Insurance Regulation in Africa: CIMA
Benefits & challenges
Understanding changing insurance markets and regulatory developments is critical to making sure multinational programmes are compliant and competitive, no matter where they are located, and the implications can be challenging. Insurance regulators are increasingly looking to nurture risk capacity, cultivate insurance expertise and retain premiums within their insurance markets - and this can have important consequences for multinational companies, particularly in terms of compliance.
As Pete King, Head of Network Partner Practice, EMEA & Managing Director, CEE, AIG, points out: “Whether it’s driven by protectionism or a desire to develop local insurance markets, each country has its own rules and regulations on insurance, from compulsory covers to tariffs to mandatory local retentions. As a result, insurance can be a complex and time-consuming process for multinational companies to navigate.”
In Africa, one organisation that has helped to simplify the insurance process is the Conférence Interafricaine des Marchés d'Assurances (CIMA). This regional insurance oversight body was created based on the notion that a large single market with common rules and a common regulatory authority will result in a more effective and efficient supervisory structure, and will promote stable and secure insurance markets in the region.
CIMA covers 15 countries in Francophone Africa* and was established by treaty in 1992, bringing virtually all insurance supervisory, legislative and regulatory powers under the CIMA Code. According to the Code, its aims include “taking all necessary measures to strengthen and consolidate close cooperation in the field of insurance,” and “pursuing the policy of harmonisation and unification of legal and regulatory provisions relating to technical insurance and reinsurance operations.”
“But it is not just about having common rules and supervisory co-operation,” says King. “It is also about reinforcing cooperation, as well as protecting and developing the integrated local insurance markets. The primary goals are to provide more regulatory capital for CIMA insurers and retain more of the insurance premiums in CIMA countries and within the region.”
As part of desire to retain premiums within the region, and in common with many territories around the world, the CIMA Code prohibits the direct insurance of any risk concerning any person, asset or liability situated in a member country with a non-admitted insurer. As an exception to this rule, non-admitted policies are allowed only for very specific lines of business and they require prior approval from the local regulator.
Foreign ownership of insurance companies domiciled in CIMA member states is permitted under the CIMA Code. Companies with foreign ownership operate under the same laws as locally-owned, locally-domiciled companies and must satisfy local legislation and regulatory requirements.
Changes to the Code
Aimed at bolstering the strength of regional insurers and retaining more premiums locally, the CIMA Code has seen a number of significant amendments in recent years, to include:
- The minimum capital requirements were increased from XAF/XOF1bn** ($1.70m) to XAF/XOF5bn ($8.52m) for joint stock insurance companies and from XAF/XOF800m ($1.36m) to XAF/XOF3bn ($5.11m) for mutual, reflecting the regulator’s apparent desire to encourage smaller companies to consolidate, so that the market is served by larger, financially strong insurers.
- Local mandatory retentions were increased from 25% to 50% for the main lines of business, to encourage the retention of even more premiums within individual countries and within the CIMA region.
− Certain specific lines, notably cargo, motor, accident, illness and life risks are retained at 100%.
− There are a few specific exceptions to the retention rule, notably marine and aviation hull and liabilities, and offshore oil risks.
- In an effort to reduce insurers’ credit risk, cash before cover has been in effect since 2011, barring insurance companies from issuing any policy documents until the full premium has been received -- for new policies and renewals.
− Failure to comply may result in suspension of local insurer’s license.
− Multinational companies must plan ahead to ensure early premium payment and contract certainty for insurance policies bought in CIMA countries.
- To improve the region’s foreign exchange reserves, the Central African Central Bank (BEAC) has recently undertaken a tighter monetary stance. While not an amendment to the CIMA Code, multinational companies will need to be aware of the wider issue of foreign exchange restrictions in the region.
