27 August 2019

Cell captives could stimulate insurance markets in sub Saharan Africa: Cenfri

Cell captives could help alleviate the structural constraints faced by many insurance markets in sub-Saharan Africa, according to the South Africa-based Centre for Financial Regulation and Inclusion (Cenfri).

In a report titled The Potential of the Cell Captive Structure for Sub-Saharan Africa, Cenfri said cell captives could help fragmented local industries facing constraints in the provision of specialised risk cover to corporates. In the retail market it could also stimulate innovation, it added.

Cenfri pointed to an insurance market in sub Saharan Africa that is highly fragmented, with many small players that lack the necessary capacity to innovate or offer products that add real value. Many of the actors in this market are also informal players, it added, that are “either unable to break into the formal space or do not see the benefit in doing so.” This hinders competition and makes it difficult for regulators to adequately supervise insurance-related activities, it said.

The lack of innovation in the region means few insurers have yet been able to tap into alternative distribution channels at scale, said Cenfri. “Finding alternative distribution partners with the right incentives to develop the necessary distribution channels is often challenging, and this hinders the development of new, innovative insurance solutions,” it said.

Unlocking innovation could bring numerous benefits for consumers of insurance in Africa. Cell captives are well suited to bridge the protection gap where local insurance markets cannot meet specialised risk management needs, argued Cenfri. That in turn could help to build local skills, it added.

Cenfri also highlighted the role captives can play as a pathway into the insurance market for prospective new insurance licensees while they build up capital, skills and experience.

“In cases where insurance capacity is constrained or regulators want to avoid further fragmenting the local insurance market by issuing additional licences, cell captive structures can provide an alternative operating space for prospective players as cell owners,” Cenfri said.

For emerging offshore domiciles, introducing cell captive arrangements can drive growth in the local insurance industry, attracting multinational companies or global cell captives or brokers that serve them, it added.

In the retail industry, cell captives would stimulate innovation by allowing corporate captive owners to share in the benefits of insurance, exercise autonomy and operate outside of the legacy systems of insurers, Cenfri said. Evidence for this has already been seen in South Africa, it added, noting that the Rainbow Nation was the global pioneer of third-party cell captives.

However, Cenfri warned these benefits can only be earned where jurisdictions develop sophisticated regulatory frameworks that can compete with other offshore centres.

Cell captives are already in use in Mauritius, added Cenfri. “Other countries, such as Namibia and the Seychelles, have also developed preliminary regulation, while others are exploring potential use cases for the cell captive structure in their jurisdictions,” it said.