The Development of Capital Markets in Sub-Saharan African From an Insurance Perspective

LAGOS (Capital Markets in Africa) – When we talk about growth in Africa and all its opportunities and challenges, we probably do not relate this to insurance. When I think back to my old days at school, insurance was something for risk-averse people and probably had little to contribute to growth and development. This article argues that the impact of insurance on growth is indeed significant, but that this impact could be even stronger if capital markets – specifically in Sub-Saharan Africa – developed further.

Economic theory says that an economy grows more quickly if its labour force or factor productivity grows. The so-called Solow model extends this notion: To attain a higher standard of living (e.g. measured by GDP per capita), an economy needs to increase its savings rate to enable higher accumulation of capital (e.g. more investment into machines or infrastructure), which in turn will increase output (and hence consumption) per capita. Post-war Germany and Japan are good examples: Both economies started with a low capital stock (due to war time destruction), but high savings rates pushed up their growth rates and, in turn, increased their standards of living.

But how to achieve higher savings rates? Here financial intermediaries come into play: banks, asset managers, and insurance companies. All financial intermediaries have in common that they collect savings, and that they invest those savings. Typically, banks provide credit to retail and corporate customers, and asset managers invest into publicly-traded stocks or bonds. But what about insurance companies?

The products of insurance companies (e.g. car, housing, health, retirement insurance) are well-known, while their investment activity much less. One guiding principle is to invest policyholder funds such that all obligations and promises to policyholders are met at all times with high certainty. This translates into an asset allocation which is rather conservative: Long maturity bonds are preferred to hedge interest rate risk, higher – and equity is kept limited due to its larger volatility.

An extract from INTO AFRICA August Edition: Driving Africa Opportunities. The article is written by Dr. Jens KÖKE, Chief Investment Officer, Allianz Africa Morocco. To read the full article, please download by clicking: INTO AFRICA PUBLICATION: AUGUST 2018 EDITION.