THE AFRICAN
REINSURER
A PUBLICATION OF THE AFRICAN REINSURANCE CORPORATION
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C o n t e n t s
June 2005, Volume 019 Established in 1987 ------Page The African
Reinsurer EDITORIAL
INSURANCE & REINSURANCE
PUBLISHER Supervising the Reinsurance Industry: The European Blueprint African Reinsurance Corporation By Philippe Trainar, Director of Economic, Financial and International Plot 1679, Karimu Kotun St., Affairs, Fédération Française des Sociétés d’Assurance V/Island P.M.B.12765, Lagos, Nigeria Tel: 2663323,, 2626660-2, 618820 Telefax:2663282/2626664 Building a Competitive Insurance Industry: Lessons from E.mail: [email protected] consolidation around Africa By Alain G. Ravoaja- Director, Central Operations & Inspection, Africa-Re EDITORIAL and Adewale Adewusi – Head of Statistics, Africa-Re
BOARD
Editor-in-Chief MANAGEMENT & FINANCE Bakary KAMARA
Principles And Practice of Good Corporate Governance In InsuranceCompanies Members Oumar E. Diaw(Consultant) By Bakary KAMARA - Managing Director, Africa Re Kasali Salami(Consultant) Isidore Kpenou Tontines in Africa: A case study of Cameroon Ken Aghoghovbia By Richard LOWE, Managing Director, ACTIVA Assurances Cameroun Mamadou Diallo Sunday J. Udoh John Izegbu
TRANSLATORS MARKET PRESENTATION Mamadou Diallo Sunday J. Udoh The Malawi Insurance Market Mamadou Kane By Chris KAPANGA, Managing Director, NICO General Insurance Ekereobong Ekpenyong Company Ltd of Malawi
The South African Market TYPING By Paul RAY, Managing Director, African Reinsurance Corporation Patricia Beguy (South A frica) Ltd
TYPESETTING Patricia Beguy NEWS FROM AFRICA
By Kasali A. Salami (Consultant)
All rights reserved. No part of this publication may be reproduced without the Publisher’s permission
Bakary H. KAMARA Editor-in- Chief
At a time when the heat of character of the profession economic realities are centred on makes it difficult for them to the international insurance be subjected to a national industry, following some supervisory authority. overseas investigations, which Nevertheless, globalisation has revealed quite a number of overtaken the proponents of unconventional practices, the such an idea, as economic and Editorial Board of the African financial information, however Reinsurer deemed it necessary to technical or remote, are now more readily expatiate on corporate governance issues available to each consumer or partner. It within the insurance industry. Indeed, was considered appropriate to invite a although the principles of transparency, neutral observer, an independent discipline, independence, equity and specialist on the subject to deliberate on accountability have already been well the issue of reinsurance supervision, with entrenched in the insurance profession, the hope that players as well as which is strictly controlled and regulated, lawmakers will be inspired thereby, as it is disheartening to discover such they prepare to introduce some practices as revealed by the investigations innovations on the subject. carried out in the United States. Africans, who were among the first (the King The notion of tontine, an African Committee in South Africa) to deliberate peculiarity and a forerunner of modern and legislate on corporate governance, insurance, deserves to be clarified, and to have a duty to remain abreast of modern that end, a professional volunteered to economic trends by adopting the rules of throw more light on the subject. transparency and judicious disclosure, which are the main allure of all Mergers and acquisitions, which are responsibly managed companies. topical issues of the day, have been analysed on a regional basis, thus leading The drive towards modern economic one to understand why the issue has not trends in the reinsurance sector goes well recorded a clear-cut success in Africa, beyond the issue of corporate governance despite the enthusiasm that this given the fact that more voices are development has raised in other parts of clamouring for stricter supervision of the the world. industry, as reinsurers serve as a complement to direct insurers. In effect, This edition concludes with the traditional the argument presented as the basis for items, which are Market Presentation, excluding reinsurers from national including the largest (South Africa), and supervision, was that the international News from Africa.
Volume 019, June 2005 The African Reinsurer
SUPERVISING THE REINSURANCE INDUSTRY: THE EUROPEAN BLUEPRINT
By Philippe Trainar Director of Economic, Financial and International Affairs Fédération Française des Sociétés d’Assurance
Europe is about to adopt a supervision but also even the blueprint on reinsurance principle of reinsurance control supervision. Although the draft itself is not accepted in all has been almost unanimously countries, even in Europe. The accepted, its motivations were reinsurance industry is various and complex. It is on record that supervised in the United States as well as France initiated the blueprint and was the United Kingdom, Finland, Denmark, joined much later by Germany. The Luxemburg and Portugal. However, there project itself gave rise to heated debates. is absolutely no supervision in Belgium, Indeed, while some people argued that Ireland and Greece. In between these supervision would be of no use either by two poles are countries like Austria, Italy, reason of the very nature of reinsurance, Germany, France, Holland and in which transactions are between very Switzerland where reinsurance is enlightened professionals or the difficulty supervised without any exigency as to the in monitoring that activity, others solvency margin. Therefore, there is the expressed the view which has eventually need to examine the arguments for and been generally accepted, that supervision against reinsurance supervision. is inevitable to confirm the quality of European services in the reinsurance 1.1 Wrong Motivations for market and establish the legal framework Reinsurance Supervision needed to discourage discrimination against European reinsurers, especially by Normally, two motivations are given for the Americans. This article will examine the supervision of financial activities: the the reasons for the supervision of the existence of systemic risk and the need to reinsurance industry and the structure protect the consumer. proposed in the European blueprint to circumvent the difficulties inherent in Systemic risk such supervision. Systemic risk refers to a loss, which, 1. Reasons for Reinsurance although restricted at the onset to a few Supervision financial institutions, has the tendency to extend to the entire sector irrespective of As at now, not only is there no the solvency of the institution concerned harmonized rule for reinsurance with the ultimate risk of payment system
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collapse and general economic crisis1. other operators, thus sustaining a Systemic risk should not be confused with “retrocession spiral”. This is a a general shock, which concurrently potential source of contagion affects a large number of financial because, like the inter-bank credit, it institutions and imperils their solvency creates such a link among all the (for example, drastic fluctuation in players in the sector that the failure interest rate, an inflationary shock or a of one reinsurer is likely to affect stock market crash). The contagious the entire sector. effect of systemic risk could be, to a large extent, psychological as officers, faced The complexity of the reinsurance with inadequate information in their arrangement and in the case of operating environment, may simply non-proportional treaty, the interpret the failure of the first few disproportionate risk sharing with institutions as a threat to others, thus the insurer as well as the systematic justifying some mistrust towards them. intervention of courts in the event Therefore, systemic risk is unpredictable of large losses make it difficult to in magnitude and ultimately self- predict the reinsurer’s actual propelling2. Whereas the initial loss can exposure. It is not uncommon to take the form of ‘Solvency crisis’, the find that a loss charge cannot be crisis could by contagious effect spread to apportioned until several years after become a ‘liquidity crisis’, as the officers the incident. involved would simply lose confidence in the system. Reinsurers normally underwrite the most volatile level of risks, namely Systemic risk is well known in the banking the peaks and intervene when the industry. However, there has not been insurers are or likely to be put under any example in history where the failure pressure, as demonstrated in a of the insurance or reinsurance industry recent study by Moody’s rating led to macro-economic crisis. agency, which shows that, on the Nevertheless, recently, people have average, insurance companies in expressed concerns with regard to difficulty are two and a half times reinsurance operations as a potential more exposed to reinsurance than source of systemic risk in the insurance their competitors3. sector. Several arguments favour that position: The reinsurance market is highly concentrated, with the top five Reinsurers rarely retain all their reinsurers writing 57% of the world written risks: generally they business while the top ten retrocede part of it to one or several companies account for 77%. Comparative ratios for insurance groups in the French market would 1 Cf. O. de Bandt and Ph. Hartmann (2000): stand at 42% and 62%. “Systemic risk: a survey”, working document N° 35? European Central Bank 2 As already stated by W. Bagehot (1873): “Every banker knows that if he has to prove 3 Cf. Moody’s Investors Service Comment that he is worthy of credit, however good may (2003): “Growing Reinsurance Risk Weighs on be his argument, in fact his credit has gone”. P a C Insurance Recovery”, August
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As earlier stated, reinsurers are at would stand at only 0.24% of the the center of the debate for credit ceded premium4. risk transfer. They are also the backbone of several insurance There is a better diversification of groups, even though they often reinsurance covers by insurers. The restrict their reinsurance operations analysis of Swiss Re treaties in within the group. Europe reveals that companies that offer more than 50% of their treaty Finally, reinsurers have secured key cessions account for only 10% of roles in the administration of certain the property premium, while those covers, directly or indirectly related that offer less than 20% account for to professional liability. As 50% of premium. In fact, it has demonstrated by recent events such been observed that only 5% of as the attack on the World Trade reinsurers’ failure result in Centre, the sudden withdrawal of difficulties for direct insurers5. reinsurers could seriously jeopardise economic activity. Reinsurers mitigate their peak risks by the geographical spread of their However, concerns with regard to acceptances and investment systemic risk in reinsurance are probably income. unfounded: Risks of retrocession spiral should There is no example of systemic risk not be exaggerated. The losses caused by a reinsurer’s failure. The caused by the spiral amount to only Piper Alpha platform loss, with a US$1 billion, world wide, resultant shock wave, which raised representing less than 5% of the fear that the insurance market retrocession, 1% of reinsurance might collapse, was eventually premium and 0.04% of direct absorbed. Similarly, the reinsurance insurance premium6. industry was able to overcome the quadruple shocks of Asbestos, Finally, it should be stated that in World Trade Centre, World most cases, the temporary or long recession and the crash of the stock term withdrawal of reinsurers market without serious failure. affected the sector only because Governments were more The amounts involved may not preoccupied with imposing cause difficulties that would result in compulsory covers than ensuring serious financial instability. Indeed, the solvency of the concerned reinsurance takes up only a little insured (Doctors, Airlines etc) fraction of direct insurance premium: an average of 4%, 8% for non-life and 1% for life (8% if savings related premiums are 4 Cf. Swiss Re (2003) 5 excluded). With regard to losses Idem 6 arising from reinsurer’s default, they Idem.This figures are based on the scenario of a loss to premium ratio of 80%, an average retrocession spiral rate of 21% and an average commission of 20% for each stage.
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Consumer Protection their business partners, unlike insurance where professionals deal The second motivation for the supervision with clients who may not be able to of financial institutions, that is consumer assess the solvency of a company; protection, relates to the confidence that the consumers repose in these institutions The industry provides relevant by entrusting them with their material information to professionals that interest, namely their savings. The would enable them assess the risk Government, whose duty is to guarantee of reinsurers’ failure, such as contract execution, takes the financial strength rating by rating responsibility of ensuring that the firms. In fact, in the reinsurance institutions concerned are in a position to programmes of most insurance fulfil their commitments and justify the companies, the underwriting limit of client’s confidence. This guarantee each reinsurer depends on its becomes all the more important given rating. It is reduced if the rating that the liability may fall due several drops. years after the client may have deposited his money or paid the premium. In such a Consequently, several experts believe scenario, there is a high risk of having a that reinsurance supervision is not only “brief case charlatan”, an institution that needless but can ultimately become a collects money and transfers it to other nuisance by imposing costly and entities before declaring itself bankrupt. ineffective external constraints on an industry that can regulate itself by the In the insurance sector, the role of the mere interplay of demand and supply. Government as the consumer protector is Given the professionalism in the market, well known. Often, insurers only the law of demand and supply would indemnify their clients several years later indeed, be more attractive to players than and, in some cases, more than ten years supervision, which is based on strict and after the payment of premium and the very general rules. cover offered will only make sense if it is credible not only in the short but also the 1.2. The Right Motivations for long term. The Government’s role Reinsurance Supervision becomes even more compelling in the case of compulsory insurance where the Reinsurance supervision is justified by the business is not written voluntarily. Unless fact that it would facilitate the activities of it wants to aid fraudulent practices, the both the reinsurers and the insurers by state has a duty of safeguarding the prescribing minimum standards and, in rights acquired by compulsion. Obviously, the case of Europe, a harmonized this reasoning, which goes for insurance, standard for the entire zone. can also be applied to reinsurance. There are several reasons to counter this: Facilitating the International Activities of Reinsurers Reinsurance business is transacted between very enlightened As stated earlier on, reinsurance professionals who are supposed to regulation differs from one country to have the necessary resources to another. In some countries, reinsurance assess the financial soundness of is not supervised, in other countries it is
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strictly supervised while in some others it as it seems to contradict the spirit of a is partially supervised. Worse still, the single market. The introduction of exigencies imposed on reinsurance differ reinsurance supervision becomes even from one country to another. Meanwhile, more compelling as, from the point of as the risks ceded are normally major view of prudential Authorities, rating ones, which, generally, cannot be easily cannot be used as a tool for prudential spread within a single national market, supervision given that it responds to reinsurance naturally has an international different considerations. Neither would dimension. Therefore, it is only by rating exonerate the prudential combining one kind of major risk with Authorities from their responsibility before others and joining one national market the law, should the insolvency of an with others that the reinsurance industry insurer be traced to the failure of its can sufficiently hope to share its risk so reinsurer. as to mitigate the large losses that may occur on a single technical risk or national Facilitating the activity of Insurers market. Reinsurance cessions constitute a key By definition, risks written by foreign factor in the management of reinsurers are normally not supervised by Assets/liability of most insurers. national Supervisory Authorities, which at Reinsurance only takes up a small fraction best rely on foreign supervisory of the risks written by insurers, an Authorities, where available and active. average of 7% globally and 10% in the That explains why some countries such as European Union (18% of the non-life the United States impose reinsurance insurance premium and 3% of the life deposits up to the limit of the risks premium). Only the fronting activities covered. That obligation may take the take recourse to reinsurance in large form of collateral security deposited proportions. Nevertheless, reinsurance either with the cedant or a recognized cessions play a very important role in the financial institution (cf. trust fund regime sense that the risks ceded are generally in the United States) or a guarantee or major risks, that is, risks of low frequency letter of credit issued by a recognized but high intensity. Therefore, they protect bank. This constraint is discriminatory to the insurer against risks whose cost is foreign reinsurers. Given the high cost of very likely to be high and which may securities and the competitive result in the failure of the insurer, should disadvantage it entails, reinsurers often they occur. Thus, reinsurers support the prefer to establish a subsidiary, which is financial solidity of insurers and the subject to supervision by national credibility of their written liabilities. Authorities, where available. Economically, reinsurance plays the role The introduction of effective reinsurance of proxy to the shareholders’ funds and supervision can reassure foreign justifies a reduced capital base for authorities of the quality of international cedants, a factor that is recognized, at reinsurers and therefore facilitate their least to some extent, by the prudential operations. This is particularly true in rules applicable in most countries. Europe where the possibility of applying a Indeed, reinsurance balances are discriminatory regime for foreign recognized on two levels. On the one reinsurers would be very badly perceived, hand, they are accepted as security for
