Insurers should be recognised for their role in facilitating the flow of capital and investments into Africa instead of remaining the unsung heroes, underwriters and multilateral development banks (MDBs) have suggested.
During a recent webinar themed ‘MDB reform to catalyse private capital mobilisation in Africa’, which was hosted by Uxolo Development Finance, Nana Garbrah, manager for client solutions division at African Development Bank (AfDB), implied that insurers should get credit for their support in developmental finance transactions.
Garbrah emphasised that when MDBs and DFIs share their credit risk with insurers, insurers are no longer content to operate behind the scenes and they want to be recognised as co-financiers.
This is because while MDBs are able to demonstrate their impact and do other things on the basis of developmental finance transactions, insurers often go unrecognised despite their essential contribution.
Fabrizio Mazza, managing director of Marsh Specialty, concurred with Garbrah’s sentiments. He noted that receiving recognition will help highlight insurers’ participation and commitment to Sustainable Development Goals and Environmental Social and Governance-positive transactions.
By recognising insurers’ contributions, MDBs and other stakeholders can encourage more insurers to participate in Africa’s investment landscape, ultimately driving more capital flows into the continent, according to Mazza.
According to Garbrah, when MDBs and development finance institutions (DFIs) are not able to take up all the credit risks, they go to insurers for cover. Insurers provide risk mitigation mechanisms, enabling investors to participate in projects that might otherwise be deemed too risky.
The webinar highlighted the crucial role of insurers in assisting MDBs to hedge risks when mobilising capital for development projects in Africa.
High perceived sovereign risk and poor ratings have been among the hindrances to the flow of capital to Africa. Alexander Ekbom, sector lead at S&P Global Ratings, stated that rating agencies’ role was to indicate to investors the level of risks in the projects they want to put their money in.
Whilst there has been an outcry by African governments that rating agencies are biased, Ekbom pointed out there has been a lot of defaults and coup d’états in Africa, suggesting that these ratings may be based on legitimate concerns.
Wieger Fokke, investment manager at ILX Fund, said ratings are meaningful and are recognised by institutional investors. He said if ratings are a guiding principle of whether to invest or not, this is creating a gap between the demand of funding and the ability of funders to provide the funding.
Manuel Moses, CEO of African Trade & Investment Development Insurance (ATIDI), emphasised the need for greater mobilisation of developmental capital to the African continent. He said the gap for infrastructure financing is huge.
“We need to tap into resources that are outside the continent and pension funds that have the resources but don’t have the appetite to channel the resources to the continent,” said Moses.
He noted that investments that are deemed too risky have been previously transferred to insurers such as ATIDI.
However, the high cost of insurance has made the cost of capital prohibitively expensive in Africa.
“Political Risk is expensive,” emphasised Reginald Max, senior adviser for PPPs (public-private partnerships) and infrastructure at Trade & Development Bank (TDB).
According to Moses, insurers often have to engage other markets such as Lloyd’s to increase reinsurance capacity, which further drives up costs of capital. He added that African markets are competing with less risky markets for the attention of reinsurers outside Africa.
International reinsurers have an option to deploy the capital in Africa where there is higher perceived risk, or anywhere else in the world at a higher return, thus increasing opportunity cost when they deploy capital on African risk.
This highlights a critical challenge facing African insurers: the need to build stronger, more creditworthy institutions that can support transactions and access global markets.
By improving ratings and expanding reinsurance capacity, African insurers can play an even more significant role in mobilising capital and supporting sustainable development on the continent.
In conclusion, as the continent seeks to bridge its infrastructure gap and achieve its development goals, insurers are poised to play an increasingly vital role.
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