling $31 billion. This was significantly below the 10-year average figure of $56 billion a year.

Regulatory pressures Healy does suggest that short-term insurers have more than usual to think about when looking at their underwriting approaches for 2014, with a rolling wave of regulation underway. “Most of the African markets we work in are strengthening asset requirements for compliance. There is also increasing regulation to keep premium in-country instead of letting it escape to international markets,” he tells RISKAFRICA. According to Marsh, regulatory pressures

and increased compliance spending in particular could have a measureable impact on insurer corporate profit levels at the end of the financial year. “The challenges facing short-term insurers continue to be inflationary pressures, low interest rates, the raft of new regulations, abundant market capacity and rising competition,” Healy notes.

Ratings on the up One positive industry trend is an increasing drive by African insurers to obtain credit ratings. According to Healy, 140 of the 320 African insurance companies that Marsh Africa monitors now have a credit rating. Of those, about 100 have an A category rating and another 40 a BBB category rating. “This is a very positive trend. In previous years, this was not something these insurers were interested in, but the interest has grown steadily over the past seven or eight years. Long may it continue,” he comments. The majority of the ratings were done by the South Africa-based Global Credit Rating Company, with one or two companies rated by Standard and Poor’s.

International rates trends Marsh South Africa’s Insurance Market Report 2013 indicates that global insurance markets have remained stable to soft for the past 12 months, for all well-managed risks, over key classes of insurance. Since the final quarter of 2012, “global reinsurance capacity remained strong, solvency levels were stable, many insurers enjoyed upwardly adjusted credit ratings and market underwriting was negotiable and flexible for well-managed risks. Solid insurer corporate profits were achieved in 2012, despite several significant catastrophe events taking place over the fourth quarter,” the report states. “First-half renewal preparations in 2013 reflected that the market was still stable across most lines of business for wellmanaged risks. A spate of global and local loss events occurred from January to November, but nothing severe enough to turn the market. Many insurers reported solid first half corporate profits and this trend continued up to end of the third quarter,” it concludes.

Sub-Saharan Africa

M&A on the up By Sarah Bassett

he value of merger and acquisition (M&A) deals targeting sub-Saharan African firms increased by 20.8 per cent in 2013, reaching a total value of $26.7 billion, up from $22.1 billion in 2012. This is according to statistics released in the latest sub-Sahara Africa M&A trend report from specialist intelligence service Mergemarket. “With investors realising the opportunity to capitalise on Africa’s growth and emerging middle class, opportunities are being swept up at a faster pace each year,” the company reported in a statement. With 215 deals completed in 2013, the highest number since 2008’s 228 deals, representing a 23.6 per cent increase compared to 174 deals in 2012. The most targeted M&A country by value in 2013 was Mozambique. Driven by its energy and gas sector, it took a 35.8 per cent

market share from only seven deals, valued at $9.6 billion. South Africa dominated by deal count, with 124 deals valued at $8.5 billion taking a 57.7 per cent share by volume. This was the highest number of deals since 2008, in which 162 deals were completed. These deals represent a 31.8 per cent share by value which dropped 24.4 per cent compared to 2012’s $11.2 billion. Nigeria, Tanzania and Angola were the next most active M&A countries for the region. The largest transaction for the year saw China National Petroleum acquire a 28.6 per cent stake in the Mozambique based oil and gas company Eni East Africa. The deal was priced at $4.2 billion. After South Africa, China was the second-most acquisitive country through 2013 with a 28.5 per cent ($5.9 billion) market share of sub-Sahara’s total inbound M&A ($20.6 billion).

The energy, mining and utilities sector was the most active for M&As, accounting for 69 per cent of market share, with a total value of $18.4 million from 50 completed deals. The next most active sectors by market share were pharma, medical and biotech, with a total of $2.3 million from four deals and agriculture, where 12 deals totalled $1.07 million. Private equity buyouts decreased for the second year in a row, down 18.2 per cent by value during 2013 ($0.9 billion) compared to 2012 ($1.1 billion). The value accounted for 3.5 per cent of total sub-Saharan M&A, down from 5.2 per cent in 2012. Despite concerns due to the United States’ planned monetary tapering, global ratings agency Fitch this week announced it expects Africa’s growth to rise above 5 per cent in 2014. Such growth would bode well for another active year in the sub-Saharan Africa M&A space.

EAST AFRICA

Poor controls

see financial crime on the rise By Sarah Bassett

his was the finding of the Deloitte Financial Crime Survey 2013, which asked banks, insurance firms, real estate companies and personnel in capital markets across East Africa to state what they felt they lost to fraud and other crimes.

While the region is a global leader in mobile money and banking innovation, financial institutions across East Africa are believed to have lost $30 million (Sh2.55 billion) in the last year to financial crime, with poor control systems and technologies given as the underlying cause for the escalating problem. EAST

â&#x20AC;&#x153;These figures are likely to be significantly understated given that a majority of players in the financial services industry opt not to report incidences of financial crime, which may have a bearing on the perception of their prevalence and impact in the industry,â&#x20AC;? noted Robert Nyamu, director of Deloitte Forensic Services, East Africa, speaking at the launch of the report in Kampala in March this year. The report reveals that the greatest impacts of financial crimes are perceived to be reputational damage most significantly, followed by the actual financial losses. Nyamu emphasises financial institutionsâ&#x20AC;&#x2122; failure to put in place high-tech controls that match the kind of innovative products put on the market as the key reason for the increasing crime in the region.

According to the report, Uganda loses between $1 million and $10 million annually to fraud while Kenya and Tanzania lose more than $10 million each. “We salute the innovation happening in the financial services industry, but feel a lot needs to be done. As more innovations are rolled out, there is need to elevate the security systems to make it more challenging for fraudsters to get their hands on depositors’ money,” he adds. While cheques and cash used to be the most vulnerable channels used to defraud financial institutions, the report reveals that real-time gross settlement systems (RTGS) and electronic funds transfer (EFT) fraud are now emerging as vulnerable channels targeted by fraudsters. Kenya, a relatively mature financial market compared to Uganda and Tanzania, takes the lead for RTGS and EFT fraud, cash theft, asset misappropriation and credit card fraud. Uganda tops the list for cheque-related fraud and Tanzania for bribery and kickbacks, money laundering, insurance claims fraud and cybercrimes.