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the liability written by the insurer in much of difficulties to which a solution should the same way as the other assets, be found. indeed, much as other high quality assets. On the other hand, it is taken into 2.1 Difficulties of Reinsurance account in calculating the solvency Supervision margin, which it brings down by some proportion up to some limits (50% for Reinsurance supervision is made more non-life and 15% for life going by the delicate both by the nature of the European rules, for example). operation concerned as it is often extremely difficult to determine the However, such recognition would be underlying risk and by its complexity, as it based on the condition that the reinsurer is difficult to understand its intricacies. is supervised or that it pledges an amount as ‘due from the reinsurer’. In fact, the Difficulties arising from the nature security becomes a substitute for the of reinsurance operations reinsurer’s supervision. Compared to the latter, the former by its simplicity is more Compared to insurance contracts, most advantageous to the supervisory reinsurance contracts, especially if they Authority. However, it throws up a are proportional quota share contracts negative cost /benefit relationship. On the (83% of contracts), do not present one hand, it does not encourage difficulties in determining the scope of reinsurance managers to be selective in cover. Nevertheless, complications may their choice of reinsurers. On the other arise with the Surplus proportional hand, it gives a false impression of contracts as the reinsurance ratios may security as the collateral deposit only differ based on the risk reinsured. covers a limited fraction, about one third However, it is mostly in non-proportional of the risks, due to IBNR. For the reinsurance that the actual reality of the immediate security of companies and to risk written becomes more difficult to encourage the cessionaries to act assess. professionally, reinsurance supervision is probably more effective and less Indeed, in the non-proportional treaty, misleading than collateral security and direct insurers can cede layers of risks, much cheaper for the insurer and/or which they hardly control, especially the reinsurer. low-frequency/high-intensity major risks (Hurricane, earthquake etc.), on which 2. The scope of Reinsurance there is very little knowledge of loss Supervision probability. The role of the reinsurance industry is to share the risks in the widest As revealed by the debate thrown up by possible manner and to eliminate as the blueprint for the introduction of much as practicable, all diversifiable risks, reinsurance supervision in Europe, it is leaving only the non-diversifiable ones, not easy to determine the nature of which are deemed to be very minimal. It effective supervision, which would neither remains however true that much of the amount to mere formality nor be difficulty in containing the risks concerned paralyzing. In fact, the idea of arise from the uncertainty in determining reinsurance supervision raises a number their correlations, which makes it impossible to completely eliminate the
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risk of concentration of even the Difficulties inherent in the increasing company’s shared risk, including those complexity of guaranties spread over time. These risks are more prominent in stop loss contracts, where Whereas proportional covers are relatively the direct insurer covers itself against easy to analyse and understand, the negative annual results. same cannot be said of non-proportional treaties. The latter contains mechanisms Inadequate knowledge of the risks ceded which confer a non-linear nature on the to the reinsurer is further compounded by ceded risk with serious variations in limit: the possibility of moral uncertainty or deductibles or priority, the scope and the anti-selection practices by the cedants. maximum total losses covered, which This can make it difficult to detect any ascribe a non-linear nature to the ceded professional deviations by the direct risks with serious consequences on limits. insurers who are thereby encouraged to These mechanisms can operate per select the risks ceded and neglect the event, per risk or per portfolio of risks to risky behaviour of their own insured. This which should be added the stop loss can only increase the volatility and protection, which affects all the covers. intensity of the risks ceded. These risks, being non-life covers are also multidimensional, unlike life risks, which As stated earlier on, the cross-border are one-dimensional, or two-dimensional, nature of risk portfolios is one of the if death risk is added to financial risk, it is reinsurers way of mutualising risks. only through complex simulation models However, from the supervisor’s point of based on data from the company that view, this also increases the risks born by their nature can be determined when reinsurance companies given that it ceded. It is therefore understandable that intensifies the opacity of reinsurance. The supervisory Authorities would find power of the supervisory Authorities to themselves in easy circumstances in two carry out on-the-spot and documentary respects: they have to rely on information assessment is limited within the national from only one source, which is the frontiers. Beyond these borders, they are company, and at the same time, control hindered by professional secrecy and the the complexity of the covers given. impossibility of on-the-spot supervision, unless so authorized by foreign It should be added that these covers authorities and such an approval might be were granted within an increasingly extremely difficult to obtain, even within complex and innovative legal frameworks. the European economic zone. Supervising That explains the development of a reinsurer may require relying on the Bermudian reinsurance, delocalised and information obtained from the company securitized reinsurance operations, carried and gathering additional input from other out through special purpose Vehicles that sources, which may be available in are based in little known locations. accounting and legal forms that national Meanwhile, experience has also shown Authorities with limited resources may that a real retrocession spiral exists, find difficult to analyse. which might sometimes require several years of procedure, including the legal process, in different countries to unravel the intricacies of the covers and determine the shares of the different
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reinsurers involved in the loss. All these In the blueprint, the following general combine to make reinsurance supervision conditions apply to reinsurance remarkably more complex, indeed, more operations: uncertain than the supervision of direct insurance. A professional reinsurance company that has its Headquarters 2.2 Strict But Flexible Supervision and intends to operate in the region shall a priori obtain a license; One of the objectives of launching the blueprint for reinsurance Supervision in Reinsurance companies that have Europe was to ensure financial stability. A their Head offices outside Europe, sane and prudent regime protects the insurance companies whose interest of the insured by ensuring the reinsurance portfolio is less than existence of strong and well-supervised 10% or 50 million Euro and Member reinsurers. The quest for solutions to States acting as guarantors of last difficulties inherent in reinsurance resort in the public interest do not supervision, which were initially under- require a license; estimated by the European Commission, delayed the compilation of the blueprint One license is valid in any part of that is expected to be adopted before the the European Union; end of the year. The blueprint7 is anchored on three principles and outlines Licenses are issued by the relevant the consequences that the introduction of Supervisory Authorities of the reinsurance supervision would have at Members States where the different levels. reinsurers’ Head offices are located
The principle of a single licensing These authorities are exclusively Authority for the European Union competent to carry out on-the-spot and documentary supervision of the Europe appears to be an appropriate companies, including their place for the definition of reinsurance subsidiaries in other member States supervision. As already stated, reinsurance operations have a significant They have the power to withdraw international dimension, which on the one licenses if the financial situation of a hand reduces the level of risks company so warrants, especially if reinsurance companies have to bear but the company is ailing on the other hand constitutes a source of additional risks. As a strictly national Supervisory Authorities of member approach is, from that point of view, States are bound to mutually inadequate and a worldwide approach is recognise the licenses and impossible in the absence of the relevant prudential guidelines issued by institutions, an integrated European others approach seems to be a good compromise. Each member State is also bound to strengthen its co-operation with others and exchange information on 7 Cf proposed COM Guideline (2004 273 final reinsurance companies operating in
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Europe within the year of The competence of the supervisory supervision. Authorities also extends to ensuring good administrative and accounting To obtain the license, the following organization and the adequacy of internal minimum conditions must be met: control procedures. Even the structure of the shareholding should be supervised. The company plan must be submitted; Therefore, all these rules are intended to maintain a high level of flexibility in the The entity must be headed by a staff management and supervision of with the relevant technical reinsurance companies. They are made to qualification or experience; take relative account of the peculiarity of reinsurance activity. Only the 70% The shareholders’ funds of the congruence rule appears to be totally company must reach at least 3 million unsuitable for reinsurance operations, on Euros. This may be reduced to 1 the one hand because they are million Euros for reinsurance captives; traditionally long tail in hard currencies (the Euros, dollar, yen and Sterling) and The company objective must be short tail in the weak ones and for sheer restricted to reinsurance operations. It prudence, on the other hand, which may ultimately be extended to include requires long tail operations for trading statistical consultancy and the currencies of the goods covered (that is functions of a holding company; the Euro and the dollar given that Europe and the United States produce the bulk of The company must disclose to the the goods and equipment covered) Authorities, the identity of major shareholders or associates. The principle of Supervision based on Reinsurers’ Solvency The Principle of flexible supervision of reinsurers’ assets and liabilities. In fact, going by the blueprint, reinsurance supervision will focus on With regard to the adequacy of reserves, monitoring the degree of fresh solvency the blueprint proposes that the relatively introduced into the European insurance flexible rules that apply to insurers should industry. In that respect, it is proposed also be extended to reinsurance. An that the same rules applied to insurers equalization reserve is compulsory for should also be extended to reinsurers. credit reinsurance operations, but left at This principle of similarity has given rise the discretion of the relevant Authorities, to heated debates. Some argue that it for other classes of business. On would be better to demand more investment regulations, the approach stringent solvency requirements because proposed by the blueprint is essentially of the nature of risks covered (major qualitative, based on the adequacy, risks), the opacity arising from the quality, liquidity, profitability, international dimension of the companies diversification and spread of assets. concerned, the complexity of the cover However the rule of congruence is and the legal settings, while others insist imposed to the tune of 70% of the that it would be justifiable to impose less assets. stringent solvency rules than those
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applicable to insurers for two main due from reinsurers supervised in Europe reasons. One of the reasons, according to are therefore accepted as cover for their them is that, more than the insurers, insurers’ liabilities and attract a reduction reinsurers are able to spread their assets of the solvency margin requirements, with and liabilities to different risk categories no option of additional security. and geographic zones. The second reason is that reinsurance is much more volatile In addition, the blueprint details out the than insurance, with higher demands on notion of risks cession by distinguishing its solvency level. This means that all cessions to reinsurance companies from through the cycle, the average solvency cessions to special purpose vehicles. level of the reinsurer would be higher Going by the blueprint, only the former than that of the insurer, provided the are subject to reinsurance supervision. In minimum exigency was met at the dullest the document, the treatment of amounts point of the cycle. due from special purpose vehicles is left in the hands of the relevant national In non-life reinsurance, the required Authorities, who have the authority to solvency margin stands at about 18% if consider them as ‘Due form reinsurers’ the premium is less than 50 million Euros both when they are presented as cover and 16% if it is more or 26% of loss for liability or when they need to be taken charges of less than 35 million and 23% if into account in calculating the solvency it is more. It should be recalled that in requirement. These provisions are their calculations, insurers and reinsurers particularly considered in the case of increase their premium and losses by guarantees offered by prefinanced 50% for some specifically risk prone collateral, which at least equate with what liability classes. Based on the informed is offered by supervised reinsurers. decision of the commission, reinsurers may further increase these data by 50%, The blueprint also affirms the principle after wide consultation with the parties that reinsurance companies whose Head concerned. offices are located outside Europe would not be treated more favourably than The solvency margin requirements for life those with their Headquarters in the reassurance are similar to those for non- Member State where it intends to carry its life. operations. For the amounts due from European insurers in favour of foreign The Consequences of Reinsurance companies to be accepted during the Supervision presentation of cover for liability and subsequently taken into account in As a logical consequence of reinsurance calculating the solvency margin control, especially with regard to ensuring requirement, the relevant member States the reinsurer’s solvency through may impose additional legal obligation for supervision, the blueprint prohibits any collateral security. Finally, the blueprint legal compulsion on reinsurers supervised allows for the possibility of entering into in Europe to pledge deposits, as is an agreement with a third party/country currently the case in France, for example. with the objective of mutual exchange of The issue of security collateral is left to information and reconnaissance. the insurer and the reinsurer to sort out in the contractual provisions. Amounts
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BUILDING A COMPETITIVE INSURANCE INDUSTRY: LESSONS FROM CONSOLIDATION AROUND AFRICA
By
Adewale Adewusi Alain Ravoaja Head of Statistics Director, Central Operations & Africa Re Inspection, Africa-Re
1.0 INTRODUCTION tightly controlled. This may be due to the The financial services landscape has reduction in the number of predominant changed significantly in the past two firms or the level of rivalry within the decades following the deregulation of the industry. sector in industrialized nations. Deregulation has led to increased The financial industry used to be highly operational and financial pressures, the regulated even in advanced markets. need for economies of scale as well as However, this could no longer hold with access to skilled labour and capital in advances in information and such a way that most companies, in order communications technologies coupled to survive are driven into consolidation. with the expansion of international trade. There was therefore the need to set up In most cases, consolidation take the the World Trade Organization, which form of mergers whereby one fostered free trade in the global market. organization combines with another to the extent that at least one entity loses Deregulation and liberalisation have its identity and full integration and control therefore opened up hitherto closed or are exercised and acquisitions, which difficult regions to increased foreign and involves an organization buying a domestic competition. controlling share in another, rather than through joint ventures and strategic In Africa, the national barriers are alliances. breaking down at a fast rate giving way
to the formation of sub-regional blocks, The key factor in every form of the harmonization of laws and regulations consolidation is that resources in the as well as the consolidation of companies industry under consideration become all over the continent.
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In Europe, Second Banking Directive industry (with particular interest in the (1993) and third Generation Insurance Insurance sub-sector) in the more Directive (1994) by the European Union developed regions of the world with the deregulated the Banking and Insurance case in Africa. Lessons could then be markets of the zone. The “Big Bang” drawn from the experiences of financial reforms of 1996 in Japan were consolidation in Africa. responsible for deregulation in Japan, While the Gramm-Leach-Billey Act of 2.0 MERGERS AND ACQUISITIONS 1999, deregulated the financial service IN EUROPE, ASIA AND USA industry in the United States. This section shall briefly analyse the The above-mentioned Decrees and Acts effects of deregulation and consolidation reveal efforts at the following: Removal of on the above mentioned markets. restriction in the ownership of different financial service vehicles, such as banks 2.1 Europe and insurance companies, the relaxation of geographical restrictions on sales and The Third Generation Insurance Directive branch networks and Price deregulation. (1994) implemented the concept of the “single passport” ensuring that an insurer These regulations were formulated to registered in one European Union country improve market efficiency as well as the can practice in any other country within choice available to the consumer through the zone. increased competition and they eventually led to a wave of consolidations and Between 1990 and 2002, there were hopefully, efficiency. 2,595 mergers and acquisitions with 1,669 resulting in change of control. The The aim of this article is to analyse and transactions were cross-border, within- compare the trend of mergers and border and cross-industry. acquisitions in the Financial Services
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Table 1: Number of deals by Country - Insurance Acquirer or Target Deals Involving a Change in Control
Target Country Acquirer Country Bel Den Fin France Ger Italy NL Nor Other Port Spain Swe Switz UK Total Belgium 34 8 1 11 4 1 3 4 1 67 Denmark 33 3 2 1 1 40 Finland 25 1 1 1 28 France 3 104 8 5 2 11 3 9 145 Germany 1 3 99 2 4 6 7 4 126 Italy 5 78 3 8 1 1 7 8 111 Netherlands 10 3 5 3 76 3 1 3 1 105 Norway 1 19 2 1 1 24 Other 6 6 6 19 36 6 23 1 21 15 2 17 56 214 Portugal 4 5 16 1 1 1 1 29 Spain 1 10 3 4 5 7 1 63 2 7 11 114 Sweden 3 1 2 1 2 29 2 1 41 Switzerland 1 4 6 4 23 1 39 UK 1 5 3 9 1 97 3 9 458 586 TOTAL 55 47 32 159 167 101 136 21 171 19 80 43 84 554 1669
In Spain for instance, between 1989 and The popular trend today is to form 1998, the number of companies declined strategic alliances, merge into by 35% and average size increased by conglomerates and buy over smaller 275%. Small inefficient firms were made companies. Independent agencies that insolvent while more efficient firms were used to define the industry are now targets of Mergers and Acquisitions fading away. Consolidation now means operators. that firms can offer a full range of insurance products rather than specialise 2.2 United States of America in certain classes.
Even though consolidation began 30 Almost half of the non-life premium is years ago in the USA, it was the repeal of underwritten by the top 10- the 1993 Glases-Steagall Act in 1999 and property/casualty firms (including State the introduction of the Gramm-Leach- Farm, Aviva, America International Group Biley Financial Services Modernisation Act and Zurich Financial Services). that cleared the way for financial superstores such as Banks and Insurance In 2003 alone, there were 210 mergers in companies to combine their operations. the insurance industry. The number of
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domestic reinsurers has dropped to less The industry is currently undergoing the than 30 from 120 in less than a decade. stage of globalisation of financial services.
