Oil slump, unrest threaten African markets - FREE

Oil slump, unrest threaten African markets - FREE

Africa mapFallout from low commodity prices, the slowdown of China’s economic activity and the impact of monetary tightening by the US Federal Reserve are affecting the prospects of Sub-Saharan Africa’s insurance sector, according to AM Best.

The drop in oil prices in particular, along with related political instability, has been a significant contributor to the continent’s economic slowdown, according to a report from the rating agency, with gold, copper and other key commodities now traded cheaper.

“The shift in Sub-Saharan Africa’s economic and political landscape is a source of unease and concern given the material downside it proposes for the various nations on the continent,” said AM Best.

“The shift in Sub-Saharan Africa’s economic and political landscape is a source of unease and concern given the material downside it proposes for the various nations on the continent.

“Fears are arising that much of the progress made in the recent past may be unravelled, with the continent returning to its pre-2000 era when it was defined by its debt crisis, decades of conflict, extreme poverty, high inflation and mass corruption,” continued the rating agency.

Low insurance penetration is set to continue, although the continent’s market is expected to continue to be attractive to overseas investment.

Citing World Bank data, GDP in Sub-Saharan Africa slowed to 3% in 2015 from 4.5% in the previous year and far below the 6.8% average sustained for the five years to 2008.

And citing Swiss Re’s “World Insurance in 2015” Sigma report, Africa’s insurance market itself is estimated to have contracted 8.5% to $64.1bn last year, largely attributed to currency depreciations.

“In particular, AM Best notes that the continued decline in the value of the South African rand has been significant in reducing the scale of the continent’s insurance sector as South Africa represents just over 70% of its premiums.

“In 2015, China’s economic slowdown contributed to the South African rand’s further decline, resulting in a quarter of its value being lost as a result of reduced demand for raw materials by its top trading partner. Other countries affected by currency depreciation during 2015 included

Nigeria, Tanzania, Ghana, Kenya and Angola,” said AM Best.

Rising political instability risk is also highlighted, as already seen in Ethiopia and South Africa, with the biggest oil exporter Nigeria, Mozambique and Ghana singled out as risks, following International Monetary Fund (IMF) interventions, with oil economy Angola also seeking assistance.

“In an attempt to avoid an IMF bailout, Nigeria was reported to have sought $3.5bn emergency assistance from the African Development Bank and the World Bank to fill the gap in its budget.

“Additionally, it has been widely reported that the country has agreed a multi-billion US dollar currency swap deal with China, with the terms and conditions of this arrangement remaining private. IMF rescue packages typically come with conditions requiring sweeping structural reforms and stringent austerity measures to be enforced,” said AM Best.

Looming elections in fifteen countries in 2016 will in most cases likely result in victory for those already in power, seen by AM Best as fuel for fires of unrest, noting recent discontent in Ethiopia and South Africa.

AM Best thinks insurers within commodity-dependent countries, particularly those with meaningful levels of underwriting concentration in the hydrocarbon industry, are particularly at risk from the economic slump.

Premium volumes derived from business classes such as property and engineering, are expected to be affected particularly as infrastructure projects are likely to be delayed or cancelled, noted the rater.

“However, some pockets of opportunity are apparent for the insurance sectors of oil-rich nations. In Angola…the government recently disbanded AAA Financial Services (AAA), the captive of the state-owned oil company, Sonangol,” said AM Best.

Up until March 2016, competition in the country had suffered from the government’s mandatory requirement for all oil and gas operators to buy their insurance from AAA.

“Likewise, despite the dampened outlook for Nigeria’s hydrocarbon sector, the Local Content Act (2010) will likely continue to support re/insurers’ ability to compete for the diminished levels of premiums derived from the oil and gas sector,” said AM Best.

The bill keeps 70% of Nigeria’s energy business for local insurers, despite weaker capital among the country’s local players.

“AM Best estimates that Nigerian insurers are currently retaining between 25% and 40% of the country’s oil and gas related business, compared to the less than 5% written prior to the 2010 legislation,” said the report.

Political factors as well as weak capitalisation among local insurers are other negative factors.

“During 2015, Nigeria’s insurance sector experienced significant delays in the renewal of certain risks, owing to the uncertainties associated with the presidential election and the subsequent policy direction of the president elect,” noted AM Best.

Insurance buying appetite is also expected to be weakened among the populations of countries affected by the recent slump.

Commodities companies’ buying is also under particular pressure, while the drop-off in infrastructure investment and local currency values expected to lead to higher claims and expenses for many insurers.

Despite the economic woes of the region’s biggest economies – South Africa and Nigeria – AM Best thinks African insurance markets remain attractive to foreign investment.

“Foreign direct investment into Africa has subsequently reduced by a third to $38bn in

2015, significantly in contrast with global trends which saw overall inflows increasing by 36%,” said AM Best.

Nigeria, Angola and South Africa saw the biggest foreign investment falls, with private equity deals falling 70% in 2015 to $2.5bn – although a rise in smaller value deals was noted.

“While high-valued deals fell considerably in the year, growth of smaller transactions remained stable, with private equity targeting the telecommunications, consumer goods and financial services sectors. AM Best believes that the shifting demographics of Sub-Saharan Africa have increased the appeal of the continent’s consumer-driven industries,” said the report.

“Additionally, fundraising continued in 2015, despite the overall decline in the quantity of private equity deals undertaken in the year, with the level of capital raised more than doubling to $4.3bn, demonstrating the continued interest in the continent,” said AM Best.

“With this backdrop in mind, Sub-Saharan Africa’s insurance sectors have remained of interest to foreign and regional investors, as its low penetration rates, enticing growth prospects and improving regulatory landscape remains attractive,” added the rating agency.

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