Transcript Swiss manpower

CAPACITY BUILDING IN RE/INSURANCE BUSINESS
Presentation at the Annual East Africa Finance Summit (EAFS)
VENUE: UNECA
December 14, 2016
Labor and Capital are generally regarded as the key
factors of production.
 From the view point of re/insurance, risk is taken
as a decisive factor for the overall economic
performance.
Risks emanate from various natural and man-made
hazards.
 The most common natural hazards include
earthquake, floods, storms, tsunamis, droughts and
freezes.
 Man-made hazards include industrial pollution,
nuclear radiation, toxic waste, dam failures, transport
accidents, factory explosions, fires, and chemical spills.
RISK MANAGEMENT
 Individual households and organizations come up
against capacity limit for the overall risk they can
bear them-selves.
This limit can be expanded by taking out
re/insurance (risk transfer or risk sharing) with a
positive effect on the economy as a whole.
 Because of this impact, re/insurance should be
understood as the indispensable lubricant that oils
the wheels of the economy.
DEFINITION OF CAPACITY
Capacity is the ability to take risks and retain
the losses, in the case of individual households
or business enterprises,
Or give cover for risks and pay claims when
they arise, in the case of re/insurance
companies.
Therefore, a prudent risk management
technique should be applied in determining an
optimum risk retention limit or underwriting
capacity for net account.
THE WORLD INSURANCE CAPACITY
 Currently there is excess capacity in the global
insurance markets and there is a potential growth in
the African Insurance Markets.
Decline in the global and European market rates
were driven by continued strong capacityparticularly for property risks- and an absence of
significant losses during 2014 and 2015.
THE ACCUMULATION OF MAJOR LOSSES
The scale of natural catastrophe and manmade disasters recorded since 1970 have
been on the increase due to: higher population density,
more insured assets in exposed areas and
 higher concentration of values worldwide.
RECENT GLOBAL LOSSES
Global insurance losses from natural
catastrophes and man-made disasters in 2015
were USD37 billion.
 This was well below USD62 billion average of
the previous 10 years.
 There were 353 disaster events in 2014. Of
these, 198 were natural catastrophes, which is
the highest number in one year.
 But, what is surprising is that there is excess
industry-wide Capital despite heavy CAT losses
during the last decade, especially in 2011.
NATURAL CATASTROPHE LOSSES FROM 1970 TO 2013 IN USD
bn
at 2013 PRICES
Source: Swiss Re/ Munich Re
RECENT NATURAL CATASTROPHE – SOUTH EAST ASIA
One of the deadliest natural catastrophes was the one
known as Super Typhoon Haiyan, in November 2013,
Particularly in the Philippines, this typhoon caused
more than 6,000 fatalities,
About 17 million people were affected by this disaster
with enormous economic losses,
. Overall, direct losses in the Philippines are estimated
to have reached USD9.7 billion,
Surprisingly, the insured portion is estimated to be
around 7% of this sum, or USD700 million only, as the
Philippines insurance market is not strongly developed.
TURBULANCE IN THE FINANCIAL MARKETS
The return on investment, which was used as a
cushion to cover bad underwriting results, has also
diminished.
Especially since 2008, as a result of turbulent
financial markets.
The key to insurers’ profitability in the late 1990s was
extraordinary investment performance.
Investment income increased in importance to
insurers with net investment results rising to about
18-20% in 1999/2000.
Currently, interest rates are at historical lows in
major industrialized countries, all leading to a low
return on investment.
SOME ECONOMC INDICATORS AND INSURANCE PENERTRATION
 54 African countries, with a total population of nearly 1.2
billion, (16% of the world’s population) are expected to have
generated GDP of US$ 2.2 trillion in 2015.
 Total premium income generated in this continent during
2012 was USD72 billion, which was about 1.5% of the world
premium income, out of which South Africa produced 75% of
the total.
The world’s insurance industry is dominated by
wealthy developed countries.
 In fact, the Group of Seven (G7) alone accounts for
almost 65% of the world’s insurance premiums even
though it covers just over 10% of the world’s
population.
INSURANCE PENETRATION- EAST AFRICAN COUNTRIES
The premium produced by the nine East
African countries, as shown in the table below,
was only USD2.52bn, which is about 5% of what
was produced by South Africa.
In fact, out of the total premium produced by
the East African countries, Kenya produced
USD1.5bn which is about 60% of the total.
The penetration rate in Kenya is 3.5%, which
is higher than all the other countries shown in the
table below.
One reason for the Kenya’s relatively high
penetration rate is that the financial sector is
reasonably well developed.
 In 2013, South Africa produced USD54.12
billion with a penetration rate of 15.4%.