Cybercrime a growing threat Rising financial crime is certainly not a problem isolated to East African, however. According to PricewaterhouseCoopers 2014 Global Economic Crime Survey, economic crime against businesses and other organisations continues to rise around the world. Some 37 per cent of respondents, a three per cent rise since 2011, say they have been victims of economic crime, and about 25 per cent report they have been victims of cybercrime, as fraudsters increasingly turn to technology as their main crime tool. Regionally, economic crime is most prevalent in Africa, where 50 per cent of respondents say they have been victims, though down from 59 per cent in 2011. It is followed by North America 41 per cent, Eastern Europe 39 per cent, Latin America and Western Europe each 35 per cent, Asia Pacific 32 per cent, and the Middle East 21 per cent. As more Africans use the Internet for their

banking needs, the number of fraudsters eyeing online financial transactions has also multiplied. The Kenyan Government statistics indicate that on a daily basis, close to 1 000 Kenyans fall victim to Internet fraud. Globally, the financial services industry continues to be the fraudsters’ target of choice, primarily for asset misappropriation. Forty-five per cent of financial services organisations have suffered frauds in the last 12 months, compared to 30 per cent in other industries. Cybercrime is now the second most commonly reported type of economic crime for financial services organisations.

Cause and prevention

“We believe that this can be attributed to a mismatch between the level of sophistication of the financial crimes and the tools and techniques being deployed by the industry players to contain these vices.” He adds that stricter reporting and control systems are required as well as greater development, use and distribution of technology. A greater emphasis on education and training within the sector is also required. Africa’s heads of state are expected to meet later this year to discuss the ratification of the AU convention on the establishment of a legal framework for cybersecurity across sub-Saharan Africa. The convention would seek to harmonise African legislation related to e-commerce, personal data protection and cybercrime control.

The execution of financial crimes in East Africa commonly involves a combination of internal and external parties through collusion, which has perpetually proven to be effective at compromising internal controls, according to the Deloitte report. “The most commonly used prevention mechanisms for mitigating financial crimes are segregation of duties and job rotation, while the most commonly used detection mechanism across the region is risk-based internal audits,” says Mark Anley director at Deloitte Financial Crime Advisory Services, South Africa.

EAST

Microinsurance project

for small-scale farmers in EAC By Dominic Uys

he International Finance Corporation (IFC), a private sector arm of the World Bank Group, has set aside $3.9 million this year towards index-based insurance cover for small scale farmers in Kenya, Rwanda and Tanzania over the next two years. This is a project to improve food security in the Eastern African Community (EAC). The funds for the project will be issued by the Global Index Facility, a multi-donor trust fund jointly financed by the European Union, Japan and the Netherlands. “In 2014, we will insure at least 500 000 small scale farmers in Kenya, Rwanda and Tanzania,” says David Crush, IFC regional leader. This is on top of the 187 000 existing policyholders that the project has already generated since its launch in Kenya and Rwanda in 2009. Tanzania joins the project later in 2014, following the completion of a feasibility study focusing on the historical climate data of the region. The insurance product, named Kilimo Salama, was developed by the Syngenta Foundation for Sustainable Agriculture and is being administered by selected insurance firms in the three regions. UAP Insurance, SORAS Insurance Company of Rwanda and the international reinsurer, Swiss Re Corporate Solutions are a few of the brands already offering the insurance. While Kilimo Salama is available to both small- and large- scale farmers in the region, Marco Ferroni, the executive director of the Syngenta Foundation, pointed out that the product is particularly suited to small one- or two-acre farms. Low-income farmers will pay a subsidised insurance premium during the initial phase of this two-year plan, adjusting to the prevailing market rates once the project gains momentum. Small-scale farmers in the EAC region incur huge losses as a result of floods, landslides, failure of the crops and fire leading to famine, abject poverty and general food insecurity. These farmers traditionally minimise inputs to reduce exposure to adverse weather conditions. “As a result they remain in a vicious cycle of low agricultural productivity and poverty,” says Ferroni, adding that insured farmers, in contrast, generally cultivate around 12 different crops, including maize, soybeans, potatoes and beans. “Our aim through this initiative is geared towards enhancing food security as well as minimising poverty for the majority of farmers in the region,” Ferroni concludes. The Syngenta Foundation plans to mobilise one million more farmers over the next two years. The project is on track and should reach operational sustainability by the end of 2016. Crush adds that IFC would commence a study on this programme’s viability in Uganda within the next few months. The crop insurance industry has performed well in other regions of the world, adding to the IFC’s confidence in the viability of this scheme in the EAC. Last year, 8 000 farmers in Rwanda were compensated around $66 000, and 80 000 insured farmers in Kenya received a total of $462 000.

EAST

EAST AFRICA NEWS

Britam expands East Africa footprint Kenya’s second-largest insurer, British-American Investments Company (Britam), has announced the approval of its 99 per cent shareholding acquisition in Real Insurance, further increasing Britam’s geographical footprint in the east and Southern African region. In addition to Kenya, Britam has operations in Uganda, Rwanda, and South Sudan. The acquisition expands this footprint to Tanzania, Malawi and Mozambique. The acquisition is in line with the group’s key strategy for regional expansion. Britam director of marketing and corporate affairs, Muthoga Ngera, tells RISKAFRICA that national expansion in Kenya remains a priority. The insurer is in a drive to have a branch or franchise in each of the country’s 47 provinces. In March, the group recorded a 12 per cent increase in profits for the year ended 31 December, with a profit before tax of Ksh3.2 billion ($37 million). Making the announcement, Britam’s group managing director, Benson Wairegi, said the group’s key drivers for growth were hinged on new business opportunities in county governments, new product offerings, real estate investment, regional expansion and strategic partnerships.