2.3 Japan and Korea 3.2 The colonial period
The “Big Bang” refers to the liberalisation During that period, branch offices of of the financial sector with the opening of companies based overseas, dominated financial markets. It was triggered in African markets. Their operations were Japan by the long term economic meant mainly to cover agricultural recession in the 1990’s while that of products shipped abroad from the Korea was due to the 1997 currency colonies. A majority of the local crises and the resulting IMF bail out. population depended on subsistence Whereas Korea intended to use that economy and insurance was only limited government intervention as a means of to motor and commercial risks, while reform, Japan left this process to market reinsurance placements were integrated forces. While the Korean experience is into the operations of the parent showing more stability, Japan’s growth is company. facing a number of challenges. 3.3 The Advent of independence Most mergers in Japan and Korea were through Management Buy-Outs, Most African countries attained their especially backed by private equity funds. independence between 1950 and 1960 For instance, Chiyoda Mutual Life and compelled the branch offices of Insurance Company was purchased by foreign companies to transform into local AIG in 2001. entities and invest their technical reserves within the country. 3.0 THE AFRICAN EXPERIENCE A combination of favourable economic 3.1 Background climate, liberal legislation and the sensitisation of States by UNCTAD from It would be necessary to review the past 1964 on the importance of insurance in so as to appreciate the current market the national economy led to the rapid structure and reflect on the prospects. setting up of national markets with the creation of local companies with The African insurance and reinsurance public/private shareholding and foreign industry evolved in four stages: participation. For their reinsurance arrangement, the companies approached The colonial period either their parent companies or other Advent of Independence reinsurers abroad. European reinsurers, The period of regulated economies mainly from the German and Swiss Return to market economy markets, were already available.
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It should however be noted that before The main objectives of nationalisation 1972, four countries had already set up were: their own reinsurance companies with the establishment of Egypt Re in 1958, the To place the funds derived from the Société Centrale de Réassurance in sector in the national interest. Morocco in 1961, the Caisse Nationale de To stem the outflow of foreign Réassurance of Cameroon in 1961 and exchange by maximising national Kenya Re in 1970, all state owned retention. companies. The second objective gave rise to the 3.4 The period of regulated establishment of national and regional economies reinsurance companies which are chronologically listed as follows: During this period, two factors accelerated the growth of the markets: 1972 – Ghana Re 1973 – Caisse Centrale de The 1972 UNCTAD resolutions Réassurance (Algeria) which encouraged States to set up 1974 – National Re (Sudan) insurance and reinsurance 1976 – Africa Re companies. 1978 – Nigeria Re 1981 – Tunis Re The advent of regulated economies, 1982 – Cica Re which considered the insurance 1984 – Zim Re sector as a strategic industry that 1990 – Zep Re should form part of state monopoly together with the Oil, Mines and In order to enable the national and Banking activities. regional reinsurers operate in a conducive environment, laws were made to grant Thus, in line with the political thinking of them legal cession on policies and that period, several direct markets treaties. However, private initiatives were radically changed their structures and not excluded in the area of reinsurance opted for State monopolies while others with the establishment of about 15 kept the competitive structure by companies, seven of which operate in establishing parastatals to compete with South Africa. the private sector. 3.5 Return to Market Economy: The nationalised markets with one or 1990 and beyond more state-owned players were: Angola, Mozambique, Swaziland, Rwanda, The economic recession which started in Burundi, Ethiopia, Uganda, Tanzania, many African countries in 1979/1980 and Zambia, Seychelles, Madagascar, Bénin, lasted for more than fifteen years, led to Burkina Faso, Guinea, Chad, Congo, a stream of failures in most regulated Nigeria, Zaire, Algeria, Libya, Mauritania economies, even though the so called and Ghana, a total of 22. free markets were not spared.
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Structural Adjustment programmes Although there was a drop in rate before imposed market liberalisation and the the September 11th 2001 terrorist attacks, privatisation of public enterprises. Even relative stability has since returned to the well managed firms were privatised by various markets. various Governments. 3.6.2 The Reinsurance Market The insurance sector was not spared from the general trend and lately, there has There are currently about thirty been the establishment of new private reinsurance companies legally established companies. It is hoped that there would in the continent including the three major not be any proliferation in the sector. international reinsurers – Munich Re, Madagascar and Swaziland are about the Swiss Re and Hannover Re. Three only countries left with government domestic reinsurers are multi nationals – monopoly- a situation that would certainly Africa Re, Cica Re and Zep Re. They were not last for long. established with the objective of promoting the development of the African Some national insurers and reinsurers insurance/reinsurance industry. Seven of such as Reinsurance Company of these companies (Kenya Re, CCR Algeria, Mauritius (RCM) and Caisse Nationale de Egypt Re, National Re, Sudan, SCR Réassurance, Cameroun have been Morocco, Tunis Re and Ghana Re) have liquidated but many more are in the the Government as the majority process of privatisation. shareholder although the privatisation of some of them is in progress. Two former 3.6 Characteristics of African national reinsurers have been fully Markets privatized, namely; Zim Re and Nigeria Re. 3.6.1 Direct Market Furthermore, a private company Aveni Re In 1998, there were 580 companies in the was set up late last year at the initiative industry including 157 in Nigeria, 120 in of several insurance companies of the South Africa and 41 in Kenya. In 2004, CIMA zone. the number of nigerian companies reduced to 110, bringing the number of African reinsurance companies on the companies in the continent to about 550. average are performing quite well given that they help to develop national and It should be noted that in the past few regional retention capacities, are profit- years, a number of new companies have making and thereby contribute to been formed within a short time in East economic development by investing Africa with the liberalisation of the technical reserves within the continent. Ethiopian, Mozambique, Tanzanian and This may be the idea behind the creation Zambian markets. of new national companies such as Namib Re and Tan Re, while Uganda Re and The performance of African direct Seychelles Re are at their gestation stage. companies in the past had been generally satisfactory following the positive underwriting result from the technically acceptable premium rate charged.
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3.6.3 The African Market compared to insurance market relative to other regions the rest of the World of the world, it would be instructive to compare the respective sizes of the As the objective of this article is to markets in tables 2 and 3. analyse consolidation in the African
Table 2: Evolution of market shares in the world
Source: Sigma US$million 1998 % 2003 %
America 817,858 37.95 1,156,513 39.33 34.76 Europe 699,474 32.45 1,022,158
Asia 571,272 26.50 685,753 23.32
South Africa 24,520 1.15 25,398 0.86
The Rest of Africa 3,972 0.19 5,570 0.19
Oceania 37,872 1.76 45,280 1.54
Total 2,155,268 100.00 2,940,672 100.00
Table 3: Details of the market share of Africa in 2003 US$million % Of World Premium Market Share South Africa 25,398 82% of 1.05% 8 African countries 4,263 14% of 1.05% Other African countries 1,307 4% of 1.05% Total for Africa 30,968 1.05% World 2,940,671 100.00
Algeria, Morocco, Egypt, Nigeria, Tunisia, Kenya, Zimbabwe, Mauritius.
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The two tables reveal the following facts: 2000 Royale Marocaine d’Assurances and Banque Marocaine The share of Africa’s income du Commerce Extérieur (BMCE), took production is very low and even control of Al Wataniya. dropped from 1.34% of the world
total in 1998 to 1.05% in 2003. 2001 Al Wataniya bought over
Alliance Africaine (subsidiary of GAN). The share of the South African market
is far higher than that of the rest of 2002 The group ORMALCOM/Atlanta Africa. At US$25 billion in 2003, its took control of SANAD. premium volume represented 82% of
the continent’s total premium income 2004 The “Omnium Nord of US$31 billion. Africain” (ONA) group, the largest
private group in Morocco and major In 2003, the eight countries shareholder (49%) of “Axa Assurance mentioned above accounted for Maroc” together with “Axa 76.54% (US$4.263 billion) of the International” (51%) is the owner of continent’s market share as against “Banque Commerciale du Maroc” 23.46% (US$1.307 billion) for the (BCM). The BCM took control of remaining 44 markets. Out of the lot, WAFA group including “WAFA consolidation is more predominant in Assurances”. Morocco and South Africa.
2005 In January there was a merger 3.6.4 The Moroccan experience of Royale Marocaine d’Assurances
(RMA) and Al Wataniya Assurances There were 265 foreign insurance with shareholders funds of US$475m companies operating in Morocco until 1973 and GPI of US$295m representing when the government decided to 25% share of the market. nationalise the sector, which then reduced the number of operators to 22. As at February 2005, the consolidation
process was still in progress as ARIG Another significant development was the Bahrein sold its shares (67%) in CNIA to decision of the supervisory authority to put “SAHAM Group”, a local private group seven companies under recovery plan in which owns “MONDIAL ASSISTANCE 1983. In 1987, five of them were put Maroc”. under judicial administration.
3.6.4.1 Market characteristics The consolidation process started in 1993 with the purchase of l’Entente by Al The Moroccan insurance sector presents Amane. Subsequently, more Mergers and the features of an emerging market, with Acquisitions ensued: 18 insurance operators in 2003
generating an income of US$1.288 billion 1996 Axa merged with Al Amane (Non-Life: US$927m. Life: US$361m), to form AXA Al Amane. which is sizeable for a population of 30.1m. 2000 AXA Al Amane bought over La Compagnie Africaine d’Assurance.
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Morocco’s premium volume in 2003 was The Financial services as a whole second to South Africa and was followed contributes 20% of the GDP and 7% of by Egypt with US$565m. Its insurance the total work force. Consolidation has density was US$42.8 per capita, preceded been taking place in South Africa since only by South Africa (US$583.9), the reintegration of the country into the Mauritius (US$196.5) and Tunisia world economy in 1994. (US$45.9) whereas the insurance penetration was 2.85% of the GDP as Some features of the South African against 15.88% in South Africa, 4.59% in experience are: Mauritius and 2.98% in Kenya. Five major companies, including Old 3.6.4.2 Reasons for consolidation Mutual, Sanlam and Liberty, account for 80% of the non-life income. Without any doubt, the most compelling reason is the search for Smaller players in the industry focus market share by competing powerful more on niche markets local/foreign/joint venture groups to enable them acquire or consolidate a An intensified effort in the direction of leading position before the full Bancassurance. deregulation of the market which is scheduled for 2006. A reduction in the work force by 21% between 1996-1999. Another reason is to ensure discipline in the market with fewer players in The following are recent examples of 2006, knowing that American insurers Mergers and Acquisitions: may soon set up subsidiaries following the recent signing of a trade Merging of Commercial Union and agreement with the USA. General Accident to form CGU.
Finally, the role of banks in insurance Acquisition of CGU by Mutual and is increasing in Morocco. Certainly, Federal. the synergy between the two sectors will certainly further develop in the Aegis Insurance purchased by medium term especially in the area of Guardian National. Life and Personal Accident products as well as Credit Insurance. Guardian National bought by Santam.
3.6.5 The South African experience Merging of BOE Insurance and Nedcor/Nedinsurance. With 89 short-term and 71 long-term direct insurers in 2004, the South Monarch bought by Ace. African Insurance market is highly competitive. There were four Federated Employers/Fedsure bought composite reinsurers, three short- by Hollard. term and four long-term reinsurers during the same period.
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3.6.5.1 Market characteristics 4.0 REASONS FOR THE LOW LEVEL OF CONSOLIDATION IN AFRICA The South African insurance industry is a
highly dynamic and sophisticated market 4.1 Direct Insurance generating a total income of US$28.779bn (Non-Life: US$5.288bn, Mergers and Acquisitions in Africa have Life: US$23.491bn). According to a Swiss usually occurred in markets with a Re report, the population in 2003 stood at relatively long experience of deregulation. 43.5m. Its insurance density of US$583.942.8 per capita and insurance In many countries, liberalization of penetration of 15.88% were the highest markets is still in its infant stage. With in Africa. time, the critical stage would be reached where weak firms would exit and 3.6.5.2 Reasons for consolidation consolidations would take place to ensure the overall efficiency of the system. For Competition is quite fierce leading to instance, in Mauritius four out of twenty poor underwriting results. companies have ceased operations. However, there have been no Stagnation in the non-life sector in the consolidations so far despite overtures past few years has led to the need to from Island General Insurance Company. achieve economies of scale. Africa is fragmented into over 50 markets, most of which are small in size. While the The demutualisation of Life Assurance smaller countries do not have enough and listing of two major companies (Old risks to go round, the supervisory Mutual and Sanlam) on the authorities in the larger economies have Johannesburg Stock Exchange, with the not deemed it fit to raise the capital prospect of listing Santam on the requirements to levels that would induce London Stock Exchange. mergers.
3.6.6 Other Developments Another factor that must be taken into consideration is the psychology of In 1996, there was the take over of the Africans not to invite others to buy into Assurances Generales of Cote D'Ivoire their companies talk less of a controlling (AGCI) by the NSIA. share. However, within the CIMA zone
regional co-insurance has been There were two recent cases of mergers introduced this year. also in the CIMA zone. These were GTA &
C2A in Togo and La Compagnie Nationale 4.2 Reinsurance d’Assurances and Les Tisserins S.A in Several African reinsurers have less than Cote d’Ivoire. The four companies belong US$10million shareholders funds. This to the same holding company (OCTIDE would have been enough reason for group). The reinsurance sector has not consolidation; however, there is not much recorded any such development. competitive pressure in this growing
market as there are few foreign reinsurers operating for the time being. There are also few major perils in Africa
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that would put pressure on shareholders funds.
Table 4 Shareholders Funds of some Reinsurance companies based in Africa
ROE AT END OF FINANCIAL YEAR Company Year Currency Amount Amount in US $ CICA Re 2003 F CFA 9,357,793,113 17,994,026 ZEP Re 2003 CMD 9,277,501 9,277,501 Africa Re 2004 USD 130,430,000 94,076,920 Kenya Re 2002 KSh 2,683,404,381 33,721,701 East Africa Re 2003 KSh 696,317,468 9,162,072 Nigeria Re 2003 NAIRA 1,992,088,000 14,275,084 Continental Re 2003 NAIRA 829,648,201 5,945,168 Globe Re 2003 NAIRA 420,207,000 3,011,157 Universe Re 2003 NAIRA 308,577,000 2,211,290 Ghana Re 2002 CEDI 136,039,208,000 16,313,611 Mainstream Re 2003 CEDI 3,012,071,000 340,347 Sen Re 2003 F CFA 2,515,000,000 4,836,073 SCR Morocco 2003 DHM 717,949,898 81, 750,575 Tunis Re 2003 TND 36,424,104 30,005,852 Hannover Re South Africa 2003 ZAR - 44,400,000
5.0 PROSPECTS This would have a positive effect on competition and further minimum capital With the advent of globalisation and the increases would force inefficient liberalization of world economies, more companies to withdraw, as “family foreign direct companies would start to business” mentality will progressively enter the African insurance terrain. disappear. . * ion of C
Mutual & Federal
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Comparison between the minimum capital required in some countries (at current ROE for 6.0 CONCLUSIONS non-Life Business) In Africa, the effect of deregulation is still Table 5 in its infancy. However, the advent of Countries Currency Amount Amount in US$ globalisation is definitely taking its toll on Nigeria NAIRA 200,000,000 1,500,000 the continent and shortly small players Kenya KSh 100,000,000 1,250,000 who remain inefficient or refuse to CIMA F CFA 500,000,000 1,000,000 change their philosophy on corporate Mauritius MUR 25,000,000 900,000 ownership may disappear. Insurance Morocco DHM 50,000,000 5,700,000 should anticipate the trend and look for South Africa ZAR 10,000,000 1,700,000 partnership to pool capital and efforts in order to acquire the critical mass, which Small successful companies would be the would enable them to safely compete in target of take-overs and mergers. their respective markets. However a few of them, depending on their expertise, may create niches for On the reinsurance side, in the near themselves, as is the case in South Africa. future we may not see much of It may take a little while for the consolidation. However, the wave is Reinsurance sector to witness blowing and operators should not deceive consolidation unless there is a spate of themselves into thinking that the status successive bad results or a massive come quo would remain for too long. Finally, in back of foreign reinsurers. It is of utmost the years to come, cross border and cross importance that Supervisory Authorities industry (banks and insurance) deals will fix the minimum capital of their respective increase. In the CIMA zone, the force of countries/regions commensurate with the law would enhance such transactions. size of the markets. Thus, only serious operators would remain in the industry.
