Building bridges
What impact can regulatory trends have on re/insurers entering or expanding within emerging markets?
Presently there are many separate regulatory regimes, which require on-the-ground understanding. Skills shortages, for example, in the actuarial space also pose a challenge. Most of the regulations involve capital adequacy requirements and financial stability, although we expect to see greater focus on areas such as the principles for treating customers fairly (TCF) and the Retail Distribution Review (RDR).
While it doesn’t necessarily stop other continents doing business there, it’s something that must be recognised. What we have found in insurers and people investing in Africa—and there has been significant interest in Africa in insurance financial services—is that it’s 54 countries, 54 separate legal jurisdictions and therefore separate regulators. One has to recognise the regulatory diversity across the continent.
What are the biggest regulatory challenges within Africa?
The vastness of Africa, number of countries and diversity of regulations create a challenge. Insurers need to recognise the challenge of setting up operations in separate countries to get adequate coverage.
Staffing and aligning the various regulatory requirements is also a challenge. However, the regulators have acknowledged this and are seeking to create greater alignment in regulations.
Some African countries, such as South Africa, have been aligned with International Financial Reporting Standards (IFRS) for many years, while others are currently in the process of their IFRS conversion.
How can the region itself and re/insurers overcome these?
In Africa the maturity of the regulations varies from mature, in South Africa for example, to more embryonic. Many countries are, however, closely following global developments. What we are seeing is that the regulators are talking to each other and they recognise that it does make sense for them to align regulations as far as possible and in line with global trends.
This is becoming more relevant as we are seeing more interest of international investors in African countries. Many regulators themselves face challenges around capacity, skills and resources, so it will take some time for alignment. However, the regulators are talking to each other.
Greater cooperation on legislative developments is an important factor, due to the number of countries. This has also been supported by economic development zones, for example in the East. In addition, general maturing of the banking systems will support the infrastructure for insurance and distribution mechanisms. The bancassurance model remains an important model for supporting premium growth.
Are any impending regulations on the cusp of being introduced?
In South Africa, the regulatory environment is closely aligned to leading developments and trends in Europe and the UK, with developments such as Solvency II and TCF being closely followed.
In South Africa, we’re introducing a local equivalent of Solvency II, and that will go live in January 2016, at the same time that it goes live in Europe. It’s called Solvency Assessment and Management (SAM), and is very much based upon the principles of Solvency II.
How does regulation in Africa compare to that in other emerging markets?
Africa is mostly in line with other emerging markets, but it does vary from country to country. For example in South Africa the regulatory environment is mature, but similarly the market is well established and market penetration is extremely high, especially in the life sector.
However, as you go further into Africa market penetration is lower, below 1 percent in some countries, and also below other emerging market and global levels. It thus follows that as the industry is less mature, the regulatory environment will also be less mature.
Which areas show the most growth potential in Africa?
South Africa is by far the largest insurance market in Africa. However, market penetration and competition is high. While growth is solid and the insurance industry is healthy, well capitalised and well regulated, limits on disposable income may limit growth going forward.
Other areas where we see potential include the Nigeria and Kenya. Nigeria has an underdeveloped insurance market with low penetration rates. However, it now has the largest economy in Africa with high growth rates, so is likely to be a growth market for the future. The size of its population, at more than 150 million, allows for a significant market as the insurance market grows.
Some of the fastest growing markets are in Africa. In addition, the continent has a population of more than one billion people. Foreign direct investment (FDI) is also significant. All of these bode well for the future growth of insurance on the continent.
Shaun Crawford is global insurance leader at EY. He can be contacted at: scrawford2@uk.ey.com
Malcolm Rapson is a partner in assurance and is EY’s Africa insurance sector leader. He can be contacted at: malcolm.rapson@za.ey.com
About the authors
Shaun Crawford leads EY’s global insurance business, spending equal time across Europe, Asia and the Americas, growing the company’s insurance consulting, audit, tax and corporate finance businesses. He has been in the financial services industry for 30 years having worked in consulting and line management with the majority of European Life assurers and UK retail banks at some point.
Malcolm Rapson has been with EY for 25 years. He focuses on financial services, primarily insurance and asset management, and serving multinational companies with operations in South Africa and into the African continent.
