The Right Policy
By TBY | Mozambique | Jun 29, 2015
The World Bank estimates that as wages rise, up to 80 million jobs may leave China and relocate to Africa. This would impact the local economy, and also the financial services, not least insurance as the industrial matrix expands. Meanwhile, a survey by the International Labor Organization (ILO) reveals a disparity between insurance coverage North Africa and sub-Saharan Africa. In countries in the former territories such as Libya, Egypt, Tunisia, and Morocco around 80% of the labor force has pension coverage, in stark contrast to the latter, where in most nations between 3% and 10% is insured. Having pointed out that only an estimated 7% of the continents citizens have a pension plan, attention turned to positive demographics, set to shape the destiny of the insurance business. Birth rates today are on the decline, reflecting greater prosperity, and the study predicts that by 2050, the 55+ demographic will have doubled, “…opening up a whole range of opportunities for the financial and healthcare sectors, but signaling the end of the demographic dividend.” Meanwhile, PROSHARE cites a recent study by Bain&Company Consultants forecasting a doubling of consumer spending in Africa 2020 to $2 trillion as more Africans enter the ranks of the middle class and make provisions for their future. Africa’s middle class doubled between 1981 and 2010 and continues its ascent.
THE SCENE IN MOZAMBIQUE
Post civil war economic restructuring and subsequent market liberalization, ending the state monopoly, saw the re-emergence of private sector insurance companies, subject to Ministry of Finance regulation. In 1999, the government legislated the establishment of the insurance regulatory body— Inspecção Geral de Seguros (IGS), subsequently ceded greater autonomy and renamed Instituto de Supervisão de Seguros de Moçambique (ISSM). Today’s Mozambican insurance sector is overwhelmingly dominated by corporate and industrial policies related to energy-related infrastructure. Henri Mittermayer, Managing Director of Hollard Moçambique told TBY that among the insurance companies in Mozambique, “…the three largest entities represent 80% of the insurance market.”
Premium generation has expanded by roughly 18% per annum in recent years according to KPMG research. The merits of insurance as security, much less investment, are irrelevant to most Mozambicans. Total premiums account for less than 1% of GDP. The need for a vibrant private sector and middle class versed in the merits of saving and investment is some way from being realized.
Mozambique’s insurance intermediary sector hosts around 40 brokers and insurance agencies. The law stipulates two types of mandatory coverage, the first being third-party motor liability for local and foreign registration. Secondly, business entities are obliged to carry workers compensation insurance to cover work-related accidents.
Micro-insurance, like other micro components of the financial industry, is intended to cover those otherwise prone to financial exclusion and promote sustainable welfare. The benefits of financial security in a developing economy are substantial, too, in providing a safety net again catastrophic loss, and in fostering calculated risk taking conducive to entrepreneurship. A paradox lies in the fact that citizen aside, the micro insurance vendor, too, must be convinced of the viability of the transaction. Early entrants face higher operational costs, and in a competitive environment, premiums drop.
The local insurance sector as yet has limited technical and financial underwriting capacity and relies heavily on reinsurance capacity. Yet SwissRe indicates that in 2011 the continent’s reinsurance market accounted for a minuscule 0.8% of the global total in direct premiums (valued at a total of $6.4 billion). By comparison, Latin America’s print was 2.8% and that of emerging markets 10.7% respectively $21.9 billion and $83.7 billion). “Given this dependence on reinsurance,” Henri Mittermayer observes that, “you will note that there is a very low level of risk retention of less than 5% of values at risk on corporate risks and megaprojects.”
In the industrial arena, the exploitation of Mozambique’s vast natural gas resources has seen certain recent concessions to foreign giants. Mozambican law generally requires insurance to be taken out with local insurers, and yet the limited scope of the local insurance market and vast scale of Offshore Areas 1 and 4, has seen additional flexibility is granted to related Concessionaires and SPVs. These are free to take out insurance with foreign insurers where it proves impossible to insure with local insurance companies at a cost that is not more than 10% of the cost of insuring with foreign insurers.
IN THE EVENT THAT…
At roughly 0.69% of GDP, the Mozambican non-life insurance market falls short of the 1.11% African average, and well below South Africa’s 2.9%. One pressing reality is the need for catastrophe insurance against the endemic risk of flood, droughts, earthquake, and pestilence. The World Bank Disaster Risk Financing and Insurance (DRFI) Program encourages the uptake of disaster insurance in vulnerable nations. A 2012 report on Mozambique, which ranks high among those most exposed to natural disaster. Data confirms that Mozambique has faced “an average of 1.2 major events per year over the 1957 to 2008 period [where] drought has impacted the largest number of people, with over 17 million affected since 1956.” Moreover, roughly 50% of the population is vulnerable to the extremes of drought or flood. It is estimated that virtually 100% of agricultural production is susceptible to drought. Official data estimates that each decade losses of roughly 20% can be expected. Yet despite the sector’s contribution to the economy (approximately 30% of GDP), and aforementioned risk profile, an estimated 75% of rural adults are oblivious to insurance, compared to the urban figure of 50%. Catastrophe risk insurance penetration remains a tiny part of the property insurance market, itself comprising roughly 10% of non-life coverage. Disaster micro-insurance is not yet an option to the vulnerable either.
NOT GETTING THROUGH
The World Bank’s Making Finance Work for Africa report indicates low insurance penetration across Africa, besides South Africa, of roughly 1%, and just seven having a rate of over 2%. The industry predominantly prints non-life business, with life insurance, given disposable income and longevity severely underdeveloped. Small wonder, then, that South Africa accounts for 93% of overall life business and over 50% of non-life business in sub-Saharan Africa. Potential is identified in health insurance, micro-insurance, agricultural insurance, and other products geared toward relieving systemic poverty, or that allow SMEs to grow.
Rui Oliveira is the President of the Insurance Association—sector player membership optional—established in 2003. Today, 10 out of the 16 companies in the sector are members. In a TBY interview he highlighted certain shortcomings of the local scene among which were the fact that, “the government does not create funds for compulsory insurance for areas such as worker’s compensation or motor insurance…which is taken out from private sector companies, and we are not an endless supply of capital able to guarantee limitless liability.” In this light, the Association, sees its chief role as, “aligning the expectations of the law with the needs of the private sector.” He goes on to comment that, “People forget that insurance is a key element of a growing economy, especially if assets, investments, and capital, too, are growing, and with them, the inherent risk of loss.”
For Mozambique, then, industrial and infrastructure-related projects will continue generating premiums—government concessions to foreign companies aside—while a wider uptake among citizens will require economic development of a broader nature than energy concessions alone can provide.
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