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REFERENCES
4. Beckmann Rainere et al. 1. Cummins J.D and Weiss M.A “Financial integration within the “Consolidation in the European European Union: Towards a single Insurance Industry: Do mergers and market for insurance”, Ruhr- acquisitions create value for University Bocham, January 2002 shareholders?”, The Brookings/Wharton Conference, 5. Samie Adam, Industry January 2004. Consolidation “Industry Consolidation: Creating 2. Cummins J.D and Rubio-Misai opportunities for smaller players” “Deregulation, Consolidation, and The Lion of Africa Newsletter, No.1, Efficiency: Evidence from the Spanish Insurance Industry”, The 6. Sang-young Rhyu “Unravelling Brookings/Wharton Conference, the Big bang: A comparative October 2003. analysis of banking and financial restructuring in Japan and Korea”, International Studies Association 3. Kamara, Bakary “Technology and New Orleans, U.S.A, March 2002. Human Capital in Building a Competitive Insurance Industry - Lessons from consolidation around 7. Sigma No.3/2004 “World Africa”, Lagos business School, insurance in 2003”, A Swiss Re December 2004. publication, February 2005
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PRINCIPLES AND PRACTICE OF GOOD CORPORATE GOVERNANCE IN INSURANCE COMPANIES
By
BAKARY KAMARA Managing Director Africa Re
I. INTRODUCTION Management. Indeed, it should be stated, as confirmed by other 1. The concept of economists, that it is an corporate governance, alternative of “management”, which, up till the early which always seeks and analyses 1990s, was still at its ways of motivating the efficient toddling stage, has been management of a company, by gaining grounds daily not only in the providing incentives which will ultimately circles of academics and management result in substantial return on investment, researchers but also among Chief without sacrificing the fundamental Executives of companies and other mission or long term objectives of the management practitioners. As the subject commercial venture, which is profit is now on every lip, people are even making. wondering whether corporate governance is not just a fad rather than an imperative 1.2 In April 1999, member countries for efficient, profitable and responsible of the Organisation for Economic management. It has become a major Cooperation and Development (OECD) preoccupation especially after the decided to describe the concept as the financial scandals that marked the system by which companies are managed liquidation of some large multinationals and controlled. The structure of corporate (Enron, WorldCom, etc.) and the failure governance allocates rights and of the new (electronic) economy. obligations to different stakeholders in the life of the institution such as the Board, 1.1 Several definitions of corporate Management, shareholders and other governance have been advanced and it partners and specifies decision-making may not be necessary to dwell on each of rules and procedure. Thus, the code has them. Suffice it only to state that all the created a structure through which the definitions share a common root, that is, objectives of the company are corporate governance is a generic term established, as well as the agreed ways which describes ways by which rights and and means of attaining the objectives and obligations are apportioned to the monitoring performance. different players in the economic life of a company, namely, the shareholders, the 1.3 Therefore, with every passing day, Board of Directors and Executive good corporate governance is becoming
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an important factor in deciding whether 1.5 Although corporate governance or not to invest. This is further might, today, appear like a fad to emphasised by the fact that the flow of sceptics, it is nevertheless an old practice, Foreign Direct Investment is sustainably whose rules have now been compiled into directed towards companies that have a code. It has now become a universal adopted it as a rule of conduct. In fact, preoccupation, because people are even if these entities never access any reflecting on the concept in all the private foreign capital, the continents and indeed, most countries of implementation of rules of governance the world. Countries of the OECD, which helps to reassure local investors and started discussing the concept in 1998, consequently reduce the cost of funds. It were preceded in their initiative by the further adds value to the company by Institute of Directors of South Africa, way of availing it with more promising which in 1992 commissioned a prospects. multidisciplinary study. The substance of that study is contained in the King report Currently, corporate governance has that was published in 1994, revised and become the preoccupation of all amended in March 2002. stakeholders in the life of the enterprise: investors (individual and institutional), Following this trailblazing effort, other creditors (the watchdogs of the entity’s countries and professions have performance), Management, employees individually undertaken to reflect on the and other partners. issue: the Serbannes-Oxly law following the works of Higgs and Smith in the 1.4 However, it is important to note United States, the Basel rules (European that the practical implementation of the Union) as well as the conclusions reached rules of management entails some at the end of the meeting of the constraints that would require the International Association of Insurance allocation of more time and resources. Supervisory Authorities (IAIS) held in There is even the risk of bureaucratic Cape Town (South Africa) on 10th October paralysis as a result of fussy control as 2000. Bolder initiatives have been taken well as costly and frustrating following the creation of the International administrative procedures, which might Corporate Governance Network (ICGN) in discourage entrepreneurial initiative. In 1995 by large institutional investors, the final analysis, it could lead to a financial intermediaries, the academia substitution/confusion of roles and and other people interested in the functions of the different decision-making development of the universal practice of organs and even block the operational corporate governance. The role of this horizon or management vision. organisation is to advise investors on available opportunities taking into account However, there is no doubt that the the practices in the target market or advantages far outweigh the country. Others, including the disadvantages and that a good Commonwealth Association for Good understanding of the object and wise Governance followed the Network’s implementation of these rules would be initiative. beneficial to the shareholders and other partners. All the studies published thus far concur that there is no unique model of
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governance, because although the reflected both in the personal conduct of principles are similar for all the zones, the the individual and in his attitude to work practical aspects differ from one country which all amount to the projection of a to another including countries of the positive and favourable perception to the same economic zone (OECD) and where benefit of the company, proper necessary, they reflect specific aspects of conception and planning of its strategic a profession or the peculiarities of a objectives, the drive for excellence in the company. execution of tasks which makes it possible to remain abreast with the latest II PRINCIPLES OF CORPORATE technical (insurance and reinsurance) and GOVERNANCE technological developments.
The different reports and studies on 2.2 Transparency and disclosure governance are unanimous in their adoption of the five fundamental Transparency means the ease and speed principles that follow: discipline, with which a person outside the company disclosure and transparency, would understand and analyse the actions independence, responsibility and equity. as well as the economic and financial These principles need to be further bases of such actions by reading certain explained, albeit succinctly, so as to information support. It is a criterion that create a common understanding of each testifies to the quality (clarity, sobriety of them. and up-to-date nature of financial, economic and social information), which 2.1 Discipline enables an investor to understand the reality of the company’s activities and This means adherence to universally decide whether or not to invest. accepted and recognised rigour of Disclosure reflects the disposition of the management by Executive Management Board and Management to keep the and the managerial staff. It involves shareholders, the Directors and other professional rectitude, which essentially partners informed of the evolution or includes compliance with the norm of decisions of the company. It is a honourable and irreproachable conduct in voluntary act, an initiative and conduct the dispatch of daily assignments, whose aim is to inform as well as integrity and objectivity in laying the establish credibility and availability of foundation. Objectivity implies the ability verifiable data or decision. to carry out assignments impartially, while integrity is a character trait by These two principles apply not only to the which decisions are taken without financial and technical results, but also to consideration for personal gains. the prospects and objectives of the company as well as all the issues that In the exercise of their duties, Executive relate to the key players in the life of the Management and the managerial staff company (auditors, major shareholders, should be loyal and faithful to the remuneration of directors, objectives, company and cultivate dignity as well as partnership agreements, crossed good professional and personal participation and other significant reputation. Discipline is a combination of transactions). This information should be acts and a moral stature which is published in any other support (web site,
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prospectus etc…), which should not entail some committees or playing a prominent any exorbitant or unnecessary expenses. role therein. Indeed, an independent Director should make significant 2.3 Independence contributions to the decision making process by expressing an objective This involves all the mechanisms put in opinion during the assessment of the place to reduce or completely eliminate Board as a whole and of Management. In conflict of interests among the Directors, addition, he could play a central role the managerial staff, including the Chief when it comes to issues where the Executive, and the staff of the company. interests of Management, the company and the Directors differ, such as This criterion is of special importance remunerations of Management, when it comes to Directors, many of succession planning, take over or whom should be independent from: acquisition, protection mechanism against such operations (the formation of a core Management, because they should be investors group) and the audit functions. able to exercise judgement over the Chief Executive, free from all 2.4 Responsibility subjectivity, regardless of whether such feelings are favourable or This involves two aspects which overlap otherwise, while the positive or and complement each other, even though negative influence of Management on they are different. them should be non-existent or minimal. This qualification should be 1. First of all, it implies accountability fully demonstrated during the for personal actions and omissions, taking constitution of the various Board responsibility for decisions made. committees. Therefore, before the shareholders, the Board accounts for the management of The Major Shareholders, as the short- the company because its prerogatives, term interests (dividend policy, duties, competence and responsibilities specific transactions) of the major are clearly spelt out in the Articles of shareholders may clash with the Association. It should provide the short, medium and long-term strategic orientation of the Corporation, interests of the company. ensure the effective follow-up and management control and report on its Related Personal Interests: these decisions to the shareholders. Whereas, refer to paid employment, the among other things, strategy involves the existence of any contract with the definition of vision and ideology while company, family or historical determining the position of the company relationship with the company (for a in the market, follow-up implies informing former staff). the different strata of managerial staff, explaining the choices made as well as Inability to meet these criteria does not in the mechanisms put in place to attain any way disqualify a person from them, including the guidelines which becoming Director. However, it could would ensure monitoring viz: action plan, prevent him from sitting as a member of risk management policy, annual budget, underwriting policy, management by
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objectives, programme implementation, would also ensure equality of treatment approval of essential capital expenditure. between the local and foreign shareholders. One of the avenues put in 2. It also means acting responsibly. place to safeguard the interest of This principle, which applies more to shareholders is the possibility to take the Management than the Board, implies a Directors and Management of their definition of the place and role of company to court at a reduced cost. Management in the choices and decision- Nevertheless, there is the risk that this making process. It presupposes that the right could be abused by way of incessant Executives have a deep knowledge of recourse to court against Management their commercial, social and and the Directors to the extent of environmental duties and a clear vision of paralysing management initiative and the strategic objectives to be attained. consequently operations. Thus, a number of legislations have decided to protect the Therefore, in defining the guidelines Management against such excesses by needed for daily management, they instituting a procedure to determine the should have behind their minds the long- extent to which the demands of the term interest of the company and ensure plaintiff/shareholder are valid and compliance with the laws of the land, the grounded. These systems constitute a best professional rules or good refuge to protect not only the management norms and other confidentiality of the information to be environmental exigencies. Thus, a well- supplied but also to ensure business managed company will also be abreast of judgement rule. In brief, it would be social preoccupations of the moment and appropriate to strike a fair balance pay particular attention to ethics because between the right of any shareholder to a responsible company is that which go to court and excessive litigation. Thus, respects norms and human rights. in several OECD member countries, the Certainly, it would gain from these stock exchange control commissions have choices by way of increased productivity put in place administrative courts or and improved reputation or corporate competent arbitration courts of first image. instance for this kind of cases.
2.5 Equity Having established the principles of good corporate governance, it would now be The mechanisms put in place by the appropriate to review the practice which managers should grant equal treatment varies significantly from one country to to all the existing parties, whether they another, one profession to another and are shareholders, staff or other partners. even one company to another. For example, a very generous dividend distribution policy would certainly favour III. PRACTICE AND MECHANISM OF the investors but could endanger the CORPORATE GOVERNANCE survival of the company and the rights of employees. The shareholders should be The principles outlined are not applied in reassured that their interests are a compulsory and rigid manner. They only adequately protected against abuse or serve as reference, compost on which to bad management either by Management plant all the range of practices or rules of or the Board. In addition, this principle
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the art or sometimes draw up specific codes. Beyond these, all other companies are urged to implement certain principles They are dynamic by nature and should contained in the code, if not the entire be reviewed in the light of changes in the instrument. In addition, in cases where circumstances and environment from some public companies cannot comply which they derived their original shape, with all the rules in the code, it is highly taking into account both the cost and recommended that they adapt them to advantages of such an initiative. Several their specific professional and countries (South Africa, Nigeria, United organisational structure. States, European Union, etc.) and professions have drawn up national and This code, which came into force on 1st specific codes. March 2002, is regarded as a living and dynamic document, which the King 3.1 Scope or field of application Committee should regularly review to ensure that it remains relevant and up-to- On its own, a code is a collection of date. Outside the peculiarities mentioned principles that have no purpose of earlier on, there are aspects that are detailing the conduct of Directors on each common to all the industries, which subject. Then, it is the responsibility of deserve to be mentioned specially. the company’s organs to carry out a comparative study of the criteria listed by 3.2 Risk management the code and the different provisions of the regulations, rules and other directives All the reports and studies consulted promulgated to ensure rational and within the framework of this presentation efficient conduct of their operations, and accorded an important role to corporate compile what should constitute a guide risk management, because it constitutes for the practice of Corporate governance. the cornerstone of all audit exercise. The However, the scope of this Turnbull report published in 1999 by the implementation needs to be established. Institute of Chartered Accountants of For instance, the practice and conduct England and Wales in conjunction with code drawn up in South Africa following the London Stock Exchange with the aim the King report, defines its scope of of assisting the companies quoted in the implementation by mentioning the stock exchange to properly implement the following companies: Combined Code of the Committee of Corporate Governance, summarily All the companies quoted in the prescribed to the Board to provide for an Johannesburg stock exchange, efficient system of internal control that would protect shareholders’ investments Banks, financial institutions, insurance and the company’s assets. This involves companies as determined by the risks that are inherent in the company South African law, and related to its operations, physical assets, human resources, technology, State owned companies and agencies business continuity, disaster recovery regulated by the Public Finance system, credit and the market as well as Management Act and the Local the observance of laws, rules and good Government Act. practices.
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Indeed, recent events that shook the Compliance with the laws, rules and international financial scene, particularly other exigencies of the supervisory the ENRON and WORLDCOM scandals authorities; would remind any stakeholder in the life of a company of the need to put in place Continuity of business even in the necessary checks to prevent any difficult/hostile conditions and /or derailing namely, effective control and the environment; implementation of an appropriate risk management policy. This should cover, Reliability of reports; and the material, operational, human and technological aspects of the company. Mature and responsible attitude towards all partners While it may not be necessary to revisit the definition of risk, it should simply be In that regard, it is the duty of the Board recalled that managing risks takes to decide on the level of risk tolerance to multifarious forms ranging from its be borne by the Corporation. It would identification, impact on the future of the take responsibility for the implementation company as well as the ways and means of the process of risk identification, the of reducing it, transferring it to a determination of its impact on the professional (the insurer), company and the anticipation of its accepting/bearing it or mitigating it. Risk effects and consequences, while management involves programming and Management and staff of the company logistics as well as the control of would be in charge of the daily resources to be utilised in minimising the administration of these phenomena. impact. To achieve this, the most utilised avenue is by internal controls except Whereas Directors take responsibility for when it relates to political, technological, risk management, Management is legislative and regulatory events or accountable for policy preparation, aspects which are beyond the control of implementation and monitoring of the company executives. Therefore, execution. Therefore, in the allocation internal controls should become a and execution of tasks, a demarcating constant reflex and indeed, act as line has to be clearly drawn to avoid security valves needed for the conflict of duties and other impediments programming of business, preparation that could mar the smooth working and execution of budgets as well as the relationship between the two above- pursuit/continuation of routine mentioned organs. operational activities. The aim of internal controls is to reduce risks to an However, the function of risk acceptable limit and thereby attain the management does not rely only on one following organisational objectives: single individual or group. Its execution falls within the jurisdiction of a team, Operational effectiveness and which makes up the human capital of the efficiency; company as a whole.
