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Life Insurance in Africa

2007-11-28 Source:UNCTAD

                                          Basil Reekie
  Introduction
  The purpose of this paper is to give a brief high level overview of the life insurance

industry in Africa and the challenges it faces. When looking at the life insurance industry in

Africa, one needs to split Africa into different regions. The reason being that the development

in each region is quite different. For purposes of this paper, we have split Africa into 5

regions, namely:
  * Anglophone eastern and southern Africa
  * Anglophone West Africa
  * Francophone Africa
  * North Africa
  *South Africa
  Anglophone eastern and southern Africa
  There are 12 countries in this region, and around 80 life insurance companies (or insurance

companies writing life business). On the whole, this portion of the African market is

significantly under developed. However, there are one or two companies in this region who are

growing and prospering. In some countries, the majority of the business is pensions investment

business coupled with group risk cover. The question is often raised, “how does
  one give group life cover in a high AIDS environment?”
  It is interesting to note that in some of these countries, employers are prepared to pay 10

times as much for Group Life cover as they would be paying in, say, South Africa (which in turn

may be twice as expensive as Europe). It is not uncommon to see 25–35 per cent of employer

payrolls going towards pensions saving and group life cover.
  The main problems facing life insurers in this region are:
  * Low life expectancy;
  * The AIDS epidemic;
  * Lack of central statistics;
  * Lack of good administration systems;
  * Investment markets are underdeveloped;
  * Lack of management experience and insurance skills;
  * Weak regulatory structure and outdated solvency measures;
  *Minimum solvency basis is often meaningless.
  These tend to be recurring themes with regard to problems in life insurance throughout Africa

(and are not necessarily specific to the Eastern and Southern African region). We deal with the

highlights of these below:
  (a) Some sample AIDS statistics for this region may clarify the picture. In Southern Africa,

AIDS contributes around 10 extra deaths per 1,000 lives assured per annum and around 3 extra

deaths per 1,000 lives assured in Eastern Africa (worse if one excludes Uganda) and about 4 extra

lives per 1,000 in West Africa. The problem that insurers face is in pricing and reserving for

products and still providing a product that gives value for money to the policyholder. Different

companies have found different ways of successfully dealing with
  the AIDS risks, these include:
  * There are companies who have insisted on periodic (say, every five years) HIV testing,

otherwise premium rates for policyholders who do not undergo (or fail) the tests increase

significantly;
  * Many companies around Africa sell what is termed Funeral Insurance. Rates for this type of

product are often much higher than normal term assurance rates and furthermore the insurer

usually reviews the rates each year. Benefits are low, but cover the cost of burial; ??Companies

have made innovative use of increasing term assurances and extended waiting periods in order to

combat the AIDS risk (and “death bed” selling) risk to the company;
  * In some countries life offices have agreed (or the Government has legislated) to ignore the

HIV risk (and not test) below a certain sum assured and thus charge much higher premiums per

mille for the lower sums assured;
  *Universal life products have been used to allow insurance companies the ability to change

mortality charges without changing the overall premium rates. This can be effective if designed

correctly, however, administration and education is then vital;
  (b) AIDS impacts life expectancy. The following graph, illustrates the fact that life

expectancy at birth is quite different in different countries within Africa:

 
  
  The differentials illustrate the need for country (or region) specific assured life

statistics for meaningful product design and reserving;
  (c) Another major problem is that insufficient consideration is given to the matching of

assets and liabilities. This is often due to the lack of availability of appropriate investments

(e.g. sufficiently long-term government bonds). Lack of expertise (and external advice on

liability profiles) amongst management is also a significant factor adding to the problem;
  (d) One of the significant problems encountered relates to administration. Many companies in

the region (excluding South Africa and North Africa) administer their business on spreadsheets or

using unreliable in-house systems. There are even some companies who do manual administration.