Even with the above restrictions, the benefits of a ‘harmonised and unified’ regulatory environment within the CIMA region are clear, as Siham Rami, Network Partner Relationship Manager, AIG, points out: “Knowing that the same regulations and supervision apply to all 15 countries brings clarity and consistency, as well as greater assurance that insurance programmes are compliant. It also facilitates risk placement, and there are no set tariffs in any of the countries covered by the CIMA Code (except for third party motor liability), all of which are certainly advantageous to clients.”
CIMA anticipates that the changes to the Code will not only strengthen the local market and reduce its reliance on outside reinsurance markets, but also simplify the supervision of insurance for the benefit of local consumers and companies operating in the region.
Although a unified regulatory environment presents tangible benefits, navigating the different regulatory requirements remain challenging. It is important that insurers, brokers and multinational clients work together to meet the local requirement and ensure compliance of multinational programmes.
IHS Markit ™ Country Risk Analysis– Jun 2018
Policy continuity is likely following February 2019 presidential elections, as President Macky Sall is expected to run for a second term.
The re-election of President Macky Sall for a second term is likely, particularly after Dakar mayor Khalifa Sall, who was considered a prime threat to President Sall’s prospects in 2019, was sentenced to five years in prison for fraud in March 2018. The judiciary is underfunded and subject to political pressure, although President Sall has taken measures to promote transparency and fight corruption. Dispute settlement procedures are bureaucratic and slow and international arbitration is becoming increasingly important to circumvent Senegal’s inefficient legal system.
Expropriation risks are low and the government is seeking to attract foreign investment as part of the Emerging Senegal Plan. The enduring relationship between Senegal and France means that French companies are likely to be favoured in the awarding of contracts, as demonstrated in 2017, when a 90% stake in the Rufisque Offshore Profond oil block was awarded to Total after being revoked from African Petroleum. President Sall, a former head of Petrosen, the national oil company, holds a tight grip over the energy sector. A new petroleum code, which is expected to be finalised before the end of 2018, is likely to contain several local content clauses. However, the government has stated that it will only enter into production-sharing agreements with major international companies. A new mining code in October 2016 increased tax and royalty rates for new concessions. Strikes are common within Senegal’s highly unionised industrial workforce and often last from 48-72 hours.
Overall legal risks to businesses have decreased since Alassane Ouattara became president in 2010.
Although bidding processes for government tenders can be vague, Cote d’Ivoire is a leader in sub-Saharan Africa for enforcing contracts. This is in part thanks to the establishment of a specialised commercial court in 2012. Contract alteration and expropriation risks remain low. The fiscal system is highly bureaucratic and tax rates are high for the region. However, the government is offering tax breaks to attract foreign investment, particularly in the agricultural and agro-processing sectors, in a bid to consolidate the country’s stability through economic prosperity. A local content policy affecting cocoa exporters has been undermined by falling cocoa prices since November 2016, which have led to local exporters failing to fulfil advanced orders. Going forward, international exporters are likely to be favoured to help stabilise the industry.
Central African Central Bank - Monetary stance
While policies generally encourage the free flow of capital and financial resources, the “tighter monetary stance” being undertaken by the Central African Central Bank (BEAC) is the major cause for foreign exchange restrictions.
Côte d'Ivoire and Senegal are two of the eight members of the West African Economic and Monetary Union (WAEMU), that use the CFA Franc (CFA), as convertible currency. Government policies generally encourage the free flow of capital and financial resources in the West African region. The Regional Stock Exchange (BRVM) in Abidjan trades equity securities and an effective regulatory system exists to facilitate portfolio investment through the West African Central Bank (BCEAO). The French Treasury continues to hold the international reserves of WAEMU member states and supports the fixed exchange rate of CFA 655.956 to 1 Euro.
There are currently no restrictions on the transfer or repatriation of capital, dividends and income earned, or on investments financed with convertible foreign currency in the West African CFA region. The various governments in the West African CFA region still regularly approve remittances of dividends and/or repatriation of capital. This is also the case for requests for other sorts of transactions (e.g. imports, licenses, and royalty fees). Funds associated with investments funded with convertible currency are freely convertible into any world currency. There are also no time limitations on remittances.