Protection of the company’s assets The authors of King Report of South (including the preservation of Africa, reviewed in 2001 and published in corporate information); March 2002, admit in section 2 Chapter 2,
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paragraph 2, that the Board can, in order to assist Directors carry out their The need to affirm and validate the functions, create a special committee roles that the Board of Directors and assigned with the responsibility of Chief Executive officer of the reviewing the policy and identifying risks company should play as the moving inherent in operations, but it hastened to forces behind the definition of the underline that they do not recommend it, company’s risk management policy; obviously out of concern for economy and efficiency taking into account the nature The imperative for the two earlier and size of each company. For mentioned organs to delegate the promptness and flexibility in decision- execution of tasks inherent in that making, the King Report proposed that function to specialised internal this assignment be given to the Audit committees such as those on committee in view of the low volume of finance, underwriting and work involved. In brief, instead of two operations as well as legal and fiscal distinct committees, the authors matters etc; i.e. committees that suggested that the Audit committee are involved in day to day should combine risk management with its management. Thus, the study primary function. That way, there would established that 67% of the be a reduction in the number of companies under review had committees, as the jurisdiction of some appropriately delegated those might overlap and lead to conflicts. duties;
In a recent analysis entitled “Corporate The systematic implementation of Governance Hand-book 2003”, the universal management norms and reinsurance magazine “The Review” policies in all the areas of the argued in the same vein, while recalling Company’s operation; the Board’s prerogative in that area. It concluded by stating that although it is The fine-tuning of audit and control the duty of the Board to develop the systems so as to verify the culture of risk management in the implementation of the norms and in company and supervise the particular the guidelines that would implementation of the policy, it is enable the Board to exercise a Management’s prerogative to follow it up vigilant supervision. and ensure adequate and regular information of Directors on its most The delegation of risk management salient aspects. prerogatives to specialised committees has the combined advantage of ensuring In its contribution to the issue, the Audit the efficiency of those who implement it and Consultancy firm, Price Waterhouse on behalf of non-executive Director, and Coopers in a recent study (March 2004) reduction in running cost and of time entitled “Enterprise-Wide Risk gain. Management for the Insurance Industry, Global Study” and based on a survey of Similarly, this policy obviously must form the top 40 insurance and reinsurance part of the overall strategy of the companies in North America, Europe, Far company, which takes charge of both the East and Australia concluded on: company’s developmental prospects and
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the reduction of hindrances to its provisions of Section 23 of the Long-Term envisaged growth. Furthermore, in all the Insurance Act and section 22 of the actions taken, flexibility should remain a Short-Term Insurance Act, requires watchword as discipline on this issue is insurance companies to set up Audit still shaky in the insurance sector and any committees which may handle issues presumption could prove disastrous. related to both the internal control and risk management. That is yet another Risk management is of paramount proof that insurance companies are not interest to insurance companies. As irrevocably bound to any stereotype of a already acknowledged by the Financial specific risk committee. The parallel that Services Authority of the United Kingdom, is often drawn between banking and their future depends on it. In a report insurance sometimes leads to erroneous sent to the Secretary for the Economy in conclusion, because, although South the Treasury Department in November African banking legislation specially 2001, the new Chief Executive of this confers the responsibility for prudent agency reaffirmed his intention to equip management of risks on Directors and each insurance company under his other Executives, it is the Audit supervision with efficient management committee that handles specific risk and adequate financial resources, problems in the sector. It is this same changes that would involve: control structure that is recommended by rating agencies. The strengthening of the company’s financial capacities in order to enable Recently (2002 and 2003), some it meet all its obligations, reinsurance multinationals (Munich Re, Swiss Re and SCOR) with resident Special emphasis on risk identification Directors have set up specific risk and management as they relate to committees. However, for a majority of technical provisions as well as other players, that task forms part of the solvency margin; all these are day to day duties and therefore falls universal norms of good governance within the competence of Management, that must be met which must periodically report to the Board, the shareholders and the public on The company producing evidence that the measures taken to mitigate the its financial situation is such that unforeseen (cf 2003 Annual Report of would enable it face clearly Everest Re – Risk factors pages 51 – 60). unfavourable unforeseen events. These include:
The FSA (UK) concludes on the need to Impact of catastrophe events on the clearly demarcate prerogatives: while it is results of the company the Board’s responsibility to determine Inadequacy of reserve for the risks facing the company, it belongs outstanding losses to Management and the managerial staff Drop in the pricing of reinsurance to classify them, manage them and report cover to the Board. Downgrade in financial strength rating of the company On its part, the Financial Services Board (FSB) of South Africa, relying on the
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Insolvency/inability of reinsurers department at its Head office since 1996 (retrocessionnaires) to meet their decided from July 2003 to further obligations. decentralise its function by providing its Absence of retrocession protection, offices in East Africa, Southern Africa and following the deliberate decision of the Indian Ocean with an experienced Management not to reinsure or the professional based in Nairobi. That inability to find a reinsurer. recruitment has since turned out to be Inability to sustain competition with useful and efficient, as it has led to more endowed players stricter control of the operations of the Exit or death of key executives in three production centres, which generate the company. almost 55% of the Corporation’s income Drop in investment income due to and liquidity. poor performance of the market or economic conditions Another control function could also be Exchange loss as a result of included in the organisational chart of all currency fluctuation insurance and reinsurance companies, i.e. Risks inherent in legislation (new, the Inspection Department. Indeed, revised and more stringent) following the necessary decentralisation Negative results from investments of the operations of direct companies and or subsidiaries regional or world renowned reinsurers, it Tax risks (new or increased became imperative to create a means of taxation). efficient supervision of the portfolio from the Head office. Therefore, the mission of 3.3 Internal audit the Inspection department would be to monitor the proper implementation of the It should be recalled that the role of this underwriting manual by all production department is to provide an independent centres to ensure the profitability of all and objective opinion on the activities of accepted business and the good quality of the company and ameliorate its the service to clients. operations. It involves assisting the company, by a strict and systematic 3.4 The insurance sector: approach, to evaluate and improve the compatibility between efficiency of risk management as well as supervision and good control and governance procedures. governance Details of the status, role and functions of internal Audit are developed in the Being a highly regulated profession, the Standards for the Professional Practice of insurance industry, which has always Internal Audit as approved by the been in the forefront of good corporate Institute of Internal Audit. The Internal governance, has acquired the most Auditor should report only to the Chief elaborate tools. Indeed, from the onset Executive, although he may submit a and more so now that they have become report on its activities to the Audit the tugboat of the industry, insurance committee of the Board and should co- supervisors have always insisted on the operate with the External Auditors. strict respect of prudential guidelines. Even when the role of auditing has been The African Reinsurance Corporation contracted to another organ (External which had set up an internal Audit Auditors, Actuaries), the supervisory
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Authority still insists on its obligation to scrutiny of the supervisors is now being ensure the respect of certain controlled in a number of markets. The management guidelines stipulated by law. African Reinsurance Corporation, which has just opened its first subsidiary, has by Thus, supervisory Authorities insist on the that token, accepted to submit itself to basic criteria of good governance: the this supervision, as it would gain in terms Board: composition, functions, of transparency in Management. It is this responsibilities; Management: separation desire for clarity that prompted of the positions of Chairman of the Board Management to opt for interactive rating and Chief Executive Officer, Risk with the best international agencies. management and Internal Audit. Having recalled the exigencies that are In addition, it also emphasises the common to all professions in the area of following principles: good governance, it would now be appropriate to explain the mechanisms Equity in the treatment of clients suggested by all the apostles of and provision of information to all management in the specific field of partners, reinsurance.
Clear policy with regard to private 4. The board of directors transactions involving key players in the life of the company, This organ is the focal point of corporate governance as it is accountable and Adoption of measures aimed at responsible for the performance and better information of clients and the activities of the company. Given this public etc… central role, shareholders are bound to select individuals with the competence, At its meeting in Cape Town on 10th experience and training that would October 2000, the Task Force on Core facilitate the enrichment and exchange of Principles Methodology set up by the views that will ensure the success of the International Association of Insurance company. Supervisors (IAIS) introduced usual parameters for prudential rules of 4.1. Functions and role of the board underwriting, so as to, in its own words, ‘establish qualitative and quantitative These include among others: norms for the investment and management of liquidity’. Determining the strategic orientation that the company should follow, This is only to recall that being a strictly appointing the Chief Executive and regulated profession, insurance has for a ensuring that succession is planned.; long time been implementing the exigencies of good governance, which Maintaining effective control over the today represent a discovery to the other company by ensuring that its decisions industries. and programmes are properly implemented by Management. Better still, the reinsurance profession, which until recently had escaped the strict
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Ensuring that decisions and options number, it is difficult to accomplish a adopted conform with existing laws collective, co-ordinated and efficient and rules; work. Clearly, as explained earlier on, the diversity in training and experience will be Drawing up a code of conduct for enriching as well as an added asset. the company to take care of conflict However, knowledge of the core business of interest that may involve mainly by each Director is crucial for significant the Directors and Management. participation in the work of that organ.
Establishing the necessary balance Therefore a careful admixture of between compliance to principles of numerical strength, training, experience good governance and the and status (Executive, non-executive and attainment of the company independent) would be preferable. objectives. Executive Directors are those who hold The Board will recruit its members based managerial positions in the Corporation in on the criteria of availability, competence addition to sitting on the Board. While it and experience. It is useful to have may be easy to understand the notion of people with diverse professional Executive and non-Executive Director, it background, as that will broaden the would be more difficult to give a clear-cut scope of the strategic choices to be definition of an independent Director. made. With the increase in competition Thus, in North America, an independent and at a time when expertise is becoming Director is not supposed to represent any more and more emphasised in very clearly identified shareholder or group of specialised domains, it is needful to put in shareholders. He is chosen based strictly place an induction programme for new on his charisma, know-how, experience Directors and refresher programmes for and personality with a view to reassuring the old ones. Thus, they will be equipped the small shareholders that his sole with new experiences and competence concern would be to defend the interest that would enable them to effectively of the company. carry out their functions. In other parts of the world, the situation Such a Board would even be better is different as a Director would be placed to task Management by suggesting considered as independent if he is not a very recent underwriting and representative of a major shareholder: management techniques and providing would a shareholder with enough voting useful assistance in the exercise of their power to singly appoint a representative executive functions. At the same time, it on the Board or any one that has the would fulfil all its responsibilities to the ability to influence Management or even a shareholders to whom it is accountable as closely knit group of 2-3 investors be well as to other partners. considered as major shareholders? The issue is open for discussion, although the 4.2. Composition author is more in favour of the first interpretation: i.e. the representative of a It has been generally accepted that the single shareholder. In fact, this is the number of Directors in the Board should definition accepted by several European not exceed 15 because, beyond this reinsurers as reflected in the King Report.
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However, it should be specified that an independent non-Executive Director, independent Director should be free from while the Chief Executive can be a all contractual obligations to the company member of the Board or an employee and not have family relations with who carries out the operational and Management. The independent Director is strategic role. supposed to be objective, a professional devoid of all contractual or sentimental Nevertheless, if for any reason, the two attachments. That is why he is always positions are given to one and the same invited to carry out some arbitration person, then a position of Vice-Chairman functions, which demand impartiality such would have to be filled by an independent as audit, appointment, remuneration etc. Director or members of the Board in that With regard to the breakdown of the category would be in the majority to Board structure by kind of Directors, it is counter the influence of the generally recommended for companies Chairman/Managing Director. that are quoted in the Stock exchange that at least half of the members of the 5. Committees Board be independent, while the number of Executive Directors, who are bound to The entire Board should meet on a have a better knowledge of the company regular basis (at least 3-4 times a year) to as they occupy managerial positions treat the affairs of the company. therein would depend on the number of However, these meetings are not the only executive positions available. consultation and decision-making avenues open to Directors. Indeed, the Board, 4.3 Chairman of the board between two meetings can make necessary consultations to decide on an He should be a person of good standing, urgent issue or follow up already respected by colleagues and the industry. discussed but unsettled matters. The Chairman heads the Board. He is responsible for guiding the trend of While Management has the obligation to discussion and should thereby allow provide ample information to Directors on energy to be liberated and talents to be the life and activities of the company, the expressed in the primary interest of the Board should also set up internal company. To that end, he plays a committees, which can assist it, although conciliatory role, namely that of being the they may not take decisions. To that end, go–between for Management and the specific terms of reference have to be Board as a whole. drawn up to define the powers devolved to the committees, given that only the All the governance code thus far entire Board has the power to make considered has attempted to separate the decisions in plenary session. In effect, the functions of the Chairman of the Board Board cannot hide behind the idea of from that of the Chief Executive in order delegation of powers to one or several to create a balance of power that would committees to repudiate its duty. It has prevent the concentration of too much the obligation of being informed on all the power in one person, both with regard to issues and then deciding based on policy formulation and in daily knowledge. management. Preferably, going by the King Report, the Chairman should be an
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It should be recalled that Directors can be one of them, the Chairman, is expected collectively or individually charged to to play the role of an umpire and evaluate court for their actions or omissions. the mission of the committee, while the Therefore, it is logical for all collective other (the Managing Director) is decisions to emanate from them. essentially the lynchpin of Management However, for specific or isolated issues, and should consequently, not be in a the Board may mandate a committee to proper position for self assessment or study and take immediate decision with judgement. the obligation to report back to the plenary session. The aim of the exigency which requires members of that committee to be well Generally, four types of committee can be grounded in Finance and Accounts is to set up: Audit, enable them to ensure that the Remuneration/Appointment, Risks and accounting norms adopted by Executive. While the first two appear Management in conjunction with the appropriate and are highly recommended External Auditors are well founded. by all the studies reviewed (King report, Furthermore, in case of any disagreement OECD and all the codes of Practice of between these two organs (the External South Africa and Nigeria), Risks and Auditors and the Board) on a given issue, Executive committees do not seem to be the committee should be able to hold an compelling. Indeed, while one is made up independent opinion and competently of members of Executive Management assist in amicably resolving the and cannot be considered as an arm of difference. Those are decisions that can the Board, the other committee (risks) only be handled by people who are at entails details in its operations that fall least very knowledgeable, if not experts, within the competence of Management. in Accountancy.
