Sarah Rundell gets to grips with the development of trade credit and political risk insurance in Sub-Saharan Africa.
Whether as protection against late payment, terrorism, war or looming political uncertainties such as the up-and-coming elections in the Ivory Coast, Burkina Faso, Guinea and Tanzania, insurance increasingly oils the wheels of African trade.
The bulk of trade insurance in the region covers commodity shipments coming out of Africa, and infrastructure, including telecoms and power equipment, going in to the continent. Although the latest predictions from economists at the World Trade Organisation see global trade growing at just 3.3% this year, Africa’s economic growth prospects of 4.4% in 2015 and 4.7% in 2016 suggest steady trade flows. Economists predict stronger African domestic demand based on private consumption and public investment in infrastructure as well as increasing foreign direct investment. “The sectors which will remain buoyant in the coming months are still construction, agriculture, services and, to a lesser extent, the manufacturing industry,” predicts Jean-Christophe Batlle, Africa manager at Coface, in the French ECA’s latest research note.
One growing area of demand is from African banks expanding their intra-African trade finance operations to meet demand from key clients. The UN puts intra-African trade at around 12% of Africa’s total trade – although it could well be more because of high levels of informal trade and Africa’s porous borders. “We are doing a lot of work with banks to provide financing solutions and mitigate risk for SMEs,” says Benjamin Mugisha, an underwriter at the African Trade Insurance Agency (ATI). “We have supported South African banks lending into Africa and are now doing more business with Nigerian banks wanting to do cross-border transactions too,” says Roderick Barnett, an underwriter at specialist insurer Beazley.
Demand for insurance is also coming from Africa’s biggest banks wanting to boost capital adequacy in line with Basel requirements. Insurance provision isn’t always linked to capital relief, and many African banks are behind the curve on meeting the Basel regulatory framework anyway, yet insurance is helping some banks lend more, as illustrated in a novel initiative in the DRC, explains the ATI’s Mugisha. Africa’s central banks require that their local banks set aside an equivalent of 12% of capital to cushion lending. But in the DRC, where the regulatory capital to risk weighted assets is currently 24.5%, banks in receipt of ATI’s insurance cover will only be required to set aside 12.25% worth of capital reserve if the transaction meets all eligibility criteria, he explains. “It’s a capital relief that will help local banks lend at the same levels as their better capitalised counterparts.”
In another trend, demand is also coming from corporates seeking political risk insurance to protect themselves against sudden political change. For many of Africa’s biggest indigenous corporations, either mining groups, service providers or construction companies, local governments are their most significant client. “There is a growing need for mitigation to protect traders or businesses from delays in payment particularly,” says Mugisha.
“In Sub-Saharan Africa those businesses that are large, sizeable contributors to GDP are now very aware that their relationship with the government might change down the line in contrast to the past, when they felt that their relationship with the government wasn’t a particular concern,” says Cape Town-based Ebbe Rabie, senior account executive at JLT. Elizabeth Stephens at Veritas sounds a similar warning bell. “Ageing leaders present a concern. Stability in Uganda is inextricably bound up in the person of President Museveni. The lack of succession planning could be a source of instability should he leave office unexpectedly. Similar scenarios are possible in Rwanda and the DRC.”
An upswing in demand and supply
Industry experts predict demand for more innovative insurance will increasingly flow from new industries such as Africa’s renewable sector, or Nigeria’s emerging power sector. De-risking of cashflows from renewable energy projects, for example through covering the shortfall in power production in case of lack of wind or sun, can make projects bankable. “Insurance like this is tricky to underwrite because we have to ensure any contract of the sale of power to a government would stand up to a change in government, however we are interested in supporting these kinds of flows,” says Beazley’s Barnett.
Innovative policies are also working to draw more private insurers into the sector. For example, the African Risk Capacity, ARC, founded in 2012 by the African Union, aims to help member states better plan, prepare and respond to extreme weather events and natural disasters by using insurance against the risk of drought, with the intention of rolling it out to cover other disaster like Ebola. ARC Ltd paid out US$26.3mn in its first policy year after three of the participating countries in western Africa suffered low rainfall. It’s an initiative that aims to provide assistance immediately, rather than wait for aid to arrive, and build capacity in the private sector to ultimately offer these products itself. By bringing together the concepts of insurance and contingency planning, ARC’s aim is to create a new way of managing weather risk by transferring part of the burden away from African governments to international financial markets much better equipped to handle the risk.
