Participating in the discussion are:

• Ed Parker, Divisional Head of Special Risks at Tokio Marine Kiln
• Murray Ross, Deputy Head of Political Risk and Credit at Convex Insurance 
• Edward Fox, Political Risk & Political Violence Underwriter at NOA Syndicate 3902 at Lloyd’s

Insurer appetite for African sovereign risk has diminished considerably over the past three or so years. Will this trend continue in 2021?

Murray Ross: The market has continued to have appetite for Africa, but in recent years it’s been saturated with enquiries in the likes of Ghana, Angola, Ivory Coast, and Benin. Given the long tenors involved, carriers have simply reached their internal capacity limits. I recently saw an enquiry where the market was prepared to look at less than 50% of the bank’s margin on an Africa sovereign risk, so clearly when an opportunity is perceived as good, the market is there.

Edward Fox: Over that period, London CPRI market capacity remained relatively constant; however, the average tenor of African sovereign risks has generally increased. That has caused a natural restriction on available capacity, since policies take longer to run off. When coupled with an increased perception of risk – whether due to Covid-19, commodity price volatility, or increased political uncertainty – a reduction in appetite and/or increase in price is inevitable. With all of this in mind, I don’t expect any material shift from this position in 2021 without a significant change in either capacity or perceived risk levels.

Ed Parker: I’d also add that the change in appetite has probably been driven by poor results over the past few years, and by reduced capacity. Deal count was low throughout 2020 as many insureds adopted a holding pattern until the pandemic and its effects matured. I expect to see an increase in deal flow as 2021 progresses and world trade is re-established. Underwriters will remain keen to seize good opportunities as they present themselves, albeit perhaps slightly more selectively and with more conservative pricing than in previous years to reflect the changed landscape post-Covid. 

Are recent changes in pricing justified or rather more an anticipation of things to come?

Edward Fox: I would describe recent rate rises as expected. Increased reinsurance costs will of course play a factor, but the reduced activity of many trade finance banks should also be noted, as they often represent the main competition to single-situation CPRI insurers. The market rating environment should continue to get more predictable as the post-Covid environment becomes known, but this is unlikely to happen for quite some time in the context of African sovereign risks.

Murray Ross: Pricing correction across the board for this line of business is justified by both the level of claims activity in recent years, and the expectation from clients, brokers, and underwriters that an additional wave of claims is expected.

Ed Parker: Our business is pricing the future. Not the risk of default or confiscation today, but the risk many years hence. Today’s world is not just more uncertain, but the outlook is considerably different than it was a year ago. The ultimate impact of the ongoing pandemic will be unknown for the foreseeable future. It’s natural to see that reflected in market conditions.

Given the capital inflows to green and sustainability-linked financing, do you expect insurer appetite for oil, gas and other natural resources projects in Africa to be re-deployed accordingly?

Ed Parker: The strong fundamentals of those industries translated into consistent insurance support, but industry changes at a macro level are apparent. We see them in falling global demand for oil, rising environmental standards, and, in the past couple of years, more green energy and long-term infrastructure deals. Notwithstanding insurers’ desire to be a positive force for change, future focus must remain on deals that ultimately make business sense. That’s likely to mean more renewable energy projects, and potentially fewer oil and gas deals. 

Edward Fox: Whilst I don’t expect a material change in the market’s position during the pandemic, I am optimistic that the market will be more open to new opportunities once the green shoots of economic recovery emerge. Transactions with an identifiable hard-currency revenue stream will often remain appealing to potential insurers, but the market must always be mindful of its ESG responsibilities and they may well impact its ability to cover certain natural resources projects, such as thermal coal.

Murray Ross: We are seeing a shift towards more bankable projects in the renewable sector. Clearly there are opportunities to explore related to photovoltaic and wind power in Africa, as a solution to energy shortfalls. But demand for natural resources will not disappear overnight, so it will be a gradual change.

Many African countries have achieved significant socioeconomic developments over the past decade or so. To what extent does the G20 Debt Service Suspension Initiative (DSSI) risk hindering such advancements for participating countries?

Murray Ross: The pattern since Covid has been for countries to approach the IMF for emergency funding aimed specifically at their pandemic-related costs, rather than for medium-term issues. But, I think we should all acknowledge that borrowing costs will increase from pre-Covid levels when we get back to normal. As for the debt pause specifically, we’re at the early stage of the process, so it’s difficult to judge if we will see a measured outcome or debt rescheduling.

