By David Whitehouse/The Africa Report
Continental Reinsurance CEO Lawrence Nazare argues that Africa’s insurance industry can’t protect against climate change impacts alone.
Lack of investment options for African reinsurers amid higher inflation and distressed sovereign debt are prompting capital flight from the continent, Continental Reinsurance CEO Lawrence Nazare tells The Africa Report.
“The risk environment in Africa is too onerous,” and risk-reward trade-offs for investors are much better in other parts of the world, Nazare says on the sidelines of the AFIS financial industry summit in Lomé, Togo. Nigeria-based Continental Re is Africa’s largest privately owned reinsurer.
Options have narrowed for African insurers and reinsurers needing to invest premiums to ensure long-term profitability. Many government bonds, in which African insurers are often obliged to invest, yield negative real returns due to high inflation. Meanwhile, the sovereign debt crisis has undermined the reliability of sovereign Eurobonds, Nazare says. Equities in African companies are too risky, while real estate is too illiquid, he adds.
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Global reinsurance rates have been increasing since before Covid-19, making it harder for African projects to get cover. The practical response, Nazare says, is to take a defensive approach, with Continental Re maximising its dollar holdings and turning to US treasuries as an investment. That reduces long-term profit as fewer risks are being taken while depriving Africa of capital.
All of Africa’s reinsurers have been following the same trajectory, with the ratings agencies providing encouragement, Nazare says. The result, he adds, is a vicious circle in which it becomes harder for African sovereigns to resolve debt crises.
Parametric potential
The AM Best rating agency gives the company a financial strength rating of B+, and says the company’s balance sheet is “very strong”. Still, AM Best says, Continental Re has “modest” profitability and “volatile” underwriting performance, and its investments are concentrated in Nigeria and Kenya, both subject to “high financial system risk”.
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Insurance was historically developed to provide protection to limited numbers of people facing specific, quantifiable risks. That model, Nazare argues, is unable to address recurring, predictable disasters in Africa provoked by climate change, which cause damage on a mass scale. The reinsurance industry, he says, faces claims inflation, but is unable to pass those higher costs onto local insurers.
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Vulnerability to climate change is closely associated with debt distress. A total of 79 low- and middle-income countries globally are seen by international institutions as in, or at risk, of debt distress, half of them in sub-Saharan Africa, according to the Center for Economic and Policy Research in Washington. Three-quarters of the countries in the global total are among the most vulnerable to the effects of climate change, their research finds.
The financial impacts of climate change on Africa, Nazare says, should be borne by those who have contributed the most to carbon emissions. “There is no viable way to protect the poorest with private capital.”
He sees parametric insurance, which pays out without inspection of damage if a climatic parameter is breached, as “the most viable way to provide protection at scale.” While the industry can structure parametric products, it can’t finance them alone. Public and external backing is needed, and the policies are likely to be best suited to market segments rather than to providing protection for the masses, he says.
Rays of hope
Nazare finds some grounds for optimism amid the gloom in terms of heightened awareness of the dangers of excessive government borrowing. “This crisis will make African sovereigns more scrupulous in how they spend,” he says, pointing to Kenya as an example of a country that has expanded its tax-revenue collection capacity, and Mauritius as a success story from which Africa can learn.
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Debt, he argues, shouldn’t go into “vanity projects” but into infrastructure projects which lead to growth. “The period of Africa bingeing on external debt is gone.” There is now more focus among African governments on the role of the private sector in economic management, he adds.
Africa’s tech-savvy young population also gives grounds for hope, Nazare says. Education has produced an aspirational new generation that sees opportunities to build businesses at scale rather than simply achieving subsistence, he says.