Meanwhile, the aim of creating the Nevertheless, there is no question of the committees is to further entrench the Board delegating all its powers in that culture of good governance and not domain to the committee. The nurture an extravagant, cumbersome and responsibility of the committee is only to inefficient bureaucracy. prepare the work of the Board, which would approve the accounts, thus 5.1. Audit committee accomplishing its function as the central organ of the company. It is recommended that the Board should set up a committee with a majority of its 5.2. Risk Management Committee members, including the Chairman, being independent Directors. The committee This committee could work in conjunction could be made up of three members and with the Executive Management to: the majority (2) should be accounting and finance literate. The Chairman of the Assess legal issues that might Board or the Managing Director need not impact on the activities of the be members of this committee since they company; can simply be invited to meetings to throw necessary light on any issue. This suggestion is based on the premise that
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Evaluate the efficiency of the risk 5.3 Appointment and Remuneration prevention and management policy, Committee especially the controls put in place; It is still the need for transparency that Ensure that the policy covers compels the Board to set up a committee company risks in its broadest sense, to study and draw up a policy for the that is risks associated with the remuneration of Directors and members markets, liquidity, operations, of Executive Management and co- financial investments, human opt/appoint other members (independent, resources, exchange fluctuation, representative of minor shareholders). technology, disaster recovery plan, The aim of this committee would be to continuity of the Company’s propose to the Board the level of operations, image, reputation and remuneration that would be sufficiently any other aspect of the Company’s competitive to attract the best hands in activity. the field of management, finance and insurance. While the Executive Review the adequacy of insurance Management could be allowed to carry covers, determine and evaluate out this assignment in respect of some methodologies as well as the senior staff, the Board needs to be relevance of involved with regard to that of Executive information/publications on risks Management either directly or through provided to shareholders and other the intervention of its chair. users. 5. CONCLUSION Small and medium scale companies could cut down on the number of committees In conclusion, it should be recalled that and heavy overhead by assigning the on issues of corporate governance there duties of the Risk committee to the Audit is no magic wand, nor universal principles Committee. that can apply to all climes and corporate cultures. Flexibility, adaptability and intelligence should remain the watchwords for any managerial act that targets efficiency, greater visibility and transparency.
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REFERENCES 5. Report of the Atedo N.A. Peterside 1. King Report on Corporate Governance Committee on Corporate Governance in South Africa- March 2002 by King of Public Companies in Nigeria- April Committee on Corporate Governance 2003
2. King Report on Corporate Governance 6. Code of Corporate Governance in Nigeria- in South Africa-March 2002; Executive October 2003 Summary 7. Resolution of the Task Force on Core 3. Commentary on the Draft King Report Principles Methodology set up by the on Corporate Governance in South International Association of Insurance Africa- July 2001 by Deloitte & Touche Supervisors (IAIS), adopted in Cape Town on 10th October 2000. 4. Corporate Governance: the Practical Guide for Directors 2003- Consultant 8. Entreprise-wide Risk Management for Editor Victoria Younghusband; Partner the Insurance Industry-Global Study- Lawrence Graham; Publisher Sarah by PriceWaterhouseCoopers published Bolton; in March 2004
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TONTINES IN AFRICA: A CASE STUDY OF CAMEROON
BY RICHARD LOWE Managing Director, Activa Assurances Douala - Cameroon
INTRODUCTION first of all define a few generic terms. The main The tontine system, which recurring ones are as also exists in several other follows: parts of Africa, is a real - Individual Contribution institution in Cameroon. This is the amount payable This article intends to by each member at a outline major aspects of its predetermined frequency functioning and (daily, weekly or, most development. often, monthly)
A. DEFINITION – CLASSIFICATION – - Bulk Prize MODES OF OPERATION This is the sum of individual contributions at a particular A1. Definitions meeting.
A. 1.1. General definition - Round This means the duration of the The Tontine is a formal or informal Tontine cycle, which generally association, which expresses the ranges between 12 and 24 months. collective will of a group with social, It ends after every member of the cultural and financial interests to establish group would have received the bulk a co-operative lifestyle based on shared prize. criteria. Its Golden Rules are: “Trust, mutual aid and keeping one’s word” - Bids This is the amount proposed by the Tontines are formed by close-knit groups potential beneficiaries in order to with common affinities based on their qualify for the Bulk prize. belonging to the same village, tribe, socio-professional class, age group, - Smaller Prizes workplace, neighbourhood and various This is made up of the bids of the other criteria. day and loaned out with a predetermined repayment timetable, A.1.2. Definition of terms generally within one or two months.
In order to have a good understanding of tontine register, it would be necessary to
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A.2 CLASSIFICATION OF TONTINES - By bidding
Tontines can be classified based on This is by far the most widespread form several criteria, the two main ones being: of allocation. The bulk prize for the day is allotted to the highest bidder. It should A.2.1. Purpose be recalled that in a cycle, a member with a single contribution can receive the bulk Two types can be identified with the prize only once. purpose based classification: As earlier indicated, the amount raised - Communal Labour Tontine: This is a from the bids is immediately loaned out system whereby members, especially usually as smaller prizes with a in the rural areas, join forces to assist reimbursement deadline of one or two one another in turn in manual rural months. Thus, the bid price is equally labour such as the harvesting of shared back to each member of the coffee or cocoa. This form of Tontine tontine, but the actual payment is made is on the decline. only at the end of the round.
- Cash-based Tontine: This is an A.3. Mode of operation association where members contribute cash. The amount of In order to analyse how tontines operate financial commitment varies and it is in Cameroon, it would be necessary to by far the most widespread form of describe how the system is generally tontine. organised and how meetings are held.
A.2.2. Method of allocation A.3.1. Organisation of Tontines
This relates exclusively to cash-based In their more modern form, Tontines in tontines, which as earlier stated, is about Cameroon are becoming more elaborately the only form practised in Cameroon. At organised, with bye-laws and rules of each meeting, the bulk prize may be procedure. allocated in two ways: - Articles of Association - By ballot Hitherto, associations were informally Members would decide that during the constituted and operated on the basis of tontine round, the bulk prize will be unwritten codes adopted by members. allotted successively to each member However, in their current form and in line based on a ballot drawn at the beginning. with legal and administrative Allocation can also be done in alphabetic requirements, Tontines take the form of order. This is more common with small associations (Article 1901 or the edict of family or work place tontines. 19/12/90 in Cameroon) with written articles of association, which are usually lodged with government authorities.
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These bye-laws specify the rules for The bulk prize or monthly contribution is admission, number of members, the clearly defined in the Articles of amount to be contributed, the different Association. provisions on sanctions as well as other provisions. - Discipline and Sanctions
They also specify that the tontine is Guidelines for discipline, particularly in administered by clearly specified organs. respect of fulfilling all financial Often there would be a general assembly, obligations, are clearly stated in the a steering committee headed by a Articles of Association. Statutory Chairman, the tontine’s legal sanctions, ranging from 5% to 10% of representative, who co-ordinates and the amount due may also be applied in decides on all transactions. the event of payment default.
The main rules and regulations contained Other statutory provisions such as rules in the Articles of Association essentially for monthly entertainment are also border on the following points: included in the Articles of Association.
- Admission - Rules of Procedure
The criteria for admission are specified in The rules of Procedure are also in a line with the object of the tontine. Often, written document which specify a number a new member is admitted on the of provisions on how the tontine is run, presentation of a sponsor who will stand namely: guarantee during a complete tontine cycle. This sponsorship is proposed to Rules governing monthly attendance the steering committee and then of meetings submitted to the General Assembly for Time table for opening and closings voting. The elected members are then Rules governing the allocation of the requested to pay a fee, which entitles bulk prize them to full membership. Rules for the allocation of the smaller prizes - Number of members – frequency of The different members of the meetings – rate of contribution Executive and their duties Rules of discipline and possible Depending on the tontine cycle agreed on sanctions by the group, the number of members Rules governing the social life of the and the individual share of contribution group with regard to joyful or sad are then fixed since it is possible that an events individual may wish to contribute more Rules of withdrawal from the than one share at each meeting. The tontine, etc tontine usually runs for 18 to 24 months. The meetings would take place according A.3.2. Meetings to the timetable fixed by the association. Meetings are often held monthly on As indicated earlier, meetings are held on specific days for instance 15th of every a specified day of the month, in the case month or 1st Sunday of the month etc. of monthly meetings, which is the most
Volume 019, June 2005 The African Reinsurer
common. With regard to the venue, two such members are authorised to bid and options are possible: the amount is then allotted to the highest bidder. The Rules and Procedures often - The use of only one venue (often the indicate the minimum amount for the Chairman’s residence) where the bids. meetings would take place at the same time every month. Award of the Bulk Prize
- Rotational meetings at members’ After concluding all guarantee residences based on a time-table arrangements, which will be dealt with later, the Bulk Prize is then awarded to drawn up at the beginning of the tontine the beneficiary in a ritual during which cycle. the group stands up to wish him success in the venture for which the money is to The times slotted for opening the be used and also remind him not to meetings are indicated in the Rules of forget to continue paying his Procedures. Generally, lateness and contributions in subsequent months so as unjustified absences are sanctioned. to enable others take their turn.
Generally, the agenda covers three issues Bidding for the smaller Prizes as follows: The amount realised during the bid is - Financial operations: This usually broken into small portions and again put comprises four stages. up for bids as loan for a period of generally one to two months. Collection of the contribution from each member - News from Families
It is worth noting that for security Generally, an agenda item is included at reasons, tontines in their modern form, each meeting in which members recount especially those involving large amounts sad or joyful events that related to them have opted to open accounts with banks within the past month. or co-operative societies, where members pay in their monthly contributions before - Other Matters the meetings. The financial secretary would simply verify that all members In order not to attach only a financial have paid, based on the statement of significance to meetings, an item is often account that would have been obtained included in the agenda for members to prior to the meeting. exchange ideas on particular issues or various current events. Bidding for the Bulk Prize
As indicated earlier, bidding is the most common way of allotting the Bulk Prize. Bidding is only open to those members who from the beginning of the cycle have not yet collected the Bulk Prize. Only
Volume 019, June 2005 The African Reinsurer
B. ECONOMIC AND SOCIAL IMPACT sizeable projects or make significant OF THE TONTINE investments.
B.1 Economic Impact The bulk prizes from the several tontine groups in Cameroon would amount to B.1.1 Savings Scheme more than CFA 150 million and such a credit scheme has three major The purpose of the tontine is first and advantages: foremost to provide an avenue for savings. Indeed, the different members, - Swift Access based on their respective capacities and monthly income, decide on a convenient Once a month, without any hassles from amount to be set aside as savings. banks, members can obtain funds to Although voluntary at the beginning, such finance their investments or projects, savings subsequently become compulsory which would have been difficult through and no default may be tolerated under the banks. any circumstance. Given the possible consequences of default, prospective - Liquidity members are encouraged to apply only when they are certain that they would As soon as the bids are closed, the bulk have no difficulty in paying monthly prize is remitted to the beneficiary in contributions, as default would not be cash or cheque without further delay. accepted for any reason. It is a freely accepted savings scheme, which - Cost effectiveness/profitability eventually becomes compulsory. Individuals, who join a tontine group for As the bulk prize is obtained on the savings purposes generally prefer to basis of bids, members, before collect their bulk prize towards the end of submitting their bids, can always weigh the cycle, unless a problem or urgent the cost of the credit to be obtained project suddenly crops up. The savings is against the profitability of the project or further remunerated by the share that investment for which the amount is accrues to participants from the sum total meant. of bids obtained from each monthly session. This reasoning is mainly valid for Several Small and Medium size salary earners. Enterprises thrive in Cameroon financed, to a large extent with funds B.1.2 Credit Scheme obtained from the various tontine groups to which the business owners The tontine is also a veritable credit belong. scheme. Indeed, several members in the business sector or Small and Medium size With regard to the bids, i.e. the amount entreprises join so as to enjoy its tendered each session; it should be undeniable benefits, including access to clearly stated that, in principle, this credits, which are sometimes significant. amount reduces as the tontine The amount granted as credit is equal to progresses towards the end of the the bulk prize minus the bidding premium cycle. Indeed, as each member can and can help members to carry out only obtain the bulk prize once, the
Volume 019, June 2005 The African Reinsurer
amount involved reduces in proportion implementation, the levels of with the number of participants in the intervention as well as the conditions bids. This allows members to better for assistance. plan their investment or project, based on the expenditure they are ready to The main objective is to strengthen incur in order to obtain the bulk prize. solidarity ties between members and promote team spirit within the group. B.1.3 Investment Mutual Scheme Such a support can be given during happy events such as marriages, In their modern form, several tontines, naming ceremonies, etc but mostly in addition to their monthly during sad events (demise of a member contributions sold through bids, have an or spouse, parents or children etc) investment mutual, made up of a scheme into which members make For each case, the Social Assistance monthly contributions with a view to Fund bye-laws specify the amount to be establishing, in future, a commercial or given to the member concerned and industrial enterprise or any other disbursements are effected at any time professional activity. Many Small and after the occurrence of the event. Medium size Entreprises and Co- operatives in Cameroon are the B.2.2 Loans offshoots of investment mutuals created by tontine groups. Many tontine groups in Cameroon also make provisions for interest free loans, Finally, it should also be specified that which are given to members in order to tontine groups do not operate enable them face some contingencies completely outside the monetary specified in the bye-laws. In most system. As noted earlier, the major cases, these involve serious illness. ones have bank accounts and the financial transactions are no longer B.2.3 Attendance done with cash but by cheque or bank transfers. Attendance is also taken very seriously. Indeed, financial assistance in the form B.2 The social Impact of gifts or loans is not considered as sufficient evidence of solidarity within Tontines also have an important social the group. That is why, with regard to dimension, as shown by the social sad events such as death, specific rules assistance fund and loans put in place are written down, which require for members. physical presence at the wake keeping as well as the burial. B.2.1 Social Assistance Fund The only accepted cases of justified The Social Assistance Fund is a mutual absence are proven cases of ill health or aid system set up by members to tackle trips outside Cameroon. In the absence their various social problems. Most of such, sanctions, which are generally often, the welfare packages are based very severe, are provided for in the on bye-laws, which clearly specify bye-laws. governing rules, the scope of
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B.3 Guarantees blank acknowledgement of debt is also added. The guarantees listed below are mainly financial but can also be moral, material Sometimes, the recipient’s guarantor is or contractual. also required to fulfil the same formality. If a payment default occurs B.3.1 Moral Guarantee in the following months, the blank cheque can be completed in the sum of As indicated earlier, the core values of the actual debt and cashed. If the the tontine are trust, mutual aid and cheque is returned then legal action honouring commitments. In effect, no could be taken. payment default is tolerated within the group and every member knows this B.3.3 Contractual Guarantees famous adage. Obviously, Contractual guarantees do not “Tontine is never late, never ill and cover insolvency risks. It simply involves never travels, even in death, the tontine a life assurance cover taken up by the must be there”. group as backup against the risk of payment default resulting from the death Failure to fulfil financial obligations of a member who has already obtained could result in the expulsion of the the bulk prize. defaulter from several other socio- cultural bodies. However, due to the continuous increase in financial stakes CONCLUSION and the harsh economic realities, other forms of guarantee are increasingly In conclusion, this clearly non-exhaustive being utilised. article demonstrates the fact that the tontine, initially based on the voluntary B.3.2 Material Guarantees solidarity of a group, has gradually broadened its objective to become a true Generally, each potential recipient of economic system whose dynamism is the bulk prize issues a blank, undated acknowledged throughout the country cheque in the name of the Chairman. (Cameroon). Sometimes, before the take day, a
Volume 019, June 2005 The African Reinsurer
*
Inter-African Cooperation: the Centrepiece of our
Concerns, yours and ours. and yours as well.
Let us join hands to make it a reality
reality.
