Posted on Apr 14, 2011 by Sergio Ulloa
The insurance industry in North Africa is in its infancy, and while that is unlikely to change due to political unrest in the short term, analysts project that with many of the appropriate foundations already established within the past decade, the North African insurance sector could be set for pronounced long term growth and development opportunities in the region.
A new research document from Standard & Poor's, the foremost worldwide insurance rating and information agency, details how the insurance business in the Algerian, Moroccan and Tunisian markets could outpace their countries' cumulative annual economic growth in the long term. Market penetration for insurance products in the region is low and many standard coverage services remain untapped on the market, including life, property and savings-related insurance options. The insurance premiums collected in North Africa are roughly half a percent of total world premiums, and the contribution of the insurance sector towards the GDP of the region remains small by international standards. This demonstrates that insurance is not yet being used as a vehicle for savings and financing investments in these countries.
As the North African economies grow, urbanize, develop their infrastructure, and further liberalize their markets, demand for life and health insurance services is set to increase. Many countries have been updating their laws and regulation towards the insurance industry: increasing minimum capital requirements, professionalizing risk management systems, and opening up the field to foreign competition. Consolidation among insurers regionally is anticipated to begin over the next few years. This will form entities with the sufficient financial and technical capabilities to benefit from economies of scale. The increase in minimum capital requirements has been seen as a prod in that direction. Insurers who can successfully access this emerging market of potential customers could see "possible volume jumps in insurance businesses in the Maghreb," the S&P report held.
In an interview, Lotfi Elbarhdadi, Director at Standard & Poor's, agreed the area was promising: "There is potential for growth," he added, "Penetration rates are really low, but markets are growing and there are many lines of business that are untapped."
The unique demographics of the region could represent a further source for prosperity. Around five percent of the North African population is over 65, and 30 percent are under the age of 14. These indicators demonstrate the substantial human capital that the region possesses, and the potential for high economic growth rates if the right policy mix is further utilized in the previously highlighted countries. This could be an opportunity in particular for the life insurance business as Sharia-compliant Takaful grows in the region while the populations in Western industrialized countries are set to decline.
The volatility of the region remains one of the main deterrents against continued industry growth. Much of the prosperity in the region is dependent on high oil prices. This factor coupled with high youth unemployment, and pronounced transparency and corruption issues in governance, could drive away foreign investors and lower the investment rates by the local populace.
Fareed Lutfi, secretary general for the Coordination Commission for Gulf Insurance and Reinsurance Cos., a UAE based regulatory authority for regional insurers, affirmed that current political affairs on the continent were disruptive: "Political unrest will present a challenge for insurers in the medium term and North Africa has traditionally been a closed market," However the market, he believed, "will present opportunities in the long run as governments become more stable and people begin to seek more medical and life insurance, looking for stability."
Tunisia has been in a state of political flux since the ousting of longtime president Ben Ali in January 2011. The protracted transition period has had a pronounced effect on the local economy and could further hamper the growth prospects of the domestic insurance industry. The S&P report noted that once the new government is established it is uncertain whether they will institute any new policies that would alter insurance pricing and coverage. Mr. Elbarhdadi explains, "In Tunisia particularly, economic activity has already been impacted by the unrest, so insurers there will have less leeway to do business in 2011," adding, "The unrest will put brakes on growth for the coming year, but we don't question long-term growth for the region."
The Tunisian insurance market had been reporting continued growth over the past three years, with the volume of premiums rising well over 6 percent a year. According to the latest figures from S&P, total premium income in Tunisia exceeded TND1 billion (US $730 million) for 2009. The insurance penetration rate and standard rate for premiums per capita remained low at 1.9 percent and US$70 a head, in 2009.
Analysts also believe that Egypt could present substantial long-term growth potential in the insurance market, despite dealing with its own prolonged political crisis. Managing Director of Kuwait-based Safenet Consultants International, Tony Awad, remarked that in times of pronounced instability, people's priorities can often shift toward personal planning for the future, especially retirement savings. This presents an opportunity for insurance companies to offer more stable solutions to address Egyptian citizen's increasing feelings of insecurity. Mr. Awad further commented that these potential insurance customers would take time to develop understanding and utilization of the products, adding, "The effect on insurance will be felt later on; now people will become more critical about the existence of a sufficient social security system and health care system."
Morocco has been one of the few successes regarding insurance sector development in the region thus far. The country features the second largest insurance market in Africa, and one of the largest among the Arab nations. Mr. Lufti confirmed that "Morocco has one of the most well-developed insurance markets in North Africa, especially when it comes to life and bank insurance. The rest of the region now has a chance to catch up." Although this feat is commendable in context, the percentage of people covered by insurance policies in Morocco remains just 3 percent, with premiums per capita of US $84 for 2009. These statistics are favorable in comparison to Algeria, where S&P reported that only 0.7 percent of the populace has any sort of coverage and where premiums totaled US$33.8 per capita in 2009.
As the global insurance markets have opened up, multinational insurers are shifting their focal point
to up-and-coming insurance industries in emerging markets throughout the world. These emerging economies are projected to offer better opportunities for growth in premium returns to offset the more static performance of the established European and North American markets. While much of the international focus has thus far been on the Asian and Middle Eastern regions,
North Africa should present a reasonably attractive business opportunity for multinational insurers over the next few years. Foreign insurers have not yet entered the North African markets en masse, typically focusing on narrow lines of business within countries when permitted. This should all soon change as the governments and regulators of these North African countries will be soon committed to the reform and deregulation of their insurance industries.
On May 23-24 2011 The MENA Insurance Summit is being held in Dubai. The conference will attract many regional and international insurance authorities and will discuss the further development of the insurance market in North Africa and the Middle East. .
Standard & Poor's
Standard & Poor's (commonly referred to as S&P) is a business branch of publishing house McGraw-Hill. Operating out of 20 countries, S&P provides the investment community with independent credit ratings on important financial vehicles such as stocks, municipal bonds,corporate bonds and mutual funds. In addition to its risk management, investment research and credit rating services, Standard & Poor's is known for its indexes, in particular the S&P 500 index.