Edward Fox: Agreed; it is a little too early to truly know how some of these countries will come out the other side. The debt moratorium has certainly provided critical relief to many African countries during the pandemic, but Africa is expected to be one of the last parts of the world to recover. This more negative economic outlook is unlikely to instil confidence in capital markets, which leads to the possibility that costs of borrowing remain high, and keep economic growth supressed in the short to medium term.

Ed Parker: The full extent of the pandemic’s effects on capital markets is still unknown, but the ability of African countries to borrow hasn’t yet been materially affected. Africa has historically shown remarkable resilience to external shocks like Covid-19, but further debt will be required to rebuild economies after the immediate crisis has passed. Anything that restricts government access to lending or increases the cost of debt servicing will have negative consequences on economic growth in those countries in the medium to long term.   

Zambia represented the continent’s first pandemic-era default. Is the DSSI sufficient to prevent further instances of default or should more be done?”

Ed Parker: Schemes like the debt moratorium may exert a positive influence when addressing the challenges many countries currently face, but it’s important to note that some eligible governments have been reluctant to participate given the dual challenge of implementing some of the structural reforms required to relive debt stress, and the threat of political unrest following decreases to public spending. 

Looking at it from another angle, the significant liquidity in global capital markets is a key factor in the sustainability of debt. It allows most countries to still service and refinance major debt stocks. But if that situation should change, perhaps following an increase in debt-servicing costs, the issue of debt sustainability is likely to be thrown into much sharper relief.

Edward Fox: We expect economic recovery to be relatively slow across the continent. African countries lag behind many other parts of the world on vaccinations, so it will struggle to increase social and economic movement. Once again, it’s too early to tell whether we will see more sovereign defaults as a result of Covid-19, but it’s fair to say that without the current debt moratorium, many African countries would have struggled to impose any of the domestic virus relief programmes without risking default.

Murray Ross: Personally I don't view Zambia as a Covid default - it had been struggling to service debt for several months prior to its eventual default, and my expectation is that this trend will continue in the other countries where the debt burden was already unsustainable. Lenders have given a good response to date, but ultimately support will only remain in place where there is confidence that countries have the ability to work their way out of these challenges.

How have previous debt crises in Africa impacted the CPRI market, and how does this compare with what we’re witnessing today?

Edward Fox: It is difficult to find something, impact wise, that compares directly to the pandemic, but from an economic perspective, comparisons could be made to how lenders, insurers, and African sovereigns interacted during the 2008 global financial crisis. It can be instinctive to take a heavy-handed approach at such times, through aggressive haircuts or even debt cancellation. However, the sources of these problems are often multi-faceted and complex, so that approach isn’t always going to give the best outcome. By contrast, practical or innovative solutions such as debt conversion or traditional restructuring are often more effective solution, even though they take longer to conclude. Buy-in and co-operation from all the stakeholders, including private insurers, is critical to success. That happened after 2008.

Ed Parker: In my opinion, we haven’t had a real debt crisis so far due to the current availability of private debt. If that does not continue, the situation might change. Any debt crisis leads to fallout into the insurance market, which in turn makes it harder to do business in those territories, but the long-term financial implications of Covid won’t be fully understood until much further down the line. 

Murray Ross: It feels too early to say what the impact to the market will be, but historically, significant market events were not Africa-driven.

How do you see private insurers and DFI/multilateral insurance agencies working together to bring GDP up across the continent? 

Edward Fox: There’s definitely opportunity for continued partnership between private insurers and multilateral entities. At times of heightened risk perception and economic uncertainty, the participation of multilateral lenders – including their ability to provide partial guarantees on facilities – can completely change the market’s appetite towards a potential transaction.

Ed Parker: DFI and multilateral insurance agencies have the local knowledge and experience of doing business across Africa that complements the capacity and expertise that private insurers bring to the table. As the others have already said, these partnerships are welcomed and needed.

Murray Ross: Partnership with these agencies has always been crucial to the private insurers who underwrite transactions that otherwise might not have got support from the market. Going forward in the post-Covid world, the agencies’ role will be more important than ever. London is still the first stop when it comes to finding creative solutions for clients in the CPRI sector.

Our team can provide insurance solutions for credit and political risks emanating from Africa on behalf financial institutions, commodity traders and exporters. Do not hesitate to get in touch to discuss further.