M-Pesa launches premium collection platform Statistics indicate that just three per cent of the Kenyan population has health insurance, mainly employer-based policies, meaning about 38.8 million Kenyans have no health insurance at all. In response, popular mobile payment platform M-Pesa, developed by Kenya’s largest mobile operator Safaricom, is offering its services as the premium collection platform for a new micro-insurance health cover product. The product, Linda Jamii, was launched in a joint partnership between Safaricom, Changamka Micro Insurance and investment firm Britam. It will provide a family cover at an annual subscription of KES12 000 (approximately $140). “We believe that the cost of insurance premiums is the primary reason that 97 per cent of the population currently caters for their medical expenses out of pocket,” says Safaricom CEO, Bob Collymore, of the new development. According to Collymore the pilot phase brought in 8 000 customers. The

cover includes in and out patient, maternity, dental, optical and a hospitalisation income replacement benefit of approximately $6 a day in case of lost income while in hospital, or death. “The product has been tailormade to ease the medical burden, particularly for people working in the informal sector. The product will enable them access medical care in more than 600 hospitals countrywide and our goal is to grow that to 1 000 by the middle of 2014,” comments Britam’s Group MD, Benson Wairegi. Linda Jamii also offers a microsaving model which will use M-Pesa as the premium collection platform. Through M-Pesa, clients can pay premiums in instalments and access partial benefits after accumulating KES 6000 (approximately $70) in contributions. The policy covers persons from age 18 to 75 years at entry, children under 18 years are also covered through their parents.

EAST

SOUTHERN AFRICA

Making southern strides By Hanna Barry and Sarah Bassett

Bernie Ray, CEO of Emerald Risk Transfer

While today Emerald Risk Transfer is the largest corporate property and affiliated engineering insurance underwriter in Southern Africa, operating in South Africa and offering assistance in the Namibian market, its humble beginnings can be traced back to 1999, where, sharing a desk in a small windowless office, Gary Corke and Dave Manuel founded what was then Emerald Underwriting Managers. SOUTH

have always been particularly proud of the kind of business that Gary and Dave created,” says Bernie Ray, who last year took over from Corke as CEO. “The business was founded on sound ethical principles, with clear goals as to what they wanted to achieve in the interests of all stakeholders. They wanted to do proper business and if this meant turning some away, they were prepared to do so. This is an ethos that has always flowed through the company.” The company’s strapline – Professionalism, Innovation, Integrity – speaks to this drive to be the best. “Our strapline wasn’t something we came up with and tried to emulate. We wanted a strapline that reflected what we’d always been doing,” is Ray’s reply when

the perception that there may be a misfit,” remembers Ray. Emerald had no shortage of interested suitors, but very early on in the negotiations, a rapport developed between then CEO, Gary Corke, and Santan CEO Ian Kirk, who quickly grasped the synergies between the two companies. Three years on and Santam has been nothing but supportive, recognising that Emerald’s strength lies in its entrepreneurial flair. The company has grown tremendously and built products that work for it and its clients, establishing good relationships with former-Santam policyholders. “At the time, we underestimated the strength of Santam’s brand and balance sheet, which gives us a strong position in South Africa and Africa. Although we trade independently, Santam is the ultimate security and this only increases the confidence our policyholders have in us.”

Namibia: a new frontier “When Santam bought Emerald in 2010, the Santam corporate team in South Africa was dealing with Santam Namibia already, and we saw a great opportunity to share the Emerald team’s technical expertise in corporate underwriting, to assist them in offering an assets and business interruption insurance solution for their corporate clients,” explains portfolio executive, Chris Potter. Though not registered to write business directly in Namibia, Emerald has been assisting Santam Namibia with technical expertise and reinsurance capacity for the past three years. “The local insurance industry in Namibia is on par with the rest of the world,” says Potter of working in the market. “There is a pool of knowledge and expertise in both broking and insurance company organisations in Namibia. The Namibian corporate insurance risks pool of business is a lot smaller than South Africa, so the risks are known to all large brokers and insurers alike.”

questioned about the meaning behind the slogan. “We understand professionalism as an attitude. It is not a word we use simply because we are professionals. Rather, it speaks to the quality of our business and the fact that we have expert and specialised knowledge in the areas in which we work.” Ray describes integrity as, “Doing the right thing, in the right way, at the right time and for the right reasons,” which he says is a description he found online and fancied because “it reflects what we do”.

A fruitful partnership “Santam didn’t shoot immediately to the top of the list, probably because of the previous competition between the two companies and

Of the challenges of moving into the market, says Potter, “It may sound silly, but my first challenge was the language barrier. I’m from Scotland and my Afrikaans ‘isn’t so lekker’. The real challenges came with my first two visits to Namibia, in the fact that the local brokers and to a certain degree the local Santam office, saw us as outsiders, trying to teach them how to underwrite corporate business when they have been doing it for many decades. “The achievements are the fact that Emerald has assisted our colleagues at Santam Namibia in becoming more technically competent in the analysis and underwriting of large corporate risks in Namibia. The local brokers are totally supportive of Emerald’s assistance and guidance that we offer Santam as a local insurer and the local brokers. Our aim as Emerald is to ensure that we

assist Namibian brokers and insurers to keep business in Namibia and, on the odd occasion, share a bit of the risk with Southern African insurers such as Santam, when capacity is required,” he adds.

People power Policyholder confidence is enhanced by Emerald’s Stretch vision, which speaks to a drive to go beyond and achieve ambitious goals, both for the company and its individual employees. The five pillars that are incorporated under Stretch include eliminating succession planning issues; growing an African footprint; differentiating itself from the market; creating stable growth; and exceeding shareholder expectations. These pillars are interdependent and revolve around having the right people in the right positions. “Strategy becomes vacuous without the right people to implement it. Emerald is a people-centric company; we think we have the best people and will continue to source the best people,” emphasises Ray. Emerald develops its own people through its training and mentoring programme, enabling young employees to go on to more senior positions and securing an exceptionally low turnover of staff. Out of a total of 10 senior managers, seven are women. Although this happened organically, Ray is pleased that it turned out that way and says his team is highly competent. “I’ve no doubt that we have the strongest technical and operational skills in our niche of the market. If there were better people out there, they would be working for Emerald. I would find them and hire them; and you can quote me on that because I’m particularly proud of our people.”

Unique knowledge Through its ties with Santam, Emerald is indirectly a signatory of the United Nations’ Principles for Sustainable Insurance (PSI). Ray would like the company to be a signatory in its own right, too. He reflects on Emerald’s commitment to managing environmental, social and governance (ESG) issues within the companies it underwrites by, for example, having its engineers and underwriters sit on the risk management committees of some of its policyholders. “We would not have been able to write some of the risks on our book without sound knowledge of the ESG management within these companies. This has helped us to create better products for these clients. Major losses are not financial, but also peoples’ lives and livelihoods and we are in a position to make a major difference through encouraging proper risk management.” And proper risk management, says Ray, will remain at the heart of this business under his leadership.

