With just under one billion people, sub-Saharan Africa is made up of forty-six countries that are made up of all different sizes, backgrounds, politics, and economics.
With just under one billion people, sub-Saharan Africa is made up of forty-six countries that are made up of all different sizes, backgrounds, politics, and economics. The insurance market is no different—it’s growing and improving in some of these countries while others are lagging behind.
Although the insurance industry in sub-Saharan Africa has grown significantly in recent years, with a substantial increase in the number of players competing for market share, there is still room for work to be done.
One area in the insurance market where there has been some movement is in the captive insurance space, where the emergence of the cell captive has created some interest for certain sub-Saharan Africa countries.
The cell captive is structured as a way for a corporate entity to access the benefits of captive insurance without setting up its own captive insurance company. However, first-party business is not the only application for the cell captive model. The cell captive structure can also be used to cover the risks of the clients or members of the cell owner.
Cell captive landscape
A recent report published by Cenfri highlighted how the introduction of the cell captive could address key market constraints and the steps and considerations to design a cell captive framework to meet the desired use cases.
The report found that cell captives have scope to support the development of insurance markets in emerging economies. Four use case examples included specialised risk management, retail innovation, insurance market participation, offshore financial centre development. Richard Eales, managing executive, Guardrisk Insurance, explains that currently the cell captive concept is not widely used in other parts of sub-Saharan Africa as, either the legislation does not allow for it, or insurers try and run cell captives from within an ordinary insurance company.
Currently, only South Africa, Mauritius, Namibia and the Seychelles have any significant regulatory frameworks in place to accommodate cell captive structures.
In Mauritius, the cell captive structure is successfully leveraged for first-party insurance whereby a cell owner insures its own operational risks.
By contrast, the cell captive landscape in South Africa largely consists of third-party cell captives.
Other countries, such as Namibia (third-party) and the Seychelles (first-party), have also developed preliminary regulation.
According to Jeremy Gray, senior engagement manager at Cenfri, across insurance markets in sub-Saharan Africa, insurance providers continue to be confronted with challenges that stifle the growth and efficiency of the sector.
Cell captives provide alternative solutions that may enable regulators to overcome these.
Market constraints
Some key challenges in sub-Saharan Africa include highly fragmented insurance markets, lack of innovation, informality in the insurance sector and barriers to establishing an offshore financial hub.
Matthew Dunn, a senior researcher at Cenfi, explains that high levels of fragmentation result in many smaller players lacking the necessary capacity in terms of capital and skills to innovate and efficiently offer products that offer both individual consumers and enterprises value.
Dunn suggests that cell captives enable corporates to develop niche insurance offerings without the need to set up a dedicated insurance licence. He says: “It facilitates specialised coverage for unusual or hard-to-insure risks in cases where conventional insurance channels are unable to meet specific product requirements or lack the capacity to cover the risk.”
In terms of innovation, Dunn notes that cell captives can support retail innovation and offer an alternative pathway to market, with lower compliance requirements, for innovators.
He comments: “A third-party cell captive structure creates the incentive for cell owners to innovate to meet the needs and realities of their client/membership base. This it does by allowing them to share in the benefits of insurance, exercise autonomy and operate outside of the legacy systems of insurers, without having to become an insurer in their own right.”
In addition, Dunn states that cell captives can also enable insurance market participation. He says: “In cases where insurance capacity is constrained or regulators are keen to avoid further fragmenting the local insurance market by issuing additional licences, cell captive structures can provide an alternative operating space, as cell owners, for prospective players.”
He adds: “Alternatively, it can provide a pathway into the insurance market for prospective new insurance licensees while they build up capital, skills and experience.”
“In this way, it encourages broad-based market participation and can serve formalisation objectives.”
Cell captives can also support offshore financial centre development. Dunn explains for emerging domiciles, the introduction of cell captive arrangements can be a potential driver of insurance industry growth beyond the local insurance demand.
He says: “In this way, offshore domiciles can generate additional revenue streams for the local economy.”
Regulators
For the cell captive to be effectively deployed and regulated in sub-Saharan Africa, it requires the coordination of three parties, the regulator, the cell captive insurer and the cell owner.
