The impact of COVID-19 on SSA insurance markets

The COVID-19 health crisis is already turning into an economic crisis that will see a broad range of sectors affected. The IAIS and IMF deem the insurance sector to be relatively resilient as a result of the steps taken in response to the 2007–2008 financial crisis – but does this hold true in developing countries? Over the past month, we’ve interviewed close to 40 insurance market players and regulators across sub-Saharan Africa (SSA) to take the pulse of the insurance market in response to the COVID-19 crisis. We also analysed data from a subset of eight countries across SSA: Ghana, Kenya, Malawi, Rwanda, South Africa, Tanzania, Uganda and Zimbabwe. This is what we found about the implications of COVID-19 for the sustainability of insurers in the region.

Fragile even pre-COVID-19

Underwriting losses. According to data from insurance regulators’ most recent pre-COVID annual reports, numerous insurers in our focus countries show underwriting losses, in part driven by high expense ratios. Only one of the four focus countries on which data was available reported an average expense ratio below the internationally acceptable level of 40%. This echoes the findings from our earlier study in Ghana, Nigeria, Kenya and Rwanda, where 33% of insurers had expense ratios of 80% or above.

Reliance on investment income. Despite widespread underwriting losses, the insurance sectors in the focus countries still show overall positive net profit after tax. The discrepancy between underwriting results and net profitability is driven by investment income. This implies that investment income is crucial to the sustainability of insurers in these markets – and their regulators know it. The Kenyan Insurance Regulatory Authority’s (IRA’s) most recent annual report mentions that investment income supplemented the record-level underwriting losses recorded by general insurers in 2018.

Where their business models depend on investment income to cover underwriting losses, insurers are already in a vulnerable position – a vulnerability that the COVID-19 pandemic is putting into sharp relief.

How could COVID-19 affect insurers?

The pandemic affects insurers’ premiums, claims and investment income.

Decrease in premiums. Our interviews suggest that some insurers face a substantial reduction in premium income from new policies. One Southern African insurer even mentioned that the number of enquiries for new policies had more than halved. Governments’ restrictions to contain the spread of COVID-19 have meant that in-person sales through agents are especially affected, while more limited lending and reductions in loan repayments have affected credit-life insurance premiums. Where digitisation by insurers has been limited and/or unsuccessful, premium collection on existing policies has also been disrupted. Furthermore, as the economic effects of the pandemic and associated lockdown measures circle out, policy lapses may become more common.

Reduced claims initially. The reduction in premiums is to some extent offset by reduced claims, at least initially. Many of the insurers we interviewed witnessed a reduction in claims immediately following the COVID-19 outbreak – especially on motor insurance (one of the biggest lines of business across SSA insurance markets). This makes sense: Where mobility restrictions apply, people drive less. One general insurer operating in two SSA countries mentioned a “massive drop” in motor claims (about 30%); another general insurer operating in East Africa mentioned a 16% decline in motor claims between March and April, but that liability and accident claims have been increasing since then.

Lower investment income. Insurers’ investments are also increasingly affected by the crisis. Different asset classes dominate in different countries in the sample, but term deposits, government securities and property are especially prominent:

• Term deposits: Interest rates have decreased due to monetary policy interventions as a stimulus to the crisis – for example, in Uganda, the Central Bank Rate (CBR) has been reduced by one percentage point, and in Rwanda the Reserve requirement ratio has been reduced from 5% to 4%. As the terms of the existing fixed deposit instruments lapse, returns on term deposits will be reduced significantly.
• Government securities: Investments in government debt may also become increasingly risky as governments become more indebted to raise capital to respond to the crisis, while at the same time facing falling tax revenues and foreign capital outflows. For example, Ghana’s Ministry of Finance has already called on investors (especially pension funds and asset managers) to follow the lead of the banks by accepting a reduction of 200 basis points on short-term instruments, including T-bills and 364-day paper.
• Property: Likewise, real estate markets are struggling given the lack of tourism and defaults on rent as companies and households struggle to manage their cashflow. Insurers that are heavily invested in fixed/investment property – for example in Zimbabwe – are likely to see a negative effect on their balance sheets.

The perfect storm?

Heightened vulnerability. In short: Many insurers in SSA were already vulnerable before the pandemic, making underwriting losses that were only compensated for by investment income. The effects of the pandemic will heighten this vulnerability, to the extent that marginal insurers could be pushed into insolvency. The insurers we interviewed are, on the whole, largely still preoccupied with the immediate measures necessitated by the pandemic: How to deal with a situation where staff work from home and face-to-face sales have been disrupted? Although some are concerned about the effect on return on investment for certain asset classes, they have yet to feel the full ripple effects. However, the data suggests that caution is in order. Indeed, the resilience of the sector itself is likely to be tested in the coming months and years.

Imperative for consumer protection, innovation. The long-term implication may be a major remapping of the insurance landscape in SSA markets, many of which are fragmented and characterised by unhealthy competition. A key imperative for regulators is to proactively monitor and manage the risks – especially when it comes to honouring claims. This includes managing the process of exit for unsustainable insurers in a responsible way, ensuring that consumers are not adversely affected, and that trust is not undermined. On the upside, COVID-19 might be the trigger needed to prompt innovation. There is a significant positive correlation between less fragmentation and faster growth and development in the insurance sector. We may just come out the other end stronger.

Risk, Remittances and Integrity programme, a partnership between FSD Africa and Cenfri. Special thanks to Karien Scribante for research assistance.