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A tale of

Twin Peaks By Hanna Barry

Further clarity on the South African National Treasury’s Twin Peaks system of financial regulation was finally forthcoming in December 2013, when the draft Financial Sector Regulation Bill was released.

outh Africa follows Australia and the Netherlands in its adoption of a Twin Peaks approach, to prevent a repeat of the recent global financial crisis. In this model, the South African Reserve Bank (SARB) undertakes the prudential regulation of banks and insurers, while the Financial Services Board (FSB) is the primary market conduct regulator. However, in a recent interview with RISKAFRICA, Professor Karel van Hulle, former head of pensions and insurance for the European Union Commission, warned that centralising the regulation of banks and

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insurers ignores the fundamental differences in the two sectors.

are unprofitable for insurers. These two arms need to work in synergy.”

“Banks are specialists in the asset side, while insurers are specialists in liability. The sectors face fundamentally different risks and require separate regulation,” he told RISKAFRICA’s Sarah Bassett in an interview at the International Conference on Financial Services, in Durban, South Africa last year. Known to many as the godfather of Solvency II, Professor van Hulle warns, “Market conduct decisions impact solvency. For example, you can make life insurance products so safe for the customer that they

Van Hulle disagreed with the views of Lesetja Kganyago, deputy governor of the South African Reserve Bank (SARB), who suggested that because of the interconnection between the banking and insurance sectors in South Africa, the prudential regulation of both sectors should be centralised. “The interaction between banks and insurers in South Africa is considerable. Out of the top four banks, three are also insurance companies and in the case of one, the bank is owned by the insurance company,” he explains.

strengthened under Twin Peaks, while the Financial Services Board’s (FSB) Treating Customers Fairly (TCF) initiative will be legislated as part of the rollout of the new regulatory regime. In a statement, Treasury notes that the ombud system is a powerful redress mechanism in the hands of consumers. Through changes to the Financial Services Ombud Schemes (FSOS) Act, the bill seeks to strengthen the ombud system by putting measures in place to enhance public awareness of the system and require that all financial institutions be members of an ombud scheme. It also broadens the mandate and role of the FSOS Council to, among others, approve the appointment or removal of an ombud. In the second phase of Twin Peaks reforms, which is envisaged as a multi-year process, existing sectoral legislation will be gradually amended or replaced with laws that more appropriately align with the Twin Peaks framework. For example, a comprehensive market conduct framework will be legislated, which will give legal effect to TCF and will ensure a consistent approach to governing the conduct of financial institutions across the financial sector.

Ombuds strengthened, TCF legislated According to a report released by the Group of Thirty (G30), a number of other jurisdictions are engaged in debates over adopting this type of approach. These include France, Italy, Spain and the United States. South Africa’s draft Financial Sector Regulation Bill, released last year and for which the public comment window came to a close on 7 February, is the first in a series of bills that give effect to Cabinet’s decision to implement a Twin Peaks model of financial regulation in South Africa. It follows two policy papers that respond to lessons learnt in the 2008 global financial crisis: A Safer Financial Sector to serve South Africa Better, released with the 2011 Budget; and a Roadmap for Implementing Twin Peaks Reforms, released on 1 February 2013. The draft bill notes that ombuds will be

The draft bill covers the first phase of the implementation of Twin Peaks, which involves the establishment of two new regulatory authorities, namely, a new prudential authority within the Reserve Bank and a new market conduct authority. The prudential authority will be responsible for overseeing the safety and financial soundness of banks, insurers and financial conglomerates. The role of the market conduct authority will be to protect customers of financial services firms and improve the way financial service providers conduct their business. This authority will also be responsible for ensuring the integrity and efficiency of financial markets and promoting effective financial consumer education. According to an article published in South Africa’s Business Day in December, the market conduct authority will no longer have a system of registrars, instead having three or four commissioners. FSB CEO, Dube Tshidi, told the national daily that when the bill becomes

law, his position and those of other executive committee members would cease to exist, but they would become eligible for the positions of commissioners or deputy commissioners.

Further objectives of the bill In addition to creating the two regulators and strengthening financial stability, the bill provides a legal framework to enhance co-ordination and co-operation between regulators. In particular, a Memorandum of Understanding (MoU) is provided for between the prudential and market conduct authorities to ensure alignment. A Financial Stability Oversight Committee (FSOC), chaired by the governor of the Reserve Bank, gives the Reserve Bank primary responsibility to oversee financial stability. The FSOC will ensure a co-ordinated and immediate response to risks to the stability of the financial system, while a Council of Financial Regulators (CFR) will co-ordinate all regulators, standard-setters and other agencies with a mandate over financial institutions on issues like financial stability, market conduct, competition, legislation and enforcement. The CFR will include regulators that don’t report to the Minister of Finance, such as the National Credit Regulator, Council for Medical Schemes, Competition Commission and National Consumer Commission. A financial services tribunal, described as a “shared enforcement mechanism”, is aimed at encouraging compliance with all aspects of the new regulatory regime. The bill enhances existing regulatory and enforcement action powers of the regulators, such as suspension or withdrawal of licences and approvals, orders to take or cease particular actions and debarments, as well as providing for a robust appeal mechanism. A crisis management and resolution framework provides authorities with the appropriate tools and powers to limit the kind of financial contagion illustrated by the global financial crisis. The bill provides for resolution powers and identifies the Reserve Bank as the resolution authority in South Africa. Where taxpayers’ money is at risk, the Minister of Finance could take crisis management decisions. Treasury expectslegislation to become fully functional by 2015.

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New legislation drives Angolan banking sector By Sarah Bassett

Angola’s banking financial institution landscape is growing and diversifying fast, pulled in the slipstream of the oil and gas economy and bolstered by changing regulation, although profits have been hit by lower interest rates and higher levels of bad debt.

nder new regulations, oil companies in the country are required to pay for their operations in local currency through local banks, presenting us with a significant window of opportunity for banks in the region. The new foreign exchange law came into effect in July 2013 as part of a move by the central bank, the Banco Nacional de Angola (BNA), to strengthen the Kwanza and reduce the economy’s dependence on the United States Dollar.

anxiety that there would be a shortage of Dollars. Instead, more the currency is being sold to commercial banks, so that operators can buy Kwanza to pay their suppliers. This means less of the dependence on the Banco Nacional de Angola to auction those Dollars.” With fewer Dollars on the streets, the BNA could have more control over the Kwanza.

