Africa-focused reinsurers are rising to the challenge of the increasingly evolving risk landscape, even as persistent high inflation and slowing economic growth weigh on the continent.

“As we enter 2024, Munich Re of Africa is focused on enhancing and developing underwriting solutions that better reflect the evolving risk landscape. It goes without saying that we will continue to stand by our clients even after difficult years, as the last ones have been. Munich Re's business and its client relationships are long-term, with risk-adequate prices being essential to offer reinsurance cover sustainably,” says Nico Conradie, Chief Executive Officer of Munich Re of Africa (MRoA).

To do so, reinsurers will have to navigate the tough global macroeconomic environment alongside various evolving risk trends, most notably that of climate change. The impact of climate change is evident in the rising frequency and severity of extreme weather events and the consistently above long-term average natural catastrophe losses recorded by the insurance industry between 2020 and 2023.

Climate-related risks have become increasingly tangible for reinsurers plying their trade in Sub-Saharan Africa (SSA) where drought, flood, and storm perils cause billions of dollars in economic losses each year. Sadly, these events often cause significant loss of life as evidenced by the 1400 or more fatalities following Cyclone Freddy which affected parts of Madagascar, Malawi, Mozambique and Zimbabwe in February and March 2023.

Insurers and reinsurers already can play an important role in helping governments to achieve their net-zero greenhouse gas (GHG) emissions by 2050 pledges, by rethinking financing and underwriting solutions to support the energy transition from coal-based to renewable energies.

“Munich Re has a clear goal: we will make our contribution to achieving the Paris climate targets. By the end of 2020 Munich Re had already set GHG emission targets for our investments, reinsurance transactions and own business operations: we stopped investing in companies that generated more than 30% of their earnings from coal or by extracting oil from oil sands, and we stopped insuring new coal-fired power plants, new coal mines, and oil sands mines,” says Conradie. As part of the Ambition 2025, Munich Re introduced a series of ambitious targets as mid-term goals towards the long-term 2050 target: “We work towards fulfilling our targets”.

From an African perspective, reinsurers must carry out their climate change and energy transition roles with due consideration for the dual challenges of inflation and currency depreciation. “Many countries in the Sub-Saharan Africa region are facing challenges with double-digit inflation which is often closely linked to the depreciation of their currencies against the US dollar. This has a big impact on our businesses due to shortages of in-country foreign exchange,” says Sipho Mthabela, Head of Africa Strategy at MRoA.

Rising exposures to ‘critical infrastructure failures’ caused by under-investment present major risks to Africa-based reinsurers. “It is possible that the insurance sector has made provisions for possible loss and damage exposure due to electricity grid failure and under-estimated the risk attached to water infrastructure failure; the latter could result in serious water shortages with significant and unconsidered consequences,” says Conradie, commenting specifically on South Africa.

But he warns that infrastructure failure with respect to water ought to be on the list of things that keep the insurance industry awake at night.

In assessing the 2024 reinsurance market outlook, stakeholders need to acknowledge the subtle differences that exist between the exposures they may encounter in Africa versus those in Asia-Pacific, Europe, and North America. For example, cyber risk, which is a major concern in developed markets, is less present in the Sub-Saharan Africa region.

It is also worth noting that Africa, with 54 country markets, with diverse nuances unique to each market differs to the aforementioned developed markets. “Africa is a combination of different countries, cultures, currencies and regulations; how insurance is conducted and how insurance professionals approach the discipline is peculiar to each country,” says Mthabela. These in-country differences require reinsurance solutions to be customised for clients across the continent.

The fact that MRoA is located on the continent gives it useful insights into servicing African clients. From its South African hub, the business has reach into East Africa (Ethiopia, Kenya and Tanzania); West Africa (Ghana and Nigeria); Francophone Africa (DRC, Côte d’Ivoire and Senegal); and countries like Angola and Mauritius. Partners in each of these countries assist the reinsurer in expanding its reach into neighbouring markets, thus achieving coverage Sub-Saharan Africa-wide.

MRoA believes there are clear differentiations between South Africa and the rest of the Sub-Saharan Africa countries it serves. Case in point, the South African insurance industry has endured a number of shock loss events over the period 2020-2023 with a pandemic in 2020-21; riots and looting in July 2021; and severe flooding events in 2022-23 all contributing to hardening reinsurance conditions. By contrast, the reinsurance markets in the rest of Sub-Saharan Africa have not been affected by major losses, thus terms are softer, though still competitive.

Sticking with Sub-Saharan Africa region, Mthabela suggests increasing insurance penetration by offering innovative insurance products that resonate with the continent’s demographics, including its burgeoning young population and growing middle class.

Another major opportunity exists in unlocking Africa’s agriculture potential. “Over 60% of all arable land in the world sits on the continent. If Africa can find ways to optimally utilise this asset, we will rewrite the narrative on economic growth; employment; food security; foreign currency reserves; and Agri-focused insurance and reinsurance products just to name a few,” says Mthabela.

Munich Re has a long history on the continent and has invested significant resources in skills development and training. These investments have, over time, contributed to a growing pool of talent from which African insurers and reinsurers can draw, thus enabling the growth of these businesses.

“Our willingness to share our technical insurance and reinsurance expertise has stood us in good stead across Africa; in interactions with clients and partners we frequently encounter individuals who recall attending a Munich Re backed programme at some point in their careers,” concludes Conradie. “The effort that we have made over decades, and continue to make each year, is a small part of our contribution towards increased insurance penetration on the continent.”

The secret to unlocking value in African reinsurance markets is to continually adapt to the changing risk landscape. As such, the reinsurers conducting business on the continent will have to keep a close watch of the relative impact of existing and emerging threats, and adjust their insurance covers accordingly, at risk-appropriate premiums.