OREANDA-NEWS. 2015 proved to be a challenging year for Africa’s reinsurance markets. A heightened country risk backdrop across the region threatened to stall the progress of prosperous economic conditions and stable political landscapes that had driven the continent’s growth over recent decades.

Despite these challenges and the negative implications for the financial strength of its reinsurers, the region’s domestic markets have continued to experience a relatively stable flow of merger and acquisition (M&A) activity. The new Best’s Special Report, titled, “Turbulent Economic Conditions Fail to Deter Interests in the African Reinsurance Markets,” states A.M. Best expects M&A activity on the continent to continue, with low penetration rates and associated enticing growth prospects. These together with the evolving regulatory landscape are anticipated to remain attractive to stakeholders interested in Africa as a longer-term investment strategy.

“A.M. Best notes that a number of reinsurers that it rates in the region maintain strong and stable risk-adjusted capitalisation, underpinned by a large and in some cases underutilised capital base, which is supplemented by solid earnings retention and supportive capital management policies,” said Deniese Imoukhuede, associate director, analytics, and author of the report. “Additionally, under stressed scenarios, the capital buffers inherent in their risk-adjusted capitalisation are expected to remain at sufficient levels relative to their current rating levels.”

These reinsurers typically maintain established business profiles in their target markets, benefiting from a privileged access to business via mandatory cessions or else maintain a diversified profile that alleviates some of the negative pressures arising from unexpected volatility in operating conditions.

“Nonetheless, the current challenges overshadowing Africa’s economic and political landscapes create a source of negative pressure for A.M. Best-rated reinsurers, if sustained over the mid to longer term,” added Imoukhuede. “To support their credit profiles prospectively, A.M. Best-rated reinsurers will need to demonstrate a risk management framework that identifies and appropriately controls and monitors these risk factors.”

Reinsurers will need to be mindful that they are operating in a highly competitive environment, with pricing, terms and conditions dictated by the softening in the wider global reinsurance markets. With additional pressures arising from the influx of foreign (re)insurance groups, reinsurers domiciled in Sub-Saharan Africa must focus on maintaining underwriting discipline as they expand, while developing business profiles that support their ability to compete effectively under severe circumstances.