Angola is the third-largest economy in sub-Saharan Africa after South Africa and Nigeria, and is Africa’s second-largest oil producer after Nigeria. It is also China’s largest African trading partner, largely because of its oil exports.

According to an October 2013 report from international professional services firm KPMG, Angola’s banks grew by 14 per cent in 2012 but profits dipped by more than 30 per cent. The BNA announced in October that credit growth rose by 26 per cent in 2012 and banks’ assets grew by 14 per cent.

Despite fears that the new system would delay payments and hit the financing of oil production, International Monetary Fund representative in Angola, Nick Staines, says, “The initial view is positive. There was SOUTH

Rising debt, stiff competition

Non-performing loans shot up to 166.5 billion Kwanza ($1.7 billion), about 84 per cent higher than in 2011, partly because of

a weakening real estate market and delays in payments for government contracts. Standard Bank Angola chief executive, Pedro Pinto Coelho, says that the bank was back in the black after two years of losses reflecting big initial investments. “We are swimming against the tide. Our credit book is new, so we don’t have a heap of historic debt like many banks. Interest rates were already coming down when we started out, so we didn’t have that free ride that others had.” He sounds a note of caution: “There are too many operators in the financial system for an economy like Angola, and we will see some consolidations.” In 1999, Angola had just six banks. In February this year, Standard Chartered became the 24th bank with a full operating licence. The KPMG report reveals that the country’s top five banks control 78 per cent of assets in the banking sector. Yet Coelho is confident that well-run and competitive banks will emerge stronger as Angola’s oil-driven economy starts to diversify.

SOUTHERN AFRICA NEWS

Old Mutual Namibia takes top awards This year Old Mutual attended the annual and walked away with four awards in the following categories: • Insurance Companies(Life)Diamond Arrow Award • Investment Services- Diamond Arrow Award • Pension/Retirement Fund Administrators- Silver Arrow Award

• Companies and Institutions held in high esteem as good corporate citizens• Bronze Award. Annually, PMR.africa completes an independent countrywide survey of Namibian perceptions on the public and private sector intending to:

1. Profile Namibia as a growth point and potential investment area for foreign and local developers and investors, 2. Measure companies, institutions, government entities and individuals on their contribution to the economic growth and development of the province, levels of management

expertise, implementation of corporate governance and levels of innovation, 3. Measure companies, institutions and government entities’ competencies, and 4. Measure brand awareness. Old Mutual wishes to thank all its staff and management who “Do great things”.

Retirement fund law for South Africa’s employers Amendments to South Africa’s legislation on retirement funds could make non-payment of retirement fund contributions by employers a criminal offence. Penalties for non-compliance will include fines of up to R10 million ($936 000) and the possibility of imprisonment for up to 10 years. The new law comes into effect in March 2015. The impact of this legislation was addressed at the Institute of Retirement Funds (IRF) bimonthly seminar in Cape Town. Company directors could also be held personally liable for nonpayment. In addition, pension fund contribution rates have also been raised to 17.5 per cent of employees’ wages. Sanlam Umbrella Fund principal officer, Kobus Hanekom, commented that while the amendment should be welcomed,

it may constitute a significant business risk for employers. “In the past, non-payment of employer contributions was, to a large extent, merely regarded as a breach of contract. Deducting contributions from members’ salaries and failing to transfer them to a fund was considered theft, but it wasn’t easy to hold the employer or a director liable in their personal capacity and recover the losses suffered by the fund members. “All the implications of the legislation have not yet been fully considered. If inability to pay will constitute a legal excuse, under what circumstances will they be excused? We may speculate, but ultimately we’ll have to wait and see how our courts will interpret these rules,” he adds. According to Hanekom, creative solutions are required by retirement funds to assist employers in

managing the business risk posed by the new legislation. In response, Sanlam Umbrella Fund has amended its rules and introduced a temporary suspension of participation arrangement for its members. Fund rules previously only allowed for employers to terminate participation in the fund. “This is a final and drastic measure, especially if the employer believes the cash flow concerns are of a temporary nature. We also understand that smaller employers are more often exposed to temporary periods of cash flow constraint, and creative ways must be found to assist them,” says Hanekom. Participating employers will now have the option of either immediate termination if a financial recovery is unlikely, or a six-month suspension if the employer believes it will recover financially.

WEST AFRICA

premium,

no cover

By Neesa Moodley-Isaacs

The growing challenge in Nigeria, regarding huge levels of outstanding premiums reported in insurersâ&#x20AC;&#x2122; financial statements, led the National Insurance Commission in Nigeria (Naicom) to issue a controversial nopremium, no-cover policy in January last year.

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espite initial concerns, the insurance industry has embraced the new policy and is upbeat about the implications for business.

A study by Naicom showed that insurers were reporting huge amounts of outstanding premium while making large amounts of provision for bad debts without significant subsequent recoveries of debts. There were wide disparities between what insurers claimed were due to them from brokers and what brokers claimed were due. The Insurance Act of 2003 deems any premiums collected by brokers to have been collected by the insurer. Even if insurers are not immediately notified by brokers of premiums collected on their behalf, the insurer is still presumed to be on cover in respect of risk which they have not had the opportunity to document and arrange for reinsurance.

Industry support The policy has also seen widespread support from the industry. The Insurance Consumers Association of Nigeria had previously appealed to insurers to introduce a programme to bridge the gap between the time policyholders would renew their policies and the date when premium payable was actually paid to insurers. Wale Onaolapo, managing director of Sovereign Trust Insurance PLC, says that despite initial concerns, the no-premium, no-cover policy has been to the benefit of the industry. “No-premium, no-cover has enabled us to plan in terms of cash flow, investment and we are all the better for it in the insurance industry.” The deputy chairman of the Nigeria Insurers Association (NIA), Gaius Wiggle, says the policy made 2013 both challenging and rewarding. According to him, the introduction of the policy and other similar reforms put in place by the commission at that time meant that the insurance industry has been on a steep learning curve. “We are coping with the no-premium, no-cover policy, we are coping with the International Financial Reporting Standards, and so on. We all

now know the pitfalls of how to prepare our accounts for the IFRS, how to go about no-premium, no-cover,” he says. Former president of the Chartered Insurance Institute of Nigeria, Wole Adetimehin, notes that the introduction of the no-premium, no-cover policy was laudable and should continually be given support by all insurance industry stakeholders. “All of us are better and happier that any business underwritten or which you find in your book is as good as premium earned. For once, we have started off with a better balance sheet that will support good returns on investment to our investors’ funds and I can foresee that the nominal value of our shares in the capital market will experience a turnaround,” he states. Managing director of Wema Bank Insurance Brokers, Gbenga Olawoyin, says his company was aware of all the challenges posed by the new policy and was fully prepared to face them. “It is not enough to tell your client this is the new policy. It is also about educating them, encouraging them and making them see why they should pay. So, we don’t envisage that we will lose clients,” he concludes.

