Deeper insurance penetration can mobilise funding investment in African development

DEVELOPING economies can grow fast from low-income per capita bases if they implement economic reforms, which support human capital development and sound economic infrastructure.

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DEVELOPING economies can grow fast from low-income per capita bases if they implement

The latter is a catchall, not only for physical infrastructure, but also sound government institutions, which uphold the rule of law and promote prudent financial management.

In the early stages of development, mobilization of savings and capital accumulation are prominent. Fast-growing developing economies typically have high levels of investment. But investment requires funding. It is in this context that we should explore the role of insurance in economic development.

In this regard, insurance companies play a vital role in financial intermediation by helping to overcome the problem of asymmetry of information that exists between savers and borrowers, which facilitates the collection and channelling of savings towards productive investment.

The richest economies in the world have the highest levels of GDP per capita, implying they have elevated levels of productivity. Simultaneously, there is a strong correlation between insurance penetration and GDP per capita. Although this does not prove causality it is fair to argue where there is wealth there is usually a strong insurance sector presence.

Insurance penetration levels are low in many emerging economies. Africa is no exception. Excluding South Africa,

gross written premiums for life and nonlife insurance amount to a mere 1.8% of GDP and 1.0% of GDP respectively. In larger developed economies penetration ratios are close to, or in, double digit territory.

Given this reality, financial market development in Africa, unsurprisingly, ranks poorly in a global context. Market capitalisation and domestic share turnover ratios are low, even where there are relatively higher levels of per capita income.