By Chiamaka Ajeamo, [email protected] 08060655687
The African Continental Free Trade Area (AfCFTA) will establish a single market covering more than 1.2 billion people with a current Gross Domestic Product (GDP) of more than $ 2.5 trillion. This is even as the free flow of goods, services, people and capital from the trade is expected to boost intra-African trade and strengthen competitiveness of companies.
It is in the light of its potential benefits that the Vice President, Yemi Osinbajo recently urged African insurance practitioners to take advantage of the huge opportunities inherent in the AfCFTA to enhance the socio-economic transformation of the continent.
Osinbajo gave this charge at the closing ceremony of the 47th African Insurance Organisation (AIO) Conference themed ‘Rebuilding Africa’s Economy: An Insurance Perspective’.
According to him, “every smart economic grouping, whether governments or businesses, must be thinking, planning and strategising for these new times.
“The free trade agreement presents a major opportunity for African countries. By some estimates, if we get it right, we can bring several millions out of extreme poverty and raise the incomes of 68 million others who live on less than $5.50 per day. There are potential income gains of up to $450 billion, and just cutting red tape and simplifying customs procedures alone could drive up to $250 billion of that sum.
“So, what does all this mean for the insurance industry in Africa? Well, plenty of opportunities. More trade in goods will mean greater need for insurance services, brokers, in particular, should expect a boom; demand for trade facilitation services will rise, but obviously companies that already have market presence in other African countries, even if by collaboration, will benefit more than others.”
The Vice President further noted that “we can expect to see more well capitalised insurance providers from other African countries coming to compete in the Nigerian market. And we shouldn’t be surprised if this happens quickly.
“Services can be set up faster than manufacturing plants. Nigerian financial services companies, especially banks, are already in many African Countries, the likes of Zenith, Access, UBA. How about insurance companies? We should now be looking at developing homegrown international African insurance conglomerates. The time is now,” the vice president said.
Although the African insurance sector is optimistic about the AfCFTA, experts have harped on the need to establish a solid regulatory integration for seamless implementation and operations.
The Secretary-General of AIO, Jean Baptiste Ntukamazina, speaking at the conference, said the AfCFTA has significant potential to serve as a catalyst for transforming the African economy.
Ntukamazina said, “For the AfCFTA to succeed, dynamic pan-African trade is required, which can only take root in a stable socio-political environment.
The African insurance sector is ideally positioned to provide security, economic and financial stability and enable the development of societies and economies in Africa through its risk knowledge and risk transfer solutions. However, to play this important role, African insurers need integration or even harmonisation of insurance regulations.”
For the Chief Executive Officer, NEM Insurance Plc, Tope Smart, the “AfCFTA is a very good initiative of the African Union and I see it as a game-changer for the Insurance sector in Africa. Since the insurance sector plays a vital role in the economic development of the continent, the expected increase in intra-African trade through AfCFTA will lead to increase in insurance penetration across the region.
Smart, who doubles as the President of the AIO, noted that one of the main objectives of the AIO is to support inter-African corporations in insurance business and his administration will work with several regulators across the region towards the accomplishment of this purpose.
It is worthy to note that in Africa, the service sector including the insurance sector made the largest contribution to GDP, with 53 per cent in 2020. The relevance of the services sector is even more significant, as the widespread informal sector is not included in most statistics.
In the light of the foregoing, the AU expects an increase in exported services and further growth in industries that are heavily dependent on services, such as manufacturing and agriculture. Liberalisation of the service sector is likely to be driven by the private sector, especially financial institutions, which will play an essential role in shaping policy; the 6th annual edition of the African Insurance Pulse of the AIO said.
According to experts the insurance growth in Africa has largely been motivated by economic growth. However, the maturity of the insurance market is low in most African countries but the penetration rate is expected to increase in markets where insurance growth has been accompanied by structural reforms, such as market liberalisation, compulsory insurance enforcement, wider distribution, public-private partnerships, and a regulatory system promoting innovation and market access.
The trend towards tighter capital requirements for insurance companies to ensure their solvency will establish stronger companies and promote job creation and build capacity in the industry. These reforms are crucial to increase the security and performance of the continent’s insurers, they stated.
Going further, they revealed that regional expansion of re/insurance business lags behind its potential due to trade barriers. While intra-African trade agreements have gradually seen a substantial reduction in tariffs on goods, non-tariff barriers, such as infrastructure gaps, the low quality of trade logistics, access to credit, and human capital remain high for most African countries.
Despite these efforts, the intra-African trade remains below its potential. This is the same for the insurance sector, according to the executives interviewed. Most insurers operate in just one or two markets. Even Africa’s reinsurers, acting as a shock absorber for cedants and economies, are challenged to diversify their portfolio because of many barriers and constraints in African insurance markets. Ahead of the implementation of the AfCFTA, a geographic expansion to build scale is the top priority for insurers and reinsurers alike, the executives maintained.
Commenting on this, the Group Managing Director and CEO, Africa Re, Dr Corneille Karekezi, said “Today’s trade restrictions within Africa are higher than those with the rest of the world. While intra-regional exports amount to roughly 50 per cent of trade in Asia and 69 per cent in Europe, in Africa only 17 per cent of exports remain within the continent. Therefore, it comes as no surprise that large hopes rest on the AfCFTA.
“According to the UN Economic Commission for Africa (ECA), intra-African trade is expected to experience a boost of 52 per cent, encouraging manufacturers and service providers, including re/insurers, to leverage economies of scale.”
These experts strongly emphasized that Re/insurance players have much to gain from a continent-wide single market. According to them, once fully implemented, the eight strategic objectives of the AfCFTA will benefit re/insurance companies in Africa directly or indirectly.
As a result, the expectations of the various insurance stakeholders for the AfCFTA are high. Many believe that the insurance pie will grow with the liberalised market access, facilitating an expansion beyond their current market range. In particular, re/insurers operating in one or a few markets see this as a unique opportunity to grow and diversify their risk portfolio.
Speaking on the challenges to the successful implementation of the AfCFTA, they listed the top three to include; increased competitiveness, indicating that not all countries, sectors and economic actors are equally prepared to benefit from the common market.
Another key concern highlighted at the continental meet was that insurance regulation differs widely across the continent and that could pose hurdles to market access. Consequently most of the participants including operators, regulators and policymakers agree that the current regulatory differences present a major obstacle to integrating African re/insurance markets.