Naicom says there were “several cases where significant amounts of premium had been paid to insurers but could not be matched against relevant debts due to a lack of sufficient information”. According to Naicom, this increases the credit risk of insurers and introduces uncertainty in the market as to the capacity of many insurers to meet their obligation to policyholders. The no-premium, no-cover policy states that only cover for which payment has been received directly by an insurer, or indirectly via a broker, will be recognised as income. Insurers granting cover without receiving premiums in advance or without a premium receipt notification from a broker face a fine of 500 000 Naira for each instance of cover granted and this may be considered grounds for suspension of the insurer’s licence. Under the new policy, brokers have 48 hours to notify insurers in writing of premiums received on their behalf. Brokers who fail to do so, face a penalty of 250 000 Naira in each case. Commissioner for insurance, Fola Daniel, says that the federal government has complied 100 per cent with the nopremium, no-cover policy on insurance accounts. “One of the biggest tests of the new policy was the Nigerian National Petroleum Corporation (NNPC) account, which generated more than $70 million and was paid before the renewal date. The effective date for renewal was 1 April 2013 and the premium was paid on 30 March.”

Positive impact Naicom maintains that the enforcement of the policy has impacted positively on the gross premium income of insurers in 2013. Naicom’s director of corporate affairs, Rasaq Salami, says that the insurers’ unedited quarterly reports showed great improvements. “The quarterly reports helped the commission to assess how each of the companies is doing and when to intervene if any company is having problems,” he says.

Salami adds that to date, the commission has not sanctioned any company for defaulting. “We have not seen any unpaid premium in the account books submitted to us since 2012. When it comes to claims, no insurer can say that it did not receive premium payment. This avoids the problem of workers’ claims not being paid out because a group life policy was not paid for by the company.”

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Nigerian firms switch to

IFRS By Neesa Moodley-Isaacs

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The insurance industry in Nigeria is still very much in its infancy and only recently made the switch to International Financial Reporting Standards (IFRS) from Nigerian Generally Accepted Accounting Practice (NGAAP). Though the deadline for compliance has come and gone, 20 insurers are yet to attain compliance. RISKAFRICA looks at the challenges of the conversion process and how successful companies have handled this.

FRS is a global accounting standard that requires transparent and comparable information in general purpose financial statements so that users all over the world can easily understand them. The standards are issued by the International Accounting Standard Board (IASB) and require more disclosure by firms as well as a fair valuation of assets and liabilities. Nigerian listed companies and significant public interest entities (PIE) were required to comply with IFRS for periods ending after 1 January 2012. Other PIEs were required to comply for periods ending after 1 January 2013, while small and medium-sized entities will need to comply for periods ending after 1 January 2014.

Nicholas Opara, says that the quality of IFRS-based financial statements submitted to the regulator were of low quality. “Companies should leverage on lessons from their 2012 accounts in order to achieve more credibility. Capacity building in the area of financial reporting should be ongoing both at industry level and at commission level. Also, companies should upgrade their accounting systems to achieve efficiency and reduce human errors in the preparation of accounts,” he says.

Nigerian-based insurance firm Staco Insurance says it was one of the few firms to receive approval from the National Insurance Commission (Naicom) for its 2012 accounts. “The transition to IFRS reporting was not as seamless as envisaged in the industry. Hopefully this means that subsequent years will be less problematic for industry players in terms of lessons already learnt,” says Sakiru Oyefeso, managing director.

Opara says company submissions had fallen short in terms of inappropriate presentation, inadequate explanations including cross referencing, as well as the accounting policies involving crafting, sequencing, completeness and relevance of data presented. “We observed issues with fair valuation, information not based on reliable and verifiable market information, insufficient disclosure of relevant information, the nature and extent of exposure to risks arising from insurance contract and financial instruments, and disregard for qualitative characteristics of useful financial information,” he says.

However, Naicom’s director of supervision,

Nicholas Ganz, a partner and director at

PricewaterhouseCoopers (PwC), says the advisory firm has been working with about 30 different companies in Nigeria as they change over to IFRS. “The process has taken about three years with two South Africans based in Nigeria and a team of six specialists flying in every two weeks. We also have a local presence in Lagos,” he says.

CHALLENGES There are several challenges that Nigerian companies encounter in converting from the Nigerian Generally Accepted Account Practice (NGAAP) to IFRS. These included: • Skills: “Once we built up a team in Nigeria through training and upskilling locals, our biggest challenge became and remains skill retention. Because there are so few people skilled in terms of implementing IFRS, they are in extremely high demand,” Ganz notes. He said that other companies often poached employees who had been upskilled so PwC saw a high staff turnover of 75 per cent over the three-year period. Tola Adeyemi, KPMG’s head of audit in Africa and Nigeria, concurred, saying that regulators such as the National Insurance Commission (Naicom) organised training

