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Foreign reinsurers still dominate local market

By Patience Saghana
Indications have emerged that there might be need to impose patronage of local reinsurers on the local market as the preference for foreign reinsurance companies over local reinsurers still persists.

And for the fact that the local content development is now a law that fully encourage exhausting local capacity. Apart from that reason, in most developing countries like Nigeria, patronage of local reinsurance companies are imposed most especially where foreign insurance still predominates.

As such, local insurers are therefore inclined to resort to foreign reinsurers, particularly in international reinsurance market thus exchanging reinsurance in return for guidance of these companies in the underwriting of risks.
The need for extensive reinsurance facilities is obvious in countries which are experiencing rapid growth in the development of their infrastructure, in the use of modern technology and in the exploitation of their natural resources.

The development of industry, improvements in communication, aid to agriculture, efforts at urbanisation etc. create great problems for local insurers, particularly those covering risks in the field of construction, aviation and marine hull, oil exploration amongst others. Mr Ken Aghoghovbai, Regional Director ofWest African office of Africa Reinsurance Corporation, purported that said for a class of business where reinsurance treaties are not easy to come by, most insurers rely solely on their shareholders’ fund to write a net line. He said, “Yet, apart from Nigeria, where the minimum capital required to transact non-life business is about US$20m, all other countries in the region have at the most 5% of that figure”.

Typically he reiterated that the insured places his business directly with an insurer, who leads a consortium of insurers and who, through a Global reinsurance/energy broker, negotiates the contract with a Lloyds syndicate or Energy Underwriter that provides terms and conditions”

“The panel of insurers takes a share of the risk (including share for the local reinsurers) and the balance is placed in the international market.

A local/regional reinsurer may however be able to receive shares from the international market provided the security criteria of the international brokers are met.  Africa Re, for instance, not only receives business from nearly all the major brokers in the world, but also provides terms for some of these African oil and gas risks that are followed by underwriters in the international market”.

There is no sufficient statistical evidence that could reflect the overall experience of business written in developing countries even in Nigeria yet it is generally admitted that the technical results of direct business have on the whole been satisfactory.

However, because of the lack of appropriate statistics especially from the Nigerian Insurers Association (NIA), the real magnitude of the foreign exchange outflow from all if those activities is unknown at present. It is even more difficult to obtain balance-of-payments statistics for reinsurance flows, because many claims and liabilities between direct insurer and reinsurer are netted out, and only the balances are transferred internationally.

Ordinarily, reinsurance premium outflow is at least partly balanced by loss payments, withholding of premium and loss reserves etc. The relatively good experience of direct business in developing countries like Nigeria does not necessarily mean that the results of their outward reinsurance have had the same level of profitability to reinsurers.

Though, a number of developing countries, in order to enhance their economic growth, undertake unusually large projects in joint ventures with, or with the assistance of, industrialised countries. Then, in the event of serious loss or damage, the services of the industrialised country are likely to be required for repair, reconstruction or replacement of the damaged property.

Reinsurance is therefore sought in international markets in order to make it possible for local insurers and their clients to obtain the foreign currency needed to purchase such services without delay.

In the case of markets served exclusively by local insurers, a large volume of outward reinsurance is observed. Some of the factors that lead to a heavy reliance on foreign reinsurance are inherent in the features of local insurers in developing countries and some are related to the nature of the business covers. Some currency considerations also play a role in determining the need for foreign reinsurance.
Mr Adeyemo Adejumo recalled that business for reinsurers was though not bad but could have been better.

According to him, “We had some increase but not as we expected it. We believe that our performance in 2010 will be better than that of 2009” He noted, “Last year was good for most of the re-insurance market all over the place even though there are some few big losses here and there, also in Nigeria we suffered major losses from one of the cooperate client but at the end of the day we still find out that our technical profit was still better, the re-insurance capacity is still in dare need and the players are still very few, so the opportunity still abound in the industry”.

Moreover, the exclusive use of treaty arrangements for placing large risks is rather limited in the case of insurers in developing countries. This is mainly because of the very high underwriting limits that these risks require, compared with other risks for which reinsurance treaties are expected.

Reinsurance placement for large risks in developing countries is mainly in the form of facultative cessions, that is to say, case-by-case reinsurance. Facultative reinsurance has an advantage in that it has the flexibility required for tailor-made covers, but for smaller companies it has the disadvantage of virtually allowing the reinsurer to impose his terms and conditions on the direct writing company, not only as regards the terms of markets and neighbouring countries and by way of intermediaries, they have been able to build up international portfolios.

The Moroccan market is one such example, being served exclusively by domestic companies which cede about 30 per cent of their premiums to purchase foreign reinsurance. Obviously the existence of foreign insurers facilitates the covering of large risks in the local market. However, this usefulness becomes negative by the very fact that providing such extensive capacity per risk precludes any possible co-insurance or local reinsurance, thus reducing the population of risks within the country and obstructing the growth if local market including indigenous reinsurance companies

In fact, most local insurers enter into business relations with foreign reinsurers with the main aim of obtaining guidance and training for their staff. Still another factor encouraging the tendency towards low levels of retention is the increasing competition for reinsurance business, which often leads reinsurers and brokers to offer high commission rates, which sometimes make it more profitable for direct companies to reinsure rather than retain.


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