According to Gray, based on a subset of sub-Saharan Africa countries where we have been able to review the insurance legislation and regulation in detail, “it would seem that cell captives would be permitted under many sub-Saharan Africa countries existing regulatory framework”.
He notes: “There seem to be no prohibitions to the cell captive model, however, to operate a cell captive model would require regulators to approve the operating model.”
A number of insurance regulators on the continent are currently considering how to be more flexible to allow new types of innovation, in both products and operating models, develop within their markets and so are increasingly open to allowing new concepts to be tested within their markets.
Gray suggests that regulators can “proactively nudge the market to consider cell captives by developing a clear regulatory framework”.
He says: “This would remove regulatory uncertainty for potential entrants and make explicit to market players and entrants the cell captive as an option.”
Gray reveals that Namibia is in that process and a couple of other sub-Saharan Africa regulators have indicated that they are considering similar. Countries looking to introduce a regulatory framework for cell captives need to consider separation of assets, capital requirements, governance, supervisory oversight, and stimulation of market conditions. According to Dunn, creating clear parameters around the legal separation of cellular assets and liabilities and ensuring that adequate recourse mechanisms are in place are “key considerations in ensuring sustainable cell captive operations”.
Meanwhile, Eales explains that the regulatory framework needs to ensure that the capitalisation of the cell captive is suitable and appropriate.
He adds that the framework should stimulate market conditions that promote the development and sale of appropriate products that meet consumer needs and requirements.
A cell captive arrangement is composed of a number of actors that interact across activities in the provision of insurance products and services. Dunn notes that the level of supervision will depend on the cell captive structure.
He comments: “Supervisors should be aware that the regulatory risk inherent in a cell captive insurer can vary substantially based on the type of cell captive structure in place.”
The future of cell captives in sub-Saharan Africa
Cell captives have the potential to help address some key challenges in sub-Saharan Africa markets and direct consultations with regulators in sub-Saharan Africa have provided early indications that there is a willingness to explore the concept further, according to Gray.
However, Gray adds: “We are of the opinion that for cell captives to take off in sub-Saharan Africa, key parties across several jurisdictions must take the lead in creating a demonstration case for other market players and other countries.
This can be in the form of a proactive regulator developing the necessary regulatory framework or private insurers taking the concept to regulators and requesting the opportunity to pilot the model, thus enabling regulators to learn from and grow more comfortable with the model.”
The rate of growth of cell captives in South Africa, which in turn is supporting the growth of the insurtech industry, strongly indicates that even in jurisdictions with established cell captives, there is continuing room for growth, according to Dunn.
He says: “Particularly in the changing digital economy, with rapid technological change, there are suggestions that the cell captive model may be increasingly relevant to facilitate innovative market entry.”
In Mauritius, cell captives are already being used to extend its position as an offshore hub for African markets to the insurance sector, based on a protected cell captive (PCC) framework.
By adhering to international insurance standards and relying on sophisticated systems for the administration of capital in cells, Gray believes Mauritius is “well-positioned to experience growth in the number of cell captives in future”.
In contrast, Gray says the Seychelles, “may take a longer time to grow the number of cell captives operating locally as the regulatory framework remains in its infancy and competition with more advanced offshore domiciles, such as Guernsey, is high”.
In Namibia, cell captive regulation also remains “nascent and regulators do not currently appear to be prioritising the expansion of cell captives in the market. As a result, slower growth is expected,” according to Dunn.
Landscape 10 years from now
Over the next 10 years, Eales suggests that cell captives will continue to play a big role in the insurance space, especially in consumer insurance.
Eales explains that cell captives “can provide products that are tailor-made to clients’ needs because cell owners understand what their customers want”.
Given the clear use cases for cell captives in the sub-Saharan Africa market, particularly with third-party cell captives, in small developing markets that also want to encourage innovative entry, Gray suggests it is likely that at least a few regulators on the continent will begin permitting this model to operate within their jurisdictions within the next two to three years.
Dunn adds: “The demonstration case provided by these jurisdictions should present learning opportunities and greater comfort for more regulators on the continent to adopt the model. Within 10 years, hopefully, we will have seen the cell captive model spread more widely across the continent.”
