Company LOGO OVERVIEW OF GLOBAL TRENDS IN REINSURANCE Mr. Johnnie Wilcox Managing Director United African Insurance Brokers Ltd

SCOPE Introduction Key Concerns as Reinsurance Brokers State of African Insurance/Reinsurance Industry Trend Drivers Global Trend Conclusion & Recommendations

INTRODUCTION I am highly honored to be invited to share my views on the subject to this August body. Rate of change at the global market place is assuming a dizzying pace and I believe that recent and not too recent happenings will have a lot of impact on our industry and the way we do business. The African Insurance and reinsurance industry being a part of the global market place is going to be affected by what is going on in the global insurance industry My mandate is to look at trends in the insurance Industry from an African Broker’s viewpoint.

In looking at the trends, this paper will highlight some major events responsible for observable trends in the global reinsurance industry and their implications. My conclusions and some recommendations will follow. INTRODUCTION

KEY CONCERNS AS REINSURANCE BROKERS As a reinsurance broker, part of our overriding concern is finding the right reinsurance protection for our client at the right price In this regard our interest in the reinsurance value chain will include –Profile and quality of risks our clients bring to the market –Their retention ratios –The capacity available in the market to meet our clients needs –The terms under which Cover is granted to our clients –Improvement in clients service –The timeliness and quality of claims settlement –Growth of the market –Impact of supervision on business practices –Risk management practices by reinsurers

STATE OF THE AFRICAN INSURANCE MARKET Capital inadequacy resulting in low retentions and high demand for reinsurance. Currently there are rising demands for more sophisticated covers requiring better capitalized companies As a fall out some countries are beginning to embrace recapitalization, Mergers and Acquisitions (e.g Ghana, Nigeria, Gambia, Kenya to name a few) Lack of capacity and underwriting expertise to underwrite some classes of business e.g. Oil and Gas Risks, Aviation and other specialized lines of business

Globalization & Competition from foreign companies Basic insurance and reinsurance products on offer. Lack of customized insurance solutions to suit local requirements. Weak and unsophisticated supervision (environment for unethical practices to thrive) Many African Countries have weak economies with resultant low Insurance penetration due to lack of disposable income, ignorance and inertia (as indicated in Slide 9) STATE OF THE AFRICAN INSURANCE MARKET

Generally the risks of the continent are good but portfolios are largely unbalanced Inadequate pricing; Companies compete on price not on service The net effect is rate cutting which is now widespread Companies are beginning to embrace ICT in service delivery ART & Financial Reinsurances not widely practiced but may be the case with globalization and maturing economies Reinsurance demands for non-sophisticated International reinsurers provide basic covers, capacities and dictate price. Consequently, African insurers are paying prices disproportionate to their experience African insurance companies end up paying higher price for their Reinsurance requirements even when markets were considered soft.

Primary Insurance: Low per-capita income and market penetration Per-capita income (2006, US$) Insurance market penetration (2006, in %)  In sum, catch-up potential for insurance clearly visible – together with high real GDP growth, this leads to expected strong insurance premium growth Penetration much lower if South Africa is excluded (NL: 0.82, L: 0.33) Source: Munich Re The African Insurance Industry – Conditions & Market practice

TREND DRIVERS Change Drivers that have significantly impacted on current global insurance and reinsurance business cycle includes; Terrorism: September 11 marked a watershed in the history of insurance – Led to the shortage of supply Reinsurance and the need for appropriate pricing Escalating CAT Losses from Natural Catastrophes all over the world Globalization Information Technology Improved Risk Management and Governance Practices ART & Financial Reinsurance Credit & Capital market Crisis Commitment of IAIS to significant improvement in quality of supervision.

GLOBAL TRENDS Most players deploy IT in service delivery. International Reinsurers are deploying rating tools in pricing. The unrelenting Credit and Capital Market Crisis is going to impact on insurance and reinsurance business in many ways. Some possible scenarios are examined below: Anticipated decrease in the capital base of reinsurance companies worldwide. Decreasing capital base likely to result in the reduction in reinsurance capacity (supply) Reduction on refinancing options available to primary insurers may stimulate the demand for reinsurance

GLOBAL TRENDS Lower capital market returns and decrease in investment incomes for companies Decrease in profitability for reinsurers For Africa any further economic crisis will likely impact insurance penetration already the world lowest Increased exposures from natural hazards likely to result in significant increases in individual and catastrophe losses The above events are likely to result in increase in pricing of insurance/reinsurance products Continuous improvement in supervisory oversight as a result of national development initiatives and the requirement of IAIS.

Decrease in Capital base of Reinsurance Companies worldwide Source: Munich Re

Increased exposures from natural hazards and increased Catastrophe Losses Source: Munich Re

At the Reinsurance Rendezvous held in Monte Carlo in September this year, the practitioners were unanimous in their conclusion that; –The reinsurance industry has weathered the credit crisis through their excellent risk management procedure –Reinsurers have managed the business cycle excellently over time, since 2001 –They also agreed that rates will continue to decline in spite of global losses and it is likely to take a ceded insured loss of about USD15 billion to USD20 billion to stabilize that softening, and a ceded loss of about USD40 billion to USD50 billion to cause a material upward change in rates –Mr. Erhart (Aon Re Executive)

CONCLUSION & RECOMMENDATIONS African Reinsurers must put their acts together and; Recapitalize adequately to enable them play a primary role in providing capacity for the African continent. Improve on their fundamentals and get rated by appropriate rating agencies Invest heavily in human capital development, especially in the area of specialized risks e.g. Oil & Energy, Aviation Invest in the development of customized reinsurance solutions Embrace ICT to upgrade their service delivery to their markets Improve in training for direct underwriters.

CONCLUSION & RECOMMENDATIONS International Reinsurers should Apply differential pricing (taking into consideration the differences in exposure and experience in pricing covers) – No continent should subsidize losses from other region Play a complementary role in the continent and contribute their to developing the African insurance markets Direct underwriters should; Recapitalize to retain more and only buy reinsurance at the top levels Embrace ICT in service delivery Improve on Risk Management and Corporate Governance Embark on cost optimization through –Reduce cost of doing business –Make each line of business pay for itself

Regulatory Authorities; Create enabling environment for insurance companies to grow and develop Encourage companies to explore other methods of Risk financing other than the traditional Reinsurance CONCLUSION & RECOMMENDATIONS

Considering all foretold The African Reinsurance Industry would not Generally expect an increase in rates for Rather will expect each market to be rated, taking into account their exposure and experiences CONCLUSION & RECOMMENDATIONS

FOOD FOR THOUGHT

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