STATISTICAL DATA AS AT 2013- EAST AFRICAN COUNTRIES
POPULATION TOTAL
GDP PER
TOTAL
INSURANCE
In millions
CAPITA
PREMIUMS
PENETRATION
COUNTRIES
1
2
3
4
5
6
7
8
9
Burundi
Djibouti
Eritrea
Ethiopia
Kenya
Ruwanda
Sudan
Tanzania
Uganda
TOTAL
South Africa
GDP
USD billions USD
In Million USD % OF GDP
9
0.9
6
89
44
11
34
46
37
3
1
3
48
45
7
70
33
23
303
1,595
544
542
1,016
698
2,040
703
626
18
15
16
219
1,520
60
285
256
131
0.70%
1.10%
0.50%
0.50%
3.50%
0.80%
0.50%
0.90%
0.60%
276.9
233
841
2,520
3.00%
53
351
6,621
54,121
15.40%
Source: The African Insurance Regulation Direcory - Africa Re - 2015
THE NEED TO RAISE EQUITY CAPITAL AND BUILD TECHNICAL RESERVES
In some countries, the minimum required capital to
start an insurance or a reinsurance company is very
small.
Consequently, such companies underwrite business
to cede most of it to re-insurers, outside the country.
Those with low solvency margins and those who
would like to grow and increase their market shares,
should increase their capital base and technical
reserves.
African governments should also set the minimum
capital requirements at a level commensurate with
the risks the re/insurance companies should take in
their respective economies.
PRODUCT DEVELOPMENT AS A MEANS OF
CAPACITY BUILDING
 During the time of capacity shortage, Aalternative Risk
Transfer (ART) products which boost insurance capacity will
be in high demand.
 Unfortunately, as the capital markets in Africa are
underdeveloped, one may not expect the ART products to
increase insurance capacity in Africa, in the foreseeable
future.
 However, Life insurance, medical care, agricultural
insurance and micro-insurance are identified as lines of
business likely to benefit from the development of new and
more relevant products.
 Countries should also make use of the services given by the
African Risk Capacity Agency.
THE NEED TO STRENGHTEN EXISTING POOLS AND
CREATE NEW ONES
 Insurance companies have been forming pools for
various reasons. One of the reasons is to augment
the supply of re-insurance capacity in a particular
country or region.
 The other reason for the creation of a pool is to give
cover for risks perceived to be large and
catastrophic.
In Africa, we have many pools, like the African
Aviation Pool, African Oil and Energy Pool, OEASAI
Fire Pool, WAICA Pool, The African Fire Pool and
Nigerian Liability Insurance Pool.
DISTRIBUTION CHANNELS
 Brokers and agents to grow fastest, followed by bancassurance and
mobile phone distribution.
 Insurance brokers are expected to be the fastest growing distribution
channel, followed by bancassurance and mobile phone distribution.
 Agents and brokers will remain critical to educating consumers about the
benefits of insurance.
 Brokers are typically used for larger risks while agents play a dominant
role in retail business.
 The prospects for mobile phone distribution depend on the technological
advancement and communication infrastructure in individual markets.
 As yet, online distribution is not an important sales channel and only
plays a role in the larger and more developed markets.
SKILLS DEVELOPMENT
 In most East African markets, regional insurance companies
struggle to overcome the lack of management skills and
product knowledge.
 They try to develop local talents by creating elite training
courses for new staff and hiring outside consultants in some
cases.
 Such practices should be encouraged by all the stakeholders
through insurance colleges and universities.
 For example, the Kenyan Insurance College, which is well
organized could be taken as an example for other countries.
PUBLIC-PRIVATE PARTNERSHIP
 Risk management is most effective when it adapts to
changing circumstances and when it is shared by all related
private and public parties .
 In developing the Risk Management capacity, the African
re/insurers should first of all make use of the available
capacity, in the short run.
 It appears that there is a need for co-operation to boost
mutual interests. Bearing in mind the credit risk and using all
the risk management techniques.
 African re/insurers should exchange business with local,
regional and continental re-insurers.
 Moreover, we should also cede business to the existing pools.
SHARED RISKS AND MITIGATION MEASURES
 Integrating the roles of insured parties, the re/insurance
industry, and the government, as risk bearer of last resort is of
paramount importance.
 Under this integrated framework, the insured party is
responsible for: buying insurance cover, being informed,
implementing protection measures and maintenance.
 The re/insurance industry is responsible for : offering
insurance solutions that balance insured needs while
managing risks prudently such that all valid claims can be paid
in a timely manner, integrated risk management, and building
awareness, learning from disasters.
 The state is responsible for: integrated risk management,
governmental guidelines, improving awareness, and defining
the legal framework for insurance.
CONCLUSION
 The insured, the insurance industry and the relevant
government organs should work together to:
 Understand and manage risks properly, using the latest
technology,
 Educate consumers to understand the advantages of getting
insurance covers,
 Work on the development of human resources to solve the
problems of shortage of skilled manpower.
 Increase the capital base and technical reserves of both the
insurance and reinsurance organizations,
 Develop the discipline and prudent underwriting and avoid
competition on the basis of prices, and
 Follow the principles of utmost good-faith and settle claims
quickly.
THANK YOU!!!!!!!!!
By Haile Michael Kumsa
Chairman, Board of Directors, Ethiopian Reinsurance S.C.
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