Company LOGO OVERVIEW OF GLOBAL TRENDS IN REINSURANCE

Presented By Mr. Johnnie Wilcox Managing Director UNITED AFRICAN INSURANCE BROKERS LTD At THE 17TH AFRICAN REINSURANCE FORUM - DAKAR 9-11 OCTOBER 2011

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 with this August gathering. 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 clients 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 insurers & 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 have embraced 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. Overdependence on governments and corporate clients and the underdevelopment of the individual clients market 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 and could lead to major instability of the insurance markets Companies are beginning to embrace ICT in service delivery Alternative Risk Transfer(ART) & Financial Reinsurances not widely practiced but may be the case with globalization and maturing economies Reinsurance demands are non-sophisticated. International reinsurers provide basic covers, capacities and dictate price. Consequently, African insurers are paying prices disproportionate to their experiences 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 (2010, US$) Insurance market penetration (2010, in %)  In sum, catch-up potential for insurance clearly visible – together with high real GDP growth, this leads to expected strong insurance premium growth Source: Swiss 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 in Reinsurance cover and the need for appropriate pricing Escalating CAT Losses from Natural Catastrophes all over the world in Insured Losses from natural disasters for 2011 half year US$67billion (2010 US$27billion) source: Swiss re Insured losses (in USD billion, at 2011 prices) source: Swiss re

TREND DRIVERS Globalization Information Technology Improved Risk Management and Governance Practices ART & Financial Reinsurance Credit & Capital market Crisis Commitment of International Association of insurance supervisors (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: Capital base of reinsurers is stable but may contract if current catastrophic loss trends continues In the event that Capital base of reinsurers contract this will probably lead to reduction in reinsurance capacity especially for catastrophe covers 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’s 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.

Capital base of Reinsurance Companies worldwide (US$ billions) Source: Munich Re

At the Reinsurance Rendezvous held in Monte Carlo in September this year, some of the conclusions reached were that; –Despite catastrophic losses and low investment yields there is still surplus capital in the reinsurance industry –Reinsurers have managed to weather the current natural catastrophe losses so far this year –A constantly changing world requires innovative solutions from reinsurers in dealing with emerging risks. –Reinsurers however need to take actions to improve profitability –Rates likely to remain flat.

CONCLUSION & RECOMMENDATIONS African Reinsurers must get their act 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 Individual African reinsurance companies cannot take on these challenges alone – they need to come together and create a common user service provider in the area of specialized risks including research and product development. 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 quota 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 –Avoid cash flow underwriting which ultimately could lead to financial ruin

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 Insurance Industry should expect fairly stable rates for 2012 renewals. It is expected that each market be rated, taking into account their exposures and experiences and not penalized for the “sins” of others CONCLUSION & RECOMMENDATIONS

FOOD FOR THOUGHT

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