Foreign reserve levels and import cover for West African CFA members are currently deemed to be more than adequate by the IMF. Both Côte d'Ivoire and Senegal issued very large Eurobonds during 2017 and earlier this year, while Côte d'Ivoire remains on course to receive significant US dollar disbursements related to its current IMF programme’s Extended Credit Facility. Although the bond issues and disbursements have boosted foreign exchange levels significantly for both countries, the IMF have cautioned that all these proceeds be used wisely. Both countries have been advised to focus proceeds on revenue generating investment projects to ensure sustained liquidity, solvency and long-term debt sustainability. There are also indications that the BCEAO has been implementing existing regulations more thoroughly in line with improved governance measures recommended by the IMF.
For Central Africa, IHS Markit (IHSM) believes the “tighter monetary stance” being undertaken by the Central African Central Bank (BEAC) is the major cause for foreign exchange restrictions being encountered in Central African CFA region. To improve the region’s foreign exchange reserves the BEAC is applying existing rules more strictly. An example is that prior to 2016, exporters repatriated as low as 40% of export proceeds whereas regulation required the repatriation of at least 80% of export proceeds. The BEAC is now also stricter on documentation requirements which might be leading to the backlog of requests, and potentially also some rejections of demands (with incomplete documentation). There are also indications that nearly 30% of foreign exchange requests by banks in the Central African Economic and Monetary Community (CEMAC) bloc were rejected for “non-compliance” in 2017. Again, albeit without much detail, IHSM understands that reform of foreign exchange regulations is underway and will be finalized by the end of the first half of 2018 and that the BEAC is also planning to further tighten the application of provisions on export earnings remittances.
Cameroon, for example, currently has reserve levels that cover just over five months of imports. In that sense it does not seem that delays are an indication of foreign exchange shortages, but rather stricter enforcement of regulations. The CEMAC’s coverage of imports in effect improved to 63% in 2017 from less than 54% in December 2016. The improvement is attributed to fiscal consolidation efforts undertaken by the various governments in the CEMAC region. In addition, considerable pressure on the reserves was also lessened by the IMF disbursements in four of the six CEMAC countries (Cameroon, the Central African Republic, Chad, and Gabon) under their respective IMF credit facilities. IHSM expects the rebound in CEMAC’s foreign exchange reserve levels to continue in 2018, supported by the ongoing implementation of various restrictive fiscal and monetary policies. IMF disbursements under the ongoing credit programmes with some of the member countries will certainly reduce liquidity stress and ease pressure on reserves. Furthermore, IHSM’s latest oil price forecast of about USD71 per barrel for 2018 bodes well for the CEMAC bloc’s external buffers given the importance of oil exports for the region, with five of the member countries being oil producers. Nonetheless banks might find it more difficult to access foreign exchange in the CEMAC region over the coming months. The emphasis on rebuilding regional reserves from the IMF as outlined in the various countries' credit support programme reviews supports the view of continued foreign exchange restrictions in the CEMAC region.
* The 15 CIMA countries are Benin, Burkina Faso, Cameroon, Central African Republic, Chad, Comoros, Congo, Cote d’Ivoire, Equatorial Guinea, Gabon, Guinea Bissau Mali, Niger, Senegal and Togo. Click to read country risk analysis from IHS Markit on Senegal and Cote d’Ivoire.
** The CFA franc is the name of two currencies used in parts of West and Central African countries. The two CFA franc currencies are the West African CFA Franc (XOF) and the Central African CFA Franc (XAF). Although theoretically separate, the two CFA franc currencies are effectively interchangeable.
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The content contained in this article from both AIG and IHS Markit is intended for general informational purposes only. Companies and individuals should not solely rely on the information or suggestions provided in this article for the prevention or mitigation of the risks discussed herein.