Capacity, like demand, has also increased. Industry experts report more appetite for African risk with new underwriters prepared “to take on Africa” for the first time. ATI, for example, is now approached by the London market looking to insure African risk and has grown capacity to carry out spot transactions in different countries.
Insurers also notice an increase in the spread of risk across the continent. Support for Zimbabwe is slowly turning around, and neither Mozambique nor Zambia are seen as “high risk” anymore, explains JLT’s Rabie. “Underwriters are putting their pen down to these types of territories: investment is going in.”
Christian Hendriks, deputy CEO at specialist political risk and credit insurer Garant adds: “There is more capacity in the market because there are more syndicates willing to look at Africa.” However he qualifies that at the riskier end of the scale, although many insurers “go to the end of the transaction” most are reluctant “to go to the very end.”
For Africa’s seasoned operators like Hendriks, today’s risks are “nothing out of the ordinary”. Instability in northern Nigeria is the biggest concern but the company hasn’t experienced any losses through terrorist activities in that region yet. “The Boko Haram presence around oil and commodities is a big issue spreading through northern Nigeria, Mali and the Ivory Coast, creating real tensions in the commodity sector. We are having to look much more closely at the exact location of the goods,” he says. Anecdotal reports highlight losses for insurers in Ghana’s steel sector, where the slowdown in the construction industry has caused insolvencies and non-payment. It’s a warning echoed by Coface’s Batlle who cautions that the fall in commodity prices has stalled investment programmes, meaning payments could be frozen or delayed and providers of services and materials may find themselves faced with payment delays.
Factors obstructing growth
Despite the upswing in capacity, significant barriers continue to hinder the growth of Africa’s insurance sector, mostly around complex licensing with country-specific legal peculiarities. It’s left many of the biggest private players frustratingly confined to the South African market. “Harmonising policy for a pan-African insurance stronghold is an increasing challenge. Most African states have yet not legislated on the matter. It’s a grey area,” says Duarte Pedreira, manager, international trade credit at AIG.
Beazley’s Barnett adds: “Due diligence is challenging. Almost all our insureds are located outside Africa because of the licensing that would be required. We rely very much on the insured’s own due diligence and we’d never underwrite an African corporate with no audited financials.”
It’s a moot point. Audited financials aren’t always available and don’t always give an accurate picture of a company’s financial health anyway. It means groups like AIG have to go the extra mile in their due diligence, explains Pedreira. “The kinds of questions you have to ask an African industrial corporate are completely different to the types of questions you ask in developed markets. Do you have access to power and how much do you spend on electricity? Are the roads to port paved? Are there still landmines left over from the war? These are the kinds of things we need to know.” He warns against “suitcase underwriters” in reference to insurers who fly into a region, broker a deal and flying out the same day. Other challenges include judicial weakness in African markets making it difficult to seize recoverables in case of a default. “Write-offs become likely,” he says.
Because local knowledge is crucial in assessing risks, local insurers could have a real advantage. But policy and regulatory hurdles aside, Africa’s own insurance sector is still hampered by a lack of expertise and experience. A growing trend of bogus insurers, particularly targeting Africa’s SME sector, is also damaging the industry. “There is quite a bit of misrepresentation out there. SMEs need to be really cautious of who their intermediary and who their insurer actually is. If they venture off the path and go to unnamed parties they could fall foul of entities that have seen a gap in the market,” says JLT’s Rabie.
And even for some of the most resilient insurers, some African risk remains off the table. “We get lots of enquiries from Sudan and Libya but we really struggle to help them,” says Rabie. Beazley too would find it “very difficult” to support any investment in Libya. The ATI’s Mugisha concludes: “We can’t insure a burning house. We have to take a view that there is an insurable solution.”