Only a select few (usually the more profitable) companies are using reliable administration

systems. This has resulted in much uncertainty regarding the solvency
  position of many companies. As a result, losses may only be identified too late for remedial

action to be taken. Unfortunately, there are, no doubt, numerous insurance companies in Africa

which are insolvent, but nobody knows! The reasons for this usually pertain to poor regulation

and a lack of credible data;
  (e) The regulatory framework is, in many cases, archaic (often based on the United Kingdom

Insurance Act of the 1940s). In terms of solvency a risk based capital approach is almost never

followed and the solvency requirements are, in some cases, pretty much meaningless. Nonetheless,

there is a glimmer of hope as there are some exceptions. These include Namibia, South Africa,

Mauritius, Ghana and the United Republic of Tanzania, who have new modern laws or are currently

redrafting their legislation.
  Anglophone West Africa
  There are six or seven countries in this region; the largest by far being Nigeria. The

Nigerian market (around $50 million of premium income in 2003) comprises around 100 insurers

licensed to write life business; however, changes to legislation in Nigeria mean that a

significantly higher capital requirement is being introduced and thus we would expect many

mergers and acquisitions and fewer life licences in the near future. If one were to combine the

capital of all the existing life licences, then there would only be enough capital to establish 4

or 5 life companies under the new regime.
  The issues facing life offices in this region are pretty much identical to those facing their

counterparts in Southern and East Africa. However, AIDS is currently less of a problem in this

region as compared to Southern Africa. Nonetheless, it is on the increase.
  Francophone Africa
  There are 16 countries in this region, of which 12 participate in the CIMA code. There are

approximately 60 insurance companies licensed to do business in one or more of these countries.

Life insurance in this region is fairly simple by European standards and is almost all term

assurance or relatively simple investment business (running on an accumulation basis). The total

market amounts to around $150 million of premium income with about 50 per cent of this emanating

from C?te d’Ivoire.
  The main challenges facing the industry here are:
  * Many practitioners view the CIMA code as having restricted competitive development by being

very prescriptive;
  * Solvency requirements are antiquated;
  * There is a lack of significant actuarial input.
  Nonetheless, there are many positives in the Francophone region. These include:
  * Strong local reinsurance support;
  * While the CIMA code has been restrictive, it has also brought about some much needed

standardization;
  * Training is better than in many Anglophone areas;
  * Data is more readily available than in most Anglophone areas.
  North Africa
  There are five or six countries in this region, with around 50 companies writing life

insurance business. The total premium income for life insurance business amounts to around $450

million annually. The regulatory environment in the French-speaking countries (Algeria, Morocco

and Tunisia) is modeled on the French insurance market, whilst the regulatory environment in the

Egyptian market is modeled on the United Kingdom’s insurance market. HIV/AIDS is less of a

problem in these markets than in the rest of Africa. In addition, life expectancy is higher.
  South Africa
  The South African Life Insurance Industry is highly developed. There are currently about 70

life insurers, of which 13 write only linked investment business. Fifteen are niche players

(mainly credit life or funeral insurance), with the balance offering the full range of life

insurance products.
  South Africa has always been on the leading edge of life insurance with some of the first

linked investment products having been written in South Africa. Similarly, dread disease

(commonly called critical illness insurance) was launched in South Africa ahead of much of the

rest of the world and the original rating done for countries in Europe was based on the

experiences of the South African market.
  Hand in hand with this well developed life insurance market is a high level of penetration

for life insurance. Life insurance premiums were around $24 billion in 2004 (over 90 per cent of

African life insurance premium income) and this equated to about 12 per cent of GDP (compared to

3.4 per cent for Africa as a whole and 4.12 per cent for America).
  However, the South African market is not immune from problems and the main problems currently

facing this market are:
  * AIDS;
  * High withdrawals;
  * The fact that small companies cannot afford good quality administration systems;
  * A significant negative perception of the industry recently – particularly concerning

returns on retirement and other savings product and the lack of transparency of charges on their

products.
  Conclusion
  Despite the problems highlighted above, it is possible to run a successful Life Insurance

Operation in almost any country in Africa and there are many such gems in the African insurance

market which prove this point. Furthermore, there is a desperate need for life insurance on a

continent which lacks investment opportunities and is plagued by AIDS and other diseases. In

order to assist companies in being able to deal with these basics (and protect policyholders);

the following areas need to be addressed:
  * Relevant solvency regulation;
  * Meaningful (and credible) assured lives statistics (particularly assured life mortality

tables by region);
  * New and relevant products;
  * Training; and
  *Updated legislation and encouragement for the industry.
  Many of these changes will not be driven from within and will need to be externally

motivated.
  

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