A blueprint for reinsurers to fund development projects in Africa

Following the recent AIO African Reinsurance Forum, Steven Oluoch, CEO of MNK Re Kenya, discusses how reinsurers can play a key role in funding infrastructure projects in Africa to foster greater economic independence.

In recent years, we have increasingly seen a combination of emerging economies and global players look towards Africa for investment opportunities.

The region has one of the fastest-growing populations globally, with its urban population alone expected to reach 1 billion by 2040. This growing consumer base has attracted investors in various sectors such as retail, healthcare and education.

When it comes to infrastructure, however, completion of the projects within the region remains low.

The household electrification rate in Africa stands at 43 percent, leaving 600 million people without access to electricity. Furthermore, 40 percent of Africa’s population has access to the internet, compared to a global average of 63 percent.

The lack of investment in infrastructure is due to a variety of reasons, including inadequate funding or difficulties in securing financing, political instability including changes in government, corruption and conflicts as well as complex regulatory requirements and legal disputes.

Other factors may be a lack of technical expertise and skilled labour, limited capacities within government agencies responsible for implementing the projects or external factors like natural disasters such as flooding or drought.

According to the World Bank, the Sub-Saharan Africa region is required to spend 7.1 percent of GDP annually until 2030 to close its infrastructure gap, but has only been spending half that amount. Furthermore, the African continent as a whole needs up to $170bn per year to meet its infrastructure needs.

Currently, around 5-10 percent of infrastructure investments in the region are made by the private sector. Growth in private investment in infrastructure is therefore essential, with African governments facing serious fiscal pressures following the Covid-19 pandemic and the recent global economic slowdown.

African insurance and reinsurance companies can play a significant role in financing infrastructure projects through various financial instruments, such as bonds and insurance policies.

Currently, however, there is not sufficient real-time data on just how much the insurance and reinsurance industries are pledging to infrastructure investment in the region.

African reinsurers’ local expertise will be invaluable in assessing risks given their deep understanding of the regulatory environment and local market. In comparison, international reinsurance companies can provide risk diversification, bringing a global perspective and a broader risk appetite, spreading risk more effectively across a wider pool of investors.

Coupled with this, international reinsurance companies can often access greater capital, specialised technical expertise and risk modelling capabilities that can enhance the risk assessment and management processes for infrastructure projects.

Collaborative efforts between local and international reinsurers can also facilitate knowledge transfer and capacity building within the African reinsurance industry.

For governments and local reinsurers within the region, it is important to find the right balance between involving international reinsurers and ensuring that the benefits of the infrastructure development are also felt within local communities and businesses.

The regulatory framework must encourage both local and international participation whilst ensuring that risks are sufficiently managed and that the interests of all the stakeholders involved are protected. Transparency is also key, with good governance practices to avoid issues such as corruption and mismanagement.

Finally, careful consideration should be given to risk-sharing arrangements between local and international reinsurers to ensure that the allocation of risk and reward is fair.

With an investment gap that requires addressing, it is now more crucial than ever for governments, local and international stakeholders to recognise the value of collaboration in helping to deal with the unique challenges and opportunities associated with infrastructure projects in Africa.