Spotlight on Africa: Opportunities Abound but Growth Also Presents Risks
A growing middle class has drawn increasing outside investment.
By Patti Vowinkel
AIG
Sub-Saharan Africa has emerged as a promising global market, with improving economic conditions and a rising consumer class leading to increased foreign investment.
“Gross domestic product (GDP) for this area is currently about $1.6 trillion,” said Wayne Abraham, managing director of AIG’s Africa Zone. GDP in the region will grow at about 5 percent each year for the next 10 years, roughly double the percentage growth rate expected in developed countries through 2020. Abraham said that demand for infrastructure to address a larger urban population is also on the upswing.
Sub-Saharan Africa’s growth presents significant opportunities for insurers. “The region’s potential is difficult to ignore,” Abraham said, adding, “We’re very optimistic about the future of Africa.”
But this growth also poses challenges. Each of the 47 sub-Saharan countries presents a unique set of economic, social, political and regulatory issues. The pool of talented insurance professionals is still developing, as are distribution channels. Insurers must find the right partners to reach potential customers and guide them on the benefits of coverage.
Insurers with deep experience in the region will be best positioned to take advantage of sub-Saharan Africa’s expansion. AIG has had a strong presence in the region for years and offers global expertise and a range of products and services. “We want to help our brokers and clients understand the complexities of doing business on this continent and how best to address all the possible risks,” said Abraham.
Economic Growth and a Rising Consumer Class
Abraham said that foreign direct investment in Africa has more than tripled since 2000, from $110 billion to $370 billion. According to Ernst & Young’s 2014 Africa Attractiveness Survey, Africa now ranks as the second most attractive investment destination in the world, up from the third-from-last position in 2011. Moreover, nearly 3 out of 4 respondents said they believe that Africa’s attractiveness will improve further over the next three years.
In sub-Saharan Africa, foreign direct investment rose 4.7 percent in 2013.[1]
A byproduct of economic growth has been the spurring of a middle-class labor force. In 2010, Africa’s labor force numbered approximately 380 million people. This number is expected to grow to around 500 million by 2020 and increase to 1.1 billion by 2040. Meanwhile, approximately 60 percent of African households are expected to have discretionary spending power by 2020.[2]
More individuals are living in cities, a trend that is likely to continue. In 2014, 40 percent of the African population lived in urban areas, up from just 28 percent in 1980.[3] By 2030, that number is predicted to rise to 50 percent.[4] This urbanization has fueled the need for new infrastructure for transportation and utilities. By 2020, infrastructure spending is estimated to reach over $1.8 trillion annually. The majority of this investment will occur in eastern and western African countries and in South Africa.[5]
Opportunities for Insurance
Construction projects and rising demand for products and services among consumers will drive the insurance market. Abraham said that the sub-Saharan property-casualty insurance market today totals $16 billion. He added that by 2023 the market is expected to more than double to $36 billion.
With three offices in sub-Saharan Africa, a solid regional insurance partner network and global resources, AIG is well-equipped to address market demand. In a recent paper released by Commercial Risk Europe, “Doing Business in Africa: Myth vs. Reality,” Abraham suggests that “right now specialist technical insurance expertise is limited. There are significant opportunities in the African market, and insurers need to continue their contribution to local skills development.”
Traditional methods may not suffice as the best way to reach new customers. Consider how local consumers receive most of their information. In Africa today, mobile phone penetration is 70 percent and Internet is just 20 percent.[6] In Kenya, insurers are already reaching consumers through a combination of text messages and mobile applications.
AIG has been working diligently with mobile phone providers as primary channels for messaging. “Partnering with mobile phone providers will be critical to sales and distribution,” says Abraham. “In the commercial lines, our products will be distributed through a network of local and global brokers,” he added.
Abraham notes that opportunities create new challenges. “There’s significant opportunity in the next few years, but with opportunity, there is a fair amount of risk. Political and economic risk, as well as the higher levels of corruption across Africa, will all continue to be concerns,” he said.
[4] Ibid.
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