For further information, contact the Managers
African Reinsurance
Plot 1679, KarimuCorporation Kotun St., Victoria Island, P.M.B. 12765, Lagos, NIGERIA
Tel: (234-1) 2663323, 2626660-2, 618820 Telefax: (234- 1) 2663282/2626664 E.mail: [email protected] - Web site: http://www.africa-re.com
THE MALAWI INSURANCE MARKET
By
CHRIS KAPANGA General Manager NICO General Insurance Company Ltd of Malawi
Background community, which suddenly found itself with more office Malawi is a landlocked space and dwelling houses than country, which is bordered required as well as white by Mozambique to the elephant investments that were south, southwest and largely dependent on southeast, Tanzania to the government business in the north and northeast and town. There are fears that the Zambia to the northwest. It property market in the city may has a population of 12 be heading for a crash. In the million, about 80% of short to medium term and until whom supply catches up, Lilongwe stands to are subsistence farmers. “benefit” from this development as the increased demand for accommodation In 1975, the capital was moved to pushes prices up. Lilongwe from Zomba, which had been the capital since 1966 when the country One cannot talk about Malawi without gained independence from the British. mentioning its tourism potential. Zomba, Visitors to Malawi are quite surprised that the old capital and university town is also Blantyre, which has the largest urban renowned for its spectacular views from population of over 500,000 has never the Zomba Plateau. been the capital of Malawi. Blantyre is the commercial city and has its historical The elegant Lake Malawi, the third largest roots in Christianity and trade. Indeed, it in Africa, only next to Lakes Victoria and is named after a small town in Scotland, Tanganyika, takes up about one-fifth of from where the famous missionary David the country’s area. Livingstone, one of the major players in the christianisation of Malawi hailed. The Economy
Although the seat of government has The country is rated among the poorest been in Lilongwe from 1975, a few in the world with a very low GDP, a per government departments had been capita income of less than 170 $, life operating from Blantyre until 2004, when expectancy (38) and an external debt the government declared that all its estimated at 3 billion United States operations should move to Lilongwe. This Dollars. The economy needs donor initiative was widely hailed although it has support, which, because of strained created anxiety in the business relations, has not been forthcoming in the
Volume 019, June 2005 The African Reinsurer
last three years. However, the situation The paradox bothering economists in has now improved due to a perceived Malawi is that the year on year national strengthening of fiscal discipline, inflation rate, as compared to interest increasing accountability and a major rates, has been quite low. For the year up drive towards the stamping out of to January 2004 it was only 10.1 % corruption. according to the Malawi Government’s National Statistical Report. The inflation The economy is dependent on rate increased by only 0.3 percentage agriculture, which contributes over 80% points on the month before. The of the export earnings. Unfortunately, this corresponding percentage point changes sector is exposed to the vagaries of the for the urban and rural areas were 0.4 % weather and climatic changes. Tobacco, and 0.3 % respectively. The urban rate, the country’s main lifeline, has been which remained above the one digit level affected by recent publicity and cannot for five straight months rose to 11.4 % continue to be relied upon for the future signaling a sustained increase in prices of survival of the economy. Therefore, non-food items. In contrast to the urban alternatives need to be quickly identified! rate, the rural rate, which increased steadily to 9.5 %, has stayed well below The manufacturing industry has been the two-digit level, as indicated in the crowded out of the economy by graph below. prohibitive interest rates due to massive government borrowing to fill the void created by the unhappy donor community in the past three years. Company closures have been the order of the day. However, it is pleasing to note that government is now determined to correct the situation. Interest rates have indeed started dropping from the upper 30s to the lower 20s per cent, which could be regarded as a positive first step.
Food and All items January 2004
180
170
160
150 All items Food
Index 140
130
120
110
Jul Feb Mar Apr May Jun Aug Sept Oct Nov Dec Jan'03 Jan'04 Month
Source: National Statistical Office Report February 2004
Volume 019, June 2005 The African Reinsurer
The Insurance Industry The Workers compensation Act 1990 gives employees no-fault entitlement to The Insurance Act of 1957 regulates the compensation for death, sickness or insurance industry. Other than currency injury arising out of and in the course of changes effected when the country employment. The Act is presently moved from the Pound Sterling to the incomplete in that it has yet to establish a Kwacha, the Act itself has not seen any workers fund that will be administered by significant modifications over the years a workers compensation commissioner. and all stakeholders agree that it is an The fund will be established from outdated legislation. A new Act is in draft contributions from all employers. form and it is hoped that it will soon be Although it is not compulsory to insure, submitted to Parliament for ratification. employers currently do so in the absence of the fund. a) Legislation The long- term (life) insurance market Responsibility for supervision of the has two major players; Nico Life insurance industry is currently in the Insurance Company Limited and The Old hands of the Ministry of Finance although Mutual. Between them, they control the office of the Governor of the Reserve about 97% of the 3 Billion Kwacha Bank is the de facto Registrar of premium income market, with Old Mutual Insurance. The Reserve Bank deals with dominating with a 55% market share. applications, registration and The third player is Vanguard Life deregistration, financial monitoring as Assurance Company Limited which is a well as routine supervision of the recent arrival in the market from industry. Zimbabwe.
The Road Traffic Act 1997 makes The short-term (non-life) sector is more compulsory the insurance of third party vibrant with no less than eight companies liability for motor vehicles. Through this competing for a small share, worth only Act, the limit in respect of third party about K3 billion. Nico General Insurance material damage insurance was raised Company, a sister company to Nico Life, from MWK 10,000 (USD 90) to MWK has close to a 40 percent market share. 250,000 (USD 2,272). The major highlight The following graph shows the five major of the 1997 Act was that liability for death players and how they stand in terms of and bodily injury which was hitherto market share. unlimited was capped at MK5m (USD45,455).
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Malawi General Insurance Market
50% 40% Nico General UGI 30% 20% Royal 10% General Alliance Market Share Market 0% CGU 2003 2002 2001 Others Year
Source: Insurance Association of Malawi Stats
CONCERNS The pensions industry is worried about a current court judgment that ruled that The outdated Act is a major employees who resign or are laid off are preoccupation for the industry, as it entitled to severance pay (statutory) as opens up the market for abuse by well as a withdrawal of pension unscrupulous players. The Reserve Bank contributions (non-statutory). Since of Malawi is doing a good job in pensions are not compulsory, this ruling supervising the industry. However without threatens the benevolence of employers an up-to-date legislation, its authority to put aside pension funds for their could be undermined if a case were to go employees and could affect the pensions to court. industry. The result would be that the development funds that come out of Fraud is another issue affecting the pension funds would gradually vanish and insurance sector. The general insurance the country as a whole would pay a heavy market has been grappling with price. The ruling is however being fraudulent motor and other insurance challenged. claims that involve collusion, aiding and abetting. PROSPECTS Credit control is another source of worry for the industry, largely due to lack of The industry owes its resilience to the either legislation or self-regulation. The professionalism of the major players in Reserve Bank has recently stepped in to the market. The Insurance Association ensure that no company goes under. makes it a point to sustain the necessary standards. The outdated legislation could With regard to life assurance, AIDS has easily have been a breeding ground for had its toll. Life insurance companies unethical practices, but to a large extent, have been creative, coming up with this has not happened. With an-up-to products that do not demand AIDS tests date legislation, the prospects are but at a “premium over the premium.” encouraging.
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One area of huge untapped potential is e- training along the UK Chartered business. The industry needs to Insurance Institute syllabus. This has led benchmark itself on the world arena if it to more and more young Malawians is to survive the intense competition joining the industry already armed with brought about by globalisation. The insurance knowledge, providing a crop current IT systems in the market are that will fly the flag into the future. It is either outdated or under-utilised. Skills believed that the University of Malawi is development in this area will be crucial also investigating the prospects of for the future. introducing law and commerce degrees with an insurance bias. This is the way The Insurance Institute of Malawi, which forward and can only be music to the looks after insurance education, must be ears of insurance veterans. commended for introducing insurance
Volume 019, June 2005 The African Reinsurer
THE SOUTH AFRICAN MARKET
By
Paul RAY Managing Director, African Reinsurance Corporation (South Africa) Ltd
INTRODUCTION Perhaps the country’s biggest asset is its people – a nation The Republic of South Africa fondly referred to as “The occupies the southernmost tip Rainbow Nation” deeply of the African Continent with a rooted in diverse cultures. As surface area of 1, 219, 090 at the last official census in km2 and has common October 2001, its population boundaries in the north with stood at some 45 million the Republics of Namibia, people. Botswana and Zimbabwe, in the north east with the Republic of Mozambique and the Kingdom THE ECONOMY of Swaziland, while the Kingdom of Lesotho is nestled in the south east. Significant economic achievements have been recorded since 1994 as a result of The country which is surrounded by the which South Africa is expected to record ocean on three sides, making it easily growth rates rising to about 4% by 2005, accessible to the rest of the world, has with Consumer Price Inflation (excluding developed first class ports in cities such mortgage rates) falling to around 5% per as Cape Town, Durban and Port annum by 2005. Elizabeth. In addition, the country boasts of one of the largest “inland ports” in the However, following a sharp appreciation container depot situated at City Deep in of the South African Rand during the third Johannesburg. and fourth quarters of 2004, the economic outlook has changed somewhat The South African Constitution, adopted with key economic indicators reflected in following the first democratic elections table 1. held in 1994, divides the country into nine provinces, each with its own legislature, Premier and executive councils. The provinces, which have distinctive landscapes, vegetation, climates and cultures are the Western Cape, Eastern Cape, KwaZulu Natal, Northern Cape, Free State, North West, Gauteng, Mpumalanga and Limpopo.
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Table 1
Dec 2003 Current Gross Domestic Product 2.8% 5.6% Q3 2004 Consumer Price Index* 4% 4.2% Oct 2004 Rand/US$ exchange rate 6.69 5.77 Nov 2004 10yr Govt Bond yield 9.04% 8.27% Nov 2004 Prime lending rate 11.5% 11% Nov 2004 *CPIX
South Africa’s economy is inextricably The fifth Annual Report of the Registrar linked to that of the southern African of Short-Term Insurance shows that as at region and its own progress depends on 30 June 2003 there were 88 short-term the economic recovery of the entire insurers and 7 reinsurers licensed to write continent and the success of NEPAD. With business in South Africa, whilst 70 this in mind, the country’s regional policy insurers and 6 reinsurers were registered aims to achieve a dynamic regional to write Life business. Subsequently, the economy capable of competing effectively African Reinsurance Corporation (South in the global market through a Africa) Limited was licensed to write both combination of sectoral cooperation, short-term and long-term business with policy coordination and trade integration. effect from January 2004.
South Africa’s interests and objectives in It should be noted however, that quite a the southern African region are sustained number of these companies have been by strong links between its domestic acquired or have merged with others, industries and the regional economy. thus leaving some licences dormant. Indeed, South African manufactured exports to SADC countries in 2001/2002 SHORT-TERM INSURANCE grew by some 13,9%. The Financial services Board has THE INSURANCE SECTOR published a special report on the results of the short-term insurance industry for The South African Insurance sector the period ended 30 September 2004, operates under two insurance acts, from which the following figures were namely The Short-Term Insurance Act, extracted: 1998 (Act Number 53 of 1998) and The Long-Term (Life) Insurance Act, 1998 (Act Number 52 of 1998) which are controlled by the Registrar of Insurance, Financial Services Board.
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Table 2
Industry Results of Typical Insurers (excluding Cell Captives, Captives and Niche Insurers)
9 months 9 months 1999 2000 2001 2002 2003 Ended Sept. Ended Sept. 2003 2004 Net Premiums R’m 12 673 13 044 14 497 16 860 19 774 14 776 18 063 Underwriting profit/(loss) R’m (288) (171) 199 377 1 381 917 2 321 Underwriting & Investment 908 1 395 1 961 1 714 2 554 1 834 3 357 Income R’m Claims (as % of earned 72 72 70 71 67 67 58 premiums) Management Expenses & 29 29 28 26 26 26 26 Commissions Underwriting profit/(loss) (2) (1) 1 2 7 6 13
Underwriting & Investment 7 9 14 10 13 12 19 Income Net premium increase (year 2 3 11 16 17 19 22 to year)
As would be observed from the above Underwriting results for 2004 appear to table, since 2001, the short-term be showing a similar trend although insurance market has shown substantial weather- related losses reported in the improvement from an underwriting result last quarter of 2004 may have a negative point of view, with 2003 being one of the effect on the upward trend. best years in history.
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The following graph gives an idea of market performance over the past 10 years.
25 20 15
10 Operating 5 Underwriting 0 -5 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 sept- 04 -10
Once again, the period 2001 to 2004 Property increased by about 25% to shows positive results particularly from an R9.8bn in 2003 representing 32.4% underwriting point of view. (31.4%) of total market income, whilst the Motor class premiums increased by Classes of Insurance 18% to R12.1bn representing about 39.7% (40.7%) of premium income. Short-term insurance is written under the Liability on the other hand showed following classes: substantial growth of 30% and now represents 4.1% (3.8%) of gross Accident & Health premiums. Other classes that make up Engineering the balance are Accident – 3.5% (4.4%), Guarantee Guarantee – 1.6% (1.7%), Engineering – Liability 4.4% (4.5%), Miscellaneous – 11.3% Miscellaneous (10.2%) and Transport about 3.1% Motor (3.2%). Property Transportation The following graph illustrates the position as at the end of 2003: Generally speaking, the split of income remained relatively static. However, following a general increase in rates, the 2002/2003 incomes have developed along the following lines:
Volume 019, June 2005 The African Reinsurer
Premium by Class of Business 2003 (2002)
2002 2003
Gtee Misc. Engin. Motor Liability Property Accident Transport
As can be seen from the above, Motor From a profitability view point, the dominates the classes, closely followed by various classes performed as follows as at Property and Miscellaneous business. the end of 2003:
Gross Income Underwriting Result 14000000 12000000 10000000 8000000 6000000 '000 4000000 2000000 0 -2000000
Motor Gtee. Property Liability Miscell. Transport Accident Engineer.
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LONG-TERM INSURANCE
The Financial Services Board has equally published a report detailing the results of the Long-term Insurance Industry, as reflected in table 3.
Table 3
Industry Results of Typical Insurers (excluding Cell Captives, Captives Link Investment Insurers and Niche Insurers) In R’m 12 months 12 months 12 months 9 months 9 months ended ended ended ended ended Dec. 2001 Dec. 2002 Dec. 2003 Sep. 2003 Sep 2004
Net premiums – Recurring 60 449 53 719 51 431 36 659 40 129
Net premiums – Non Recurring 59 987 57 859 53 723 39 516 35 879 Net premium increase (year to year) % - (7) (6) (6) 0
Claims (as % of net premiums) 91 99 100 100 106 Commission (as % of net 6 6 6 7 premiums) 5 Man. Expenses (as % of net 8 9 10 11 11 premiums)
Investment yield % 16 (2) 12 5 8 Number of policies increase (yr 14 (14) 1 (3) 5 to yr) %
Individual lapse % 31 26 31 33 23
Individual termination % 27 23 25 27 20 Individual contractual termination % 24 35 38 40 51 Fund & group schemes termination % 27 17 13 11 34
Capital Adequacy Ratio (median) 3.5 3.0 2.8 2.7 2.6
Return on investment is calculated according to the formula R=2i/A+B-I where I is all investment income plus realised and unrealised surplus sale of investments, A is initial value of investments and B is end value of investments.
Expressed as a percentage of the number of new policies issued during the period.
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It is interesting to note from the above CLASSES OF INSURANCE that net premiums reduced from R120.4bn in 2001 to R105.1bn in 2003, Typically, insurers registered as long-term which is a 12.7% fall over the period. insurers are licensed to write business However, as September 2004 figures are under the following classes: virtually the same as those for the period ending September 2003, one may assume Assistance that this declining trend has stabilised. Disability Fund Nevertheless, it is expected that with the Health apparent growth in the South African Life economy, and rising employment rates, Sinking fund there should be an influx of income from group schemes and individual business. As at the end of 2002, the Registrar of It would also be noted that since 2001 long-term insurance reported the there has been a deteriorating trend in following position as regards the the loss ratio and this may be attributable distribution of income among the various to the increase in HIV/AIDS related classes: deaths.
