With the exception of the past four years, Africa’s economies have enjoyed exceptional growth since the turn of the century. The outlook is favourable even though the projected growth falls short of past trends.
However, the economic expansion has not yet translated into equal insurance growth and penetration is still low. This is particularly true for agricultural insurance, which is essential in improving the resilience of Africa’s farmers – who still represent 60% of the continent’s work force – against weather related events.
Technological change and index-based insurance products open up new avenues to provide protection. Reinsurers, with their expertise and experience across the continent and beyond, can help to spread these products - as a recent initiative of Africa Re with its founding investor, the World Bank, demonstrates.
Africa had an average real annual growth rate of 5.4% from 2000 up until 2010. Due to falling commodity prices, weaker global demand and the impact of political instability growth slowed to an average real growth of 3.3% for the years up to 2015, according to the McKinsey Global Institute (MGI). Although growth fell to 2.2% in 2016, it is expected to recover in 2017 and 2018 to an estimated 3.4% and 4.3% respectively, according to the African Economic Outlook. The decline was most pronounced in the oil exporting countries and in the Arab Spring countries. With the exception of these markets, the bulk of the African countries maintained stable growth of around 4.5% since 2010.
According to the World Economic Forum, three trends continue to fuel Africa’s growth. First, a young and growing population and workforce will add impetus. By 2034 Africa is expected to have the world’s largest workforce of 1.1 billion people. Secondly, the continent will continue to urbanise. Its middle class, currently standing at approximately 350 million people, will expand and its consumption will outpace GDP growth. Thirdly, technological change will further accelerate growth, reduce costs and enhance productivity. East Africa is already the world leader in mobile payments. By 2020 Africa’s smartphones penetration will be at least at 50%, up from 2% in 2010. In addition to these mega-trends, spending on infrastructure, which already doubled over the past decade to 3.5% of GDP, will continue to outpace GDP growth.
Insurance growth lagging behind
These strong underlying factors impact the growth of insurance. Due to the depreciation of local currencies against the US dollar, in 2016 premium volume stood at only US$60bn, down from US$64bn in 2015, according to recent figures from Swiss Re. In local currency, the year-to-year comparison is positive for key markets, however. (Although South Africa’s premium volume, by far Africa’s largest insurance market, declined.) The continent’s insurance penetration remained at 2.8%, considerably below the world’s average of 6.3% and highlighting Africa’s potential to catch up, in particular, as international investments in the continent are driving the demand for insurance. In addition, awareness to insure against natural disasters is rising. And finally, insurers are benefiting from positive changes to regulation and the compliance systems.
Of particular importance for Africa’s economies and societies is the continent’s agricultural sector. Most of the growth that Africa experienced in recent years had been driven by higher production of mineral and hydrocarbon resources. The rural areas did not benefit equally, as the World Bank states. Today, agriculture still dominates Africa’s economies, accounting for 16% of the continent’s GDP and employing roughly 60% of the economically active population, and 70% of the continent’s poorest communities.
Agricultural growth and enhanced productivity greatly contribute to reduce poverty while supporting structural transformation and urban transition. As the cost of food declines, it remains accessible for an urban population, secures employment and induces the development of an agro-industry. In addition, food security reduces the continent’s vulnerability to famine and epidemics and will also help to lessen migration and political conflict. While incomes increase, people are able to move out of agriculture into sectors of higher productivity and value-add.