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workshops for all parties involved in the financial reporting cycle to help bridge the knowledge gap. • Relocation costs: Since there was a lack of sufficient local IFRS knowledge and skill, PwC had to bring in skilled staff from other parts of the world to help speed up the process and meet deadlines. “Getting experts from other parts of the world to Lagos then presented a safety issue. For example, a number of Americans, British and Europeans were not keen to relocate to Nigeria due to the high crime perception,” Ganz says. • In order to reduce relocation costs, PwC rented apartment blocks for employees who relocated with their families. “However, the rental market is different. The costs are similar to what you would expect if you wanted to rent an apartment in New York but you have to put up with continuous power outages and water shortages,” Ganz says. Payment is also required upfront. For example, if you want to sign a two-year rental lease, you have to pay the entire two years’ rent upfront. • Reliable information: In terms of actually doing the IFRS conversion, getting reliable information from companies proved to be a challenge. “The deadlines were very tight and raised the risk of getting quality information. There is also a high bribery and corruption element in Nigeria. We saw this when dealing with two potential clients, where there were elements of corruption within the business. We ended up turning down their business,” Ganz says. Adeyemi says data gathering was cumbersome as some of the information required for IFRS disclosures was not previously kept by many companies in the form required for IFRS reporting purposes. • Compatible software: The accounting software or applications used by most companies prior to conversion from NGAAP to IFRS were not IFRS-compliant and could not carry out fair valuations, amortised cost computations and necessary IFRS disclosures. “A number of companies had to devise solutions using Microsoft Excel for their IFRS disclosures,” Adeyemi explains. Ganz noted that some companies that moved to IFRS didn’t change their systems much. For example, they used NGAAP and then simply used an Excel spreadsheet to do the required calculations for IFRS. While this works fine for now, it is not sustainable in the long term,” he says. “IFRS is also continuing to change. For example, between 2012 and 2013, new standards were introduced. So if a company’s conversion process is not thorough now, they are going to have a complicated switch-over in the long run.” • Underestimation of the scope of changes required by IFRS: The IFRS adoption date for listed companies in Nigeria was announced in 2010 and listed entities had only two years to present their first set of IFRS financial statements. A WEST

number of these entities did not start the conversion process early enough because they assumed that the process simply involved a change of software. • Cost of conversion: The conversion process was expensive. Companies had to train employees, change business processes and purchase new accounting software. The costs involved were either not budgeted for or grossly underestimated resulting in cost overrun. • Lack of awareness on the part of investing public on the impact of IFRS on companies first IFRS financial statements: Most listed companies did not sensitise their stakeholders on the impact that IFRS conversion would have on the results previously presented under the old GAAP.

COSTS Determining the overall costs would differ between companies and would depend on a range of factors including the size of the company, the people required and the reporting systems that were already in place. “Costs are also different for different industries. For example, in the banking industry there is a lot of work to be done. Some companies may feel that the impact is not that big. Just an analysis to see the differences between GAAP and IFRS can cost up to $30 000. You still have to work out the cost of adjustment and factor in

hiring new staff and changing existing processes,” Ganz points out. He adds that on the other hand, costs could be as high as $10 million if a company opts to change its entire system. Ultimately, the costs will vary depending on the industry, the size of the company and the company’s approach to implementing IFRS. Adeyemi adds that costs also varied depending on the level of IFRS reporting previously done by the entity. “Conversion costs were cheaper for entities that had been reporting IFRS numbers (for example, to offshore parent companies) prior to the IFRS adoption date. Implementation costs for companies in the financial services sector were higher because the sector had complex transactions,” he says. Adeyemi says some of the costs incurred in implementing IFRS included: • Training costs. • Cost of overhauling previous accounting software and cost of implementing new accounting systems. • Conversion and implementation costs paid to consultants. • Increased cost of publishing IFRS financial statements (as IFRS financial statements contain more disclosures than financial statements prepared under Nigerian GAAP).

SOLUTIONS Adeyemi says that Nigerian companies used consultants to help them do the IFRS conversion. Some of the solutions companies used were: • A number of listed companies engaged audit firms and/or other IFRS consultants to partner with them in their transition from NGAAP to IFRS. • Additional IFRS requirements or disclosures, which were not available in the accounting software of companies, were prepared using Microsoft Excel. Excel templates were designed for the computation of fair value and amortised cost. • Training sessions were conducted for directors and other employees to bring them up to speed on IFRS requirements and implications. • Where the company was unable to acquire an IFRS-compliant software (very few companies acquired application software that was able to produce the relevant IFRS numbers), they raised journals to recognise the IFRS adjustments on their accounting systems.

WEST AFRICA NEWS W

Ghana launches banking services through supermarkets Ghana’s Fidelity Bank has launched a distribution model, Fidelity Agency banking, using shops and supermarkets as bank agents, to be known as Fidelity Smart Agents.

Beware the pirates: regional cooperation crucial

maritime law enforcement efforts. According to Pottengal Mukundan, director of the IMB, a cooperative is critical in combatting the escalating problem, as has been demonstrated on the east coast of the continent.

While global maritime piracy incident rates reached a six-year low in 2013, incidents off the coast of West Africa are steadily on the incline, making up 19 per cent of attacks worldwide last year. Globally, 264 attacks were recorded worldwide, a 40 per cent drop since piracy levels peaked in 2011, yet the dramatic rise in incidents off the western coast of Africa has driven up insurance costs for shipping companies active in the region, as insurers increasingly classify the area as high risk.

Solving the Somali situation

Nigerian pirates and armed robbers accounted for 31 of the region’s 51 attacks, taking 49 people hostage and kidnapping 36, more than in any year since 2008. Nigerian pirates ventured far into waters off Gabon, Ivory Coast and Togo, where they were linked with at least five of the region’s seven reported vessel hijackings. Off the coast of Nigeria, two ships were hijacked, 13 were boarded and 13 fired upon. This is according to figures released yesterday by the International Maritime Bureau (IMB), with the reduction primarily attributed to a focused drive to reduce pirate activity off the coast of Somalia. The IMB Piracy Reporting Center (PRC) has monitored world piracy since 1991. Analysts in Nigeria say security forces already have the capacity to slow the attacks, but lack the political will; though in October 2013, the surge prompted regional leaders to establish a new working group intended to combine

“The single biggest reason for the drop in piracy worldwide is the decrease in Somali piracy off the coast of East Africa,” says Mukudan. The bureau says Somali pirates have been deterred by a combination of factors, including intervention from international navies, the hardening of vessels, the use of private armed security teams, and the stabilising influence of Somalia’s central government. Just 15 incidents were reported off Somalia in 2013, down from 75 in 2012 and 237 in 2011.

Fidelity deputy managing director, Jim Baiden, commented at the launch in Accra that the concept was part of the bank’s financial inclusion strategy to provide banking services to all. Roughly 70 per cent of the adult population in Ghana is unbanked. The model offers customers under agency banking a full bank account within five minutes of contacting any of the dedicated staff or designated retail agents across the country. In the three-month pilot phase, around130 000 accounts were opened with nearly 100 Smart Agents. Director of financial inclusion at Fidelity Bank, Dr William Derban, says roughly 1 200 Smart Accounts are already being opened every day because of its convenience and simplicity. He added that other services such as insurance, credit facilities and investments would be made available to Smart Account holders.