Life 39.1%, Disability 1%, Health 0.8%, Fund 48.7%, Assistance 0.7%, Sinking Fund 9.7%
Life Disability Health Fund Assistance Sinking Fund
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CONCLUSION SOURCE A recent report presented by one of the International Reinsurance Brokers showed 1. Financial Services Board Special that Africa contributed 7.8% of the Report on the Results of the Short- international insurance premium income Term Industry – September 2004 in 2003. It is expected that South Africa alone accounted for some 25% of the 2. Financial Services Board Special African income or around 2% of the Report on the Results of the Long- global production, which makes her one Term Industry – September 2004 of the largest individual contributors to the continent’s insurance premium 3. Registrar of Short-Term Insurance volume. Fifth Annual Report
Potential for further growth is definitely in 4. Registrar of Long-Term Insurance the offing as the South African economy Fifth Annual Report continues to flourish and one hopes that the country’s Industry will continue to 5. Global Credit Rating Co - South Africa lead the way and assist with the Short Term Insurance Industry development of the Industry on the Bulletin – August 2004 continent.
Volume 019, June 2005 The African Reinsurer
NEWS FROM AFRICA
By Kasali SALAMI Consultant
The performance of the place to promote the growth African economy has been of African trade. The AGOA ever so impressive in the and “Everything-but-Arms’’ last few years, with GDP facilities extended to Africa rising from a level of 4.6% by the United States of in 2003 to 5.1% in 2004. America and Europe Growth may remain at the respectively are particularly same level this year but relevant in this connection. should move up to an In order to benefit from average of 5.4% in 2006, these programmes, Africans with prospects for further have to adhere strictly to the increases in the years ahead. The impact various reform schedules, move away of inflation has also reduced considerably. from military dictatorship and ensure also From a two-digit average of 10.6% in that they do not resort to armed conflicts, 2003, it dropped to 7.7% in 2004 and at the slightest provocation. may stay at the same level in 2005. It is, however, expected to reduce by a point As impressive as the performance to 6.0% in 2006. The unfolding scenario appears, there are still fears that the size may well herald the long-awaited era of of the Continent’s GDP has yet not given economic revival and sustainable growth any indications that its economy is ripe when Africa would be more inward- enough to support the various looking, willing to depend on its abundant infrastructures necessary to provide the natural resources to gradually move the basic necessities of life. It is, for instance, continent forward and constitute less of a estimated that Africa’s GDP is just burden to the international community US$480.0 billion or 1.5% of the world whose support has been of such a great total of US$31,500.0 billion. significance to its progress. Consequently, majority of Africans, particularly those in Sub-saharan Africa, There is no doubt about the fact that live on less than US$1 per day. And for as Africans have made great sacrifices to get long as they face such stark reality, for so this far and it is hoped that never again long would the impressive statistics would performance slow down to the credited to Africa remain meaningless. levels recorded in years past when the African leaders are very much aware of majority of economies in the region either the yawning gap between the official deteriorated or, at best, remained statistics and the actual welfare packages stagnant. It is in fact expected that the on ground and are making efforts to back current trend would be sustained, given up these seemingly empty numbers with the continued support from the developed concrete actions, that are designed to world and the various mechanisms put in improve the lot of their people. It is,
Volume 019, June 2005 The African Reinsurer
therefore, not surprising that the thrust of vigour and speed with which the the agenda of the fourth Ordinary Session ownership of public enterprises is being of the General Assembly of the African transferred to the private sector. This Union, held in Abuja (Nigeria), in April sector currently makes only a meagre 2005 was on how food security and contribution to the GDP of Africa. For access to affordable health care services, instance, the total credits to the private among other basic necessities of life sector, as a percentage of GDP, is just could be achieved within the shortest about 20% of the corresponding figure in possible time. Hopefully, the concern the emerging Asian countries. Clearly, a expressed at the meeting would be lot of work still has to be done, if this translated into concrete action that would sector is to drive the economy. benefit Africans. One also notes with delight the war being Clearly, unlike the immediate years after waged against corruption, which has independence, African leaders have now become ever so intense in the last seen the wisdom in taking their destiny in decade. Hopefully, a new Africa would their hands. There is need to recognize emerge from this endeavour, which would the fact that the developed countries command greater respect and provide an attained their current status through hard enabling environment that would attract work, selfless services and great significant volumes of investment from commitment to progress. Thus, although the international world. The initiative Africans still need support from the would have to be sustained, as otherwise, international world, they are now making all the efforts being made to sort out the all efforts to attract such assistance, on affairs of this continent would be in vain. merit and in a more honourable way. Accordingly, a great deal of attention is In addition to the various steps being being given to creating the enabling taken to promote and enhance the environment for them to benefit from the progress of this continent, it is clear that ongoing globalization of the world Africa would have to accept that armed economy, in spite of the sacrifices conflicts would not resolve any problems. involved. Such upheavals would only extend the catalogue of woes of this community. In It is, indeed, difficult to believe how fact, at no time in the last four decades African nations are enduring the untold has Africa ever known peace. The large pains inflicted on them by the various scale destruction of properties and human reform programmes that are meant to lives resulting from such conflicts has, in integrate them into the new world socio- no small way, slowed down the progress economic and political environment. They of this continent, as evidenced by the are adjusting very fast and have so far level of development recorded by been able to create the necessary countries that have been ravaged by environment that would enable wars. Clearly, not too many investors democracy grow and thrive in this part of would commit their funds to investments the world. They have also gone a long in an environment where gunshots way in introducing appropriate ecomic literally crisscross the sky. Yet without reform that would accelerate the external finance, Africa’s growth and economic growth and development of the development would be greatly hampered. continent. In this regard, one notes the It is for instance estimated that only 10%
Volume 019, June 2005 The African Reinsurer
of the trade transactions in Africa are meagre to support and drive the carried out among African countries and economy. that just six countries account for 68% of such intra-Africa trade. This scenario is The international community remains unlikely to alter, to any significant extent, concerned about Africa’s plight and would well into the foreseeable future, given go to all lengths to ensure that the that this continent is yet to develop continent is not left behind, as the world robust financial systems that are able to races to the global village. For instance, support such trade. The need to maintain the African Commission, launched at the peace would, therefore, remain ever so instance of the British Prime Minister paramount, if the continent is to would seem to have taken a step in the successfully contest for investments. right direction, given its concern about the continent’s debt burden. Clearly, One hopes that, with good governance, Africa’s progress may be stalled by such characterized by the rule of law, respect colossal financial obligations, the for human rights, equity and fairness, the settlement of which would seem to run to ongoing efforts that are aimed at creating perpetuity. The continent’s Finance a peaceful society would achieve the Ministers did discuss this issue at length, desired objective. At the 6th Ordinary at the three-day meeting held recently in Session of the Executive Council of the Dakar and ended up by calling for the African Union in Abuja which was held in cancellation of the debts to free Africa April 2005, the Executive Secretary of the from servitude and allow it to plan and ECA, observed that substantial support, in grow. In the same vein, the former the form of official aid, of well over the President of the United States of America, US$25.0 billion which was provided in Mr. Bill Clinton, did submit at the World 2004, would be required this year, if the Economic Forum held in Davos, continent is to meet the Millennium Switzerland in April 2005 that a fraction of Development Goals on poverty, health the US$80.0 billion expected to fund the and food security, among others. In fact, ongoing campaign in Iraq could well the indications are that the required funds serve as additional aid to Africa to fight would be in the neighbourhood of poverty and disease. US$37.0 billion which should rise steadily to US$73.0 billion by 2015-the official Clearly, Africa must live up to date when the United Nations reckons expectations in order to qualify for the that poverty would have been reduced by proposed assistance, which the advanced 50%. Thus, as desirable as Africa would countries intend to extend to the have loved to manage its affairs without developing world in a bid to wipe off such a heavy reliance on external poverty from the face of the earth by sources, it just cannot raise the huge 2025. Needless to add that this continent funds required for its development. The has to steer clear from trouble and fact is that the necessary infrastructures remain committed to the various reform to support such a desire are either non- programmes in order to be part of an existent or weak. For instance, science event that promises to set its people and, and technology are at rudimentary indeed all poor nations, free from the stages, managerial skills are still being pangs of hunger and deprivation. developed and domestic capital is just too
Volume 019, June 2005 The African Reinsurer
From all indications, and particularly from Côte d’Ivoire the efforts being made by African leaders to improve the lot of their people, this Loyale IARD, SONAR, FEDAS, CEA VIE continent would ultimately move away and AVENIR Re – a regional reinsurance from the periphery to the center where it company owned by a group of can assert itself and make positive professionals in the Ivorian market, some contributions to issues affecting the insurance companies in the Francophone progress of this world. Indeed, the desire region and a financial institution. by the African Union to push for 2 permanent and 5 non-permanent seats Libya on the UN Security Council is an indication of how African leaders intend to African Insurance Company Ltd and pursue the objective of establishing the Sahara Insurance Company Ltd. economic relevance of this continent. Needless to add that given its traditional Morocco role as a pivot of socio-economic and political development, the insurance La Royale Al Wataniya, which is the industry would be expected to make outcome of a merger of La Royale significant inputs in support of this Morocaine D’assurance and Al Wataniya. laudable initiative. South Africa Below are highlights of significant events in the industry Unity Insurance Company Ltd – an associate company of Auto and General NEW COMPANIES Insurance Company Ltd.
The following companies were established Togo during the period under review. FIDELIA Assurances Bénin MAJOR LOSSES Avie Assurances Algeria Cameroon The biggest insured loss ever recorded in SAMARIS and PROASSUR VIE Africa and the Arab world, Algeria SKIKDA LNG, which occurred in January 2004 has Congo now been provisionally estimated at US$470.0 million FGU. NSIA Burkina Faso
The cost of a fire incident which affected a cotton-separating factory of SOFITEX on 31st January 2004 in Bobodioulasso has now been put at CFA 496,035,778.
Volume 019, June 2005 The African Reinsurer
Cote d’Ivoire Custodians - the two institutions that are to manage Pension Schemes. The boiler explosion of 29th January 2004 in a Sugar factory at Sierra Leone Ferkessedougou may cost the industry CFA 836,676,987. A new insurance commission has been established in Sierra Leone. An accident at Abidjan airport Prior to this, the commission was a involving a CAM AIR aircraft may cost department in the Central Bank. (equipment only) US$14.0 million. Three, out of the ten insurance A fire incident occurred at a furniture companies operating in the market, company (ARTIS) in Abidjan on 7th have been deregistered namely (?) May 2005. The cost is put at CFA700,000,000 South Africa
On 26th November 2004, a Tsunami was In addition to the introduction of the triggered, off the coast of Indonesia, Financial Advisers and International which affected ten countries including Services Act effective 30 September Kenya, Madagascar, Somalia and 2004 which required all insurers, financial Seychelles. Well over 250,000 lives and advisers and related professionals to properties estimated at about US$15.0 register before practising, the March 2005 billion were claimed by the incident. bulletin of SAIA also provides the following highlights. LEGISLATION Financial Intelligence Centre Act: Algeria (Money Laundering) – Short – term Insurers are excluded from the ambit of Insurance against natural hazards this Act at present. became compulsory with effect from 1st September 2004. Demarcation of Medical Schemes and Health Insurance and Libya Reinsurance – Senior Counsel opinion has been forwarded to the Financial Motor tariffs were increased by 20%, with Services Board and results are being effect from February 2005. awaited.
Nigeria Policy Holder Protection Rules – The new draft rules have been gazetted. A new Pensions Reform Act came into effect in June 2004. Among other things, Financial Services Ombuds Schemes the Act has established contributory Bill - It has been approved by Pension Scheme for employees in the Parliament. Public and Private sectors and has also set down the requirements that have to Road Accident Fund - Amendment Bill be met by the Pensions Fund has been published for comment. It will Administrators and Pensions Fund effectively limit payments to R25,000.00
Volume 019, June 2005 The African Reinsurer
OTHERS Nigeria
Ethiopia The certificates of registration of the following companies were cancelled with A directive issued by the National Bank of effect from 2nd August 2004: Accelerated Ethiopia – Directive No.SIB/24/2004, Insurance Company Ltd, Altimate Trust which took effect from 1st May 2004 Insurance Company Ltd, Amicable prohibits Insurance Companies from Assurance Plc, Financial Assurance issuing a Financial Guarantee Bond or any Company Ltd, Fortress Insurance form of Unconditional Bond. Company Ltd, Gateway Insurance Company Ltd, Lake Insurance Company Gabon Ltd, Marine and General Insurance Company Ltd, New Era Insurance A.N.G “Assurances Nouvelles du Gabon” Company Ltd, Security Assurance Plc, became “Nouvelle Société Interafricaine” Stallion Assurance Company Ltd, Triumph after it had been bought over by NSIA Assurance Company Ltd, Val Insurance Group. Company Ltd and Unity Life & Fire Insurance Company Ltd. Malawi Uganda NICO (Malawi) took over CGU (Malawi) with effect from 1st April, 2005. UAP of Kenya acquired a controlling share in United Assurance Company Mauritius Ltd in a deal that was concluded in the last quarter of 2004. Jubilee Insurance (Mauritius) Company Ltd ceased to write new business from The name of Imperial Insurance June 2004 and has since been on run-off. Company Ltd has changed to NICO Insurance (Uganda) Ltd following its acquisition by NICO (Malawi). Morocco Industrial and General Insurance ARIG’s share in CNIA was sold to a Company of Nigeria has won a bid to buy private Moroccan group in February 2005. 60% of the share of the National Insurance Corporation of Uganda which has been put up for privatization. The remaining 40% shares would be sold through the Stock Exchange.
Volume 019, June 2005 The African Reinsurer
HEADQUARTERS
Executive Management Managing Director Bakary KAMARA
Deputy Managing Director Haile M. KUMSA
Secretariat & Administration Director of Administration/ Isidore KPENOU Corporation Secretary
Assistant Director, Human Muhammed ALI-KOTE Resources & General Services
Assistant Director, Secretariat & Mamadou DIALLO Languages
Finance & Accounts Director of Finance & Accounts Ganiyu MUSA
Information Technology Assistant Director Gabriel OPADOKUN
Technical Operations Director, Central Operations and Alain G. RAVOAJA Inspection
Director of Operations, West Africa K. AGHOGHOVBIA
Internal Audit Director of Internal Audit Ike O. UDUMA
REGIONAL OFFICES Casablanca Regional Director Moncef Manai Assistant Director, Finance & Ousmane SARR Accounts Deputy Directors, Underwriting & Mohammed KANNOU Marketing Mohammed BELAZIZ Fuad ELGDERI Nairobi Regional Director George OTIENO Assistant Director, Operations R. RAMAMONJARISOA Assistant Director, Finance & Ibrahim A. IBISOMI Accounts
Abidjan Regional Director Bene B. LAWSON Assistant Director, Finance & Assemian O. ASSEMIAN Accounts Assistant Director, Operations M. HAIDARA
Mauritius Regional Director Ms. E. AMADIUME Assistant Director, Finance & Eshan GAFFAR Accounts
Cairo Regional Director Omar Abdel Hamid Gouda
SUBSIDIARY South Africa Managing Director Paul RAY General Manager, Daryl - DE VOS Operations/Marketing General Manager, Finance & Godfrey WAWERU Accounts
Volume 019, June 2005 The African Reinsurer
Volume 019, June 2005 The African Reinsurer