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Reinsurance

You need to be streetwise in emerging markets

Jurgen Graeber, Chief Operating Officer Non-Life reinsurance of the global Hannover Reinsurance Group and Chairman of the Hannover Re Group Africa, recently visited South Africa. Tony van Niekerk was lucky enough to be invited to discuss the local and African reinsurance markets with him.

How have you seen the reinsurance environment in Africa change over the last two decades?

Many things have changed, not the least of which is that we now have better policy wordings. There is growing commitment from the industry to be precise in its promises to clients, which stems from a higher business ethic, honesty is assumed to be a shared value. We have a market with fantastic growth potential, a market that stretches from Third world to First world. Although this has always been the case, we have not previously taken advantage of the opportunities to the extent that we do now. The geographical concentration of insured values in specific areas is a bit of a disadvantage. There is a strong innovative power in the market and a great ability to create products like pay-as-you-go covers in emerging markets. As far as tracking devices are concerned, and in other similar areas, South Africa is in the forefront of development. We have also seen a significant improvement in data quality across all aspects of the business, but it is still far from perfect.

The Financial Services Board has become more aware of the issues facing the industry and is involving business more. SAM is a good example of this understanding and working together.

Africa – where is the growth focus?

Africa makes up 1,5% of world premium while South Africa accounts for 1%, which shows that, within Africa, South Africa still dominates. The question is: why has this not changed?

Furthermore, emerging insurance markets need to address three things, namely currency risk, insurance law and corruption. Currencies outside South Africa devalue too rapidly and they are too volatile. In addition, there are still too many conflict-ridden countries. Insurance markets usually have a 20 to 25 year cycle: it starts with motor/ marine/ property; then, as companies grow, they buy business interruption cover; then employees get richer and personal lines business grows. Thereafter, individuals and companies start suing each other and liability products develop. In Africa, this takes much longer than 20 to 25 years. The big unknown is the influence of China buying into different countries.

Is first world regulation inappropriate for Africa?

Reliable data and actuarial skills are essential requirements for the implementation of regulation such as SAM, and the associated capital management. We cannot work on risk management solutions when underlying requirements are not there. This was introduced in Europe and the US in 1994, but people could not calculate the tail risk in the reserves as there were not enough actuaries. European companies only started to implement solvency calculations in early 2000. It took them many years to create the capacity to implement these regulations.

Risk management strategies are great, but experience and being streetwise is more important in emerging markets. In Africa, when crossing a busy street, you look at the cars, not the traffic light. In the first world you can rely more on the drivers obeying the traffic lights, and therefore look only at the lights before crossing.

How should we do it in Africa?

We should start with proper data. Through that, we can determine what the environment is all about and which risk management measures are needed. In each country, the industry bodies should develop good data as a starting point.

Secondly, insist that you only accept hard assets as part of the balance sheet. We must find ways to get insurers started differently. The promise to pay must be based on quality assets. Insurers must pay as much attention to asset risk as to insurance risk. Minimum capital requirements are needed for the asset side of the balance sheet.

Lastly, if you want a credible system, pay your government officials well, and this should eliminate the element of corruption.

Globally, where are we going with product development?

· We are seeing value concentration in the mega cities of the world and therefore higher exposures in smaller areas; for example, the availability of air conditioners changes where people can choose to live.

· Nano-technology is an exposure that is unassessable at the moment, as it involves things we cannot see.

· Cyber risks change so fast that this area is a challenge to assess and then to insure.

· Contingent business interruption, such as an earthquake in a micro-chip production area, could lead to enormous supply chain interruption problems.

· How do we deal with a zero interest model? (The German government issues bonds with a zero return). The cash we hold does not work for us, so we need to be steering the underwriting process much more tightly.

· What will the currency/law of international contracts be? Can we see Chinese currency/ law for many different contracts signed all over the world? It always used to be the west dominating, but that is now very different.

Any comments on actuarial skills?

European universities have already reacted and should be able to meet the growing demand. The situation is not as critical as it was 10 years ago – there is quite a large number of actuaries in Europe and they have a good reputation. Similarly in South Africa, the profession is attracting increasing numbers of young graduates, but there is still a shortage of experienced actuaries.

What is happening on the natural catastrophe front, from a reinsurer’s perspective?

Insurers must show how much capital they are willing to expose to 100 and 200 year scenarios. 2011’s catastrophes were severe and frequent, and they exceeded probability curves (EP Curves), in terms of which risk tolerance is defined. Climate change, however, is of less concern as we can adjust terms every year; however, we must observe the trends. Penetration of models on nat-cat exposure is getting higher, data is better and assessment is more concise. Nat cat exposure is still a driver of very high volatility of earnings. This is a concern, as we want to have stable earnings for shareholders.

The government of countries in the developing world are not always pro-active enough to ensure that insurance is in place for natural catastrophe events.

Firstly, they have to set in motion emergency plans; secondly, they need to ensure they do not lose revenue as companies do not work and do not pay tax after a major event; and, thirdly, they must recognise they will not be re-elected if they have no emergency plans that were properly executed during an actual natural catastrophe. Governments therefore have much to lose. Bureaucrats do not react unless there is a great catastrophe. Emergency plans have been improved, but the ability of governments to translate these plans to financial emergency plans is not yet good enough.

What is your view of the South African environment?

We are very pleased with the operation here. Hannover Re Africa contributes disproportionately highly in our group. We have a good team and a good rating, so it is ideal for us. As an organisation, we are always planning for potential scenarios. One concern in South Africa is the education system: too many learners leave school too early. The stability of the rand is also a concern. There will therefore be some reluctance by large corporates to have large unhedged rand exposures. However, we are still very positive about South Africa as it has always been good for us. South Africa challenges us as an innovative power.







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