African Reinsurance Treaty trends for 2024 - A Regional perspective  - COVER WebMag (2024)

The tough Reinsurance climate being experienced internationally again for the 2024 reinsurance treaty renewals is impacting African Reinsurance terms in the same way and mostly to the same extent across these markets. It’s the new normal it seems and we a required to adapt to remain relevant and for markets to be able to compete in a sustainable way.

For example, in the East African markets, hard terms are epitomised by increases of approximately 10% on (loss-free) reinsurance premiums on Excess of Loss programmes (higher) Rate-on-Lines and in some cases greater than 100% additional premium on reinstatement of covers. Reinsurers are also restructuring Excess of Loss programmes by increasing attachment points and on Proportional Treaties, unfavourable commission structures are being applied, and if these were not punitive enough, Reinsurers also commit to offer only small written lines making for challenging placements, in some cases, leading to differential terms and thus increasing the number of reinsurance players on a panel.

Another new and worrying trend on Retrocession Programmes is the reduction of capacity by A-rated securities, which in turn is causing a deterioration in the quality of the retrocession panel.

Additionally, poorly structured (with low deductibles) and priced Retro and Reinsurance programmes result in the same placing challenges which are becoming very difficult (if not impossible) to place. Those books which have not been performing well are struggling to get markets to support their programmes.

In the Primary East African markets, there is a sign of improved pricing at the risk level which is starting to create more stable and sustainable results for Insurers, with under-pricing of business dissipating. As a result, competition by rating alone in those markets is not as prevalent as in the past. This should also bode well for Retro Reinsurers in the coming years with a commensurate relief on pricing. The absence of large CAT losses across the region in 2023 has helped profitability in these markets.

Regulators are beginning to play a pivotal and tougher role in some markets. For example, in Kenya, in terms of a program that has been renewed, for a company to be able to operate in 2024, the Regulator requires all Reinsurance balances to be cleared up to the second quarter. To support this requirement, Insurers are required to get a statement from their Lead Reinsurer to show that all premium balances are indeed cleared as required, other than for accounting reconciliation matters, and only then will they be given the clearance to continue to trade.

Reinsurers too, are beginning to insist in some markets that outstanding balances in respect of premium remittances are to be made as a pre-requisite to renewal.

In Tanzania, the Regulator has also made a stipulation that 30% of the Reinsurance programme needs to be placed in the local market with local Reinsurers. The Regulators there are comfortable however, that the Retrocession Programmes are placed in the international markets. Such Regulatory issues are likely to become a trend in the East African Region. In Uganda however Reinsurers must be accredited, and Reinsurance Brokers have to have a local licence in order to operate there.

In Botswana, the very same conditions prevail as in East Africa, however, there are experiences of flat commissions being reduced and result in dependant, sliding scales commissions are becoming more prevalent.

Reinsurers are also preferring to opt for non-proportional structures rather than Quota Share or Surplus treaties. On the Retro side, increased deductibles on Excess of Loss Programmes, even on well-performing treaties, is continuing into 2024. This is despite a willingness by clients to accept a pricing increase in favour of higher deductibles.

Another feature which is emerging is Reinsurers are sometimes reluctant to back Retro programmes where there are requests for new (innovative type) product lines to be ceded into the treaties as part of the renewal. Rather, they are preferring traditional retro programmes based on standard lines of business where there is a history of sound data for the conventional business, and which have predictable performance patterns and for which they have a better experience.

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The Regulator in Botswana now requires Reinsurers to have a credit rating of BBB or better for Reinsurers on their Retro panel, which is also a new challenge as Reinsurers who do have a Credit Rating stronger than BBB are reluctant to support Retro business, as those Reinsurers have suffered a lot of Natural Catastrophe’s from other international markets. A conundrum indeed!

As regards competition, some markets like Botswana have little to no barriers to entry, hence the market has become overtraded with Reinsurers each looking for their slice of an already relatively small cake. For example, new entrants do not need to be rated and thus competition is rife in the absence of regulation to protect the existing local players as is the case, for example in Namibia, where the State Reinsurer benefits from compulsory cessions. It would therefore seem that the Botswana Regulator is of the view that “the more the merrier” with 7 reinsurers currently operating there. In this way, the oversupply impacts the ability to drive up much needed risk commensurate pricing to create sustainable performance, ultimately leading to a low growth environment and falling margins with very little room for reinsurance providers to negotiate more stringent reinsurance structures and/or risk improvements.

Another trend across several African markets these days is the developing of protectionist measures – closing out players that are not locally incorporated and as such attracting local investors in the broking or Reinsurance spaces. As such, markets insure and reinsure “within” excluding foreign support in the form of capacity, support, and expertise. The problem lies in finding quality support for Retrocession capacity – without which a market disaster can have a serious detrimental impact.

However, the positive here seems to be a growing demand at the risk level for a “back to basics” approach in terms of underwriting and pricing. For example, Reinsurers in some markets are starting to demand the submission of a bordereaux for both premiums and claims to accompany Quarterly Accounting Statements.

The Rating for securities is getting centre stage and becoming a resounding check in the backdrop of Risk-based supervisions.

In some markets we are seeing that there is a general favour towards signing lines on stand-alone treaties rather than the traditional bouquet approach which hitherto was commonplace. This is most likely against the backdrop of the imminent IFRS 17 accounting standards coming into the fore where onerous contracts will be bearing heavy capital charges from the onset.

We are also noticing a reduced appetite by several Reinsurers resulting in capacity constraints from them particularly on business where there is an unfavourable Premium/Liability imbalance, i.e. those that do not generate adequate premiums to warrant the capacities demanded by cedants. Following this, more and more exclusions are being introduced in treaties necessitating the placement of sub-layer or buy-down Treaty programmes and/or Autofac facility requests. Such programmes are difficult to find adequate reinsurance support for.

Threats of a new trend of the increasing frequency of natural disasters which we have witnessed around the globe in recent years is also becoming more and more prevalent in the African region. This in turn is threatening underwriting results and creates challenges for Reinsurers to bring about a more realistic pricing of this business. This in turn, has led to a shortage of capacity on Reinsurance programmes, as these disasters occur with predictable regularity. So, the simplified approach to underwriting and pricing which basis its theory on only past experiences, falls short of meeting the required underwriting margins for Reinsurers. Future pricing using extensive CAT modelling software and techniques is a solution, but due to the exorbitant pricing of such tools, this falls outside the pocket of the smaller up and coming reinsurers who are ill-equipped to do so and thus avoid such reinsurance programmes. Consulting services for these challenges and making use of highly specialised Reinsurance brokers who have strong actuarial abilities and good modelling tools is the way to go to sidestep these challenges.

The rising cost of inflation is having serious impacts on losses and claims which are becoming more and more expensive to settle, due to the inflationary cost of importing parts and raw materials and pricing has not kept up with this trend.

Insurance Policy wordings are also undergoing review and there is also much closer scrutiny to address wording ambiguities in reinsurance wordings to ensure a more appropriate approach to claims decisions. This is also seen on the underwriting side where there is a kind of back-to-basics approach to underwriting and pricing to create a better alignment between Insurers and their Reinsurers. Underwriting profits have been eroded over the years and such measures are being employed to ensure improved underwriting performance and sustainability of the business whilst being cognisant that investment income can no longer be relied upon to boost profits.

In terms of Insurance penetration, Africa has a long way to go to narrow the insurance gap and thus expanding our markets will present good opportunities for future growth. Education in the informal sector on Insurance and related products will doubtless lead to encouraging progress in the insurance sector for decades to come.