“It is imperative to continue combined international efforts to tackle Somali piracy. Any complacency at this stage could rekindle pirate activity,” warned Mukundan. The IMB’s annual global piracy report shows that in 2013, a total of 12 vessels were hijacked, 202 were boarded, 22 were fired upon and a further 28 reported attempted attacks. More than 300 people were taken hostage at sea and 21 were injured, nearly all with guns or knives. Nigerian pirates were notably violent, killing one crew member, and kidnapping 36 people to hold onshore for ransom. The 15 incidents attributed to Somali pirates include two hijacked vessels, both of which were released within a day as a result of naval action. A further eight vessels were fired upon. These figures are the lowest since 2006, when 10 Somali attacks were recorded.

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NEWS INTERNATIONAL

Germany Germany eyes watchdog ruling on insurer Insurers and bankers in Germany are anxiously awaiting a regulatory decision which could pave the way for a fresh wave of consolidation and shake up the country’s fragmented insurance market. The German regulator, BaFin is poring over the planned sale by Lloyd’s Banking Group of insurer Heidelberger Leben. Senior bankers say that if the regulator waves through the £250 million (R4.5 billion) joint purchase, by private equity group Cinven and the reinsurer Hannover Re, it could kick-start consolidation in the German insurance market similar to that of the UK. The planned deal comes at a time of turmoil for the German insurance industry. Low interest rates are harming profits in a country where generous guaranteed rates are still paid to risk-averse consumers, who often depend on insurance products for a retirement income.

BaFin recently indicated it would take an open mind to the idea of selling portfolios in run-off mode. But it has helped to scupper previous similar deals. An attempt by Nomura, the Japanese investment bank, to take over the German run-off life insurance assets of Delta Lloyd in 2012 failed after the Dutch insurer said negotiations with BaFin had been more difficult than expected.

United Kingdom

If losses exceed the limits of that reinsurance coverage, a supplemental levy will be charged to insurers, according to the government’s proposals. The Federation of Small Businesses has called on the government to rethink its plan and include small businesses in the scope of Flood Re. “Since last summer, small businesses in flood risk areas have often been unable to access affordable and adequate insurance,” the federation said in a statement.

Government urged to include small businesses in flood insurance programme Business groups and insurers called on the government to change its upcoming non-profit flood reinsurance programme in the wake of recent widespread flooding across the United Kingdom. Flood Re, which is slated for introduction in the summer of 2015, will be funded by a levy on insurers that underwrite homeowners’ insurance. Money collected through the levy will be used to purchase reinsurance to cover losses paid by insurers.

The leader of Hamilton, Bermuda-based Hiscox Ltd, which has large operations at Lloyd’s of London and in the UK personal and small- to mediumsize enterprise insurance sector, also criticised plans for Flood Re. In a statement, Hiscox CEO Bronek Masojada said that one in six UK households would be excluded from Flood Re, including many currently affected by flooding. Insurance fraudsters face jail time A team of con artists who netted

£300 000 from a cold-calling scam selling worthless mobile phone insurance is facing lengthy jail terms. Police installed hidden cameras and microphones in their office. Workers at the bogus call centre tricked around 3 000 mobile phone users across the country in the elaborate scam. They pretended to be from phone giants O2 and Orange, and claimed to offer their customers discounted insurance packages, but were not authorised to sell the policies which were worthless. Three members of the team admitted conspiracy to defraud, another four admitted selling insurance when unauthorised to do so and were sentenced to four years in prison.

Japan Short-term losses offset by increased earnings The worst snowfall in decades in central and north-eastern Japan, in February 2014, is unlikely to damage the earnings profile of

rated non-life insurers, says Fitch Ratings. This is because reported claims are expected to be offset by rising earnings, leaving the overall credit profile intact. According to the Nikkei newspaper, the reported damage from the record snowfall is estimated at around 60 billion Yen ($580 million) in claims at the three major non-life groups, Tokio Marine Group, MS&AD Insurance Group and NKSJ Group. It will take several months to tally a final claims figure. In the nine months to December 2013, consolidated recurring profit of the three non-life groups rose to JPY564 billion, or as high as 92 per cent of their aggregated full-year estimate of JPY614 billion. Therefore, on an annualised basis, full-year profit targets can still be met across the sector, barring any other adverse developments. The upswing in earnings is underpinned by the auto insurance business which remains a mainstay of premium income. Earnings are also supported by the increasing contribution from

overseas business, with every major insurance group registering double-digit increases in revenue from their overseas subsidiaries.

India Rising online fraud drives banks to insurance cover Indian banks are increasingly seeking insurance cover against fraudulent online transactions, including those involving credit cards, as a rising use of plastic money and the ease of Internet business potentially increase lenders’ exposure to cases of data breach. This is according to Indian Business Insider. “Demand for insurance policy against phishing, skimming and Internet hacking has gone up in the last year,” says TR Ramalingam, head of underwriting at Bajaj Allianz General Insurance. “Enquiries have gone up and we are working on how to price the product and working on the wording.” In 2012–2013, domestic banks lost Rs17 284 crore on account of fraud, according to

information obtained through the Right to Information Act. During the period, 62 banks filed a total of 26 598 cases related to online frauds. The situation has compounded the woes of the bank sector where lenders are facing huge non-performing assets. “The policy covers cyber extortion and breach of data privacy,” said M Ravichandran, president, Tata AIG General Insurance. “There is a lot of talk around cyber insurance and people are actively looking to secure these exposures.” While companies like Tata AIG have underwriting capabilities for these policies, for others, it is reinsurance driven.

Brazil Brazil seeks Solvency II

supervisory authority Susep is applying for a review of its regulatory framework, which will be carried out by the European Insurance and Occupational Pensions Authority (EIOPA). This is the first step in a process that would enable European firms to apply local solvency rules to their Brazilian subsidiaries. The decision to apply for equivalence recognition comes a few months after the compromise agreement on Omnibus II, which put the Solvency II project on track for a 2016 implementation. Brazil will be granted temporary equivalence status and be required to close regulatory gaps during a five-year period. Australia, Chile, China, Hong Kong, Israel, Mexico, Singapore and South Africa are the other countries applying for this transitional regime.

equivalence Brazil is seeking Solvency II equivalence for its insurance solvency regime, in a reversal of its initially tentative response to the pan-European insurance project. The country’s insurance

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