Sierra Leone Re: Why Sierra Leone Needs a Reinsurance Company Now

The Insurance Institute of America defines risk as the uncertainty about the occurrence of a loss. Catastrophe risks though infrequent, often pose a severe loss exposure, that usually threatens the solvency of not only insurance companies but the socio-economic development and stability of developing countries like Sierra Leone.
There has been an egregious lack of strategy, vision, capacity and expertise in dealing with catastrophe risks to which the country is exposed. Risks ranging from strategic to operational, speculative and pure abound throughout the country’s socio-economic, financial and governance infrastructure. Yet despite the old adage that necessity is the mother of invention, the failure in addressing these opportunities with vision and new institutions remains a cause of concern and an impediment to growth.
One sure step in remedying this situation is the establishment of an indigenous private enterprise reinsurance company, Sierra Leone Re, that ensures diversification and the spread of risks both nationally and internationally.
I have placed especial emphasis on the indigenous nature of the proposed reinsurance company, as the current actors and drivers poised to take over such an endeavor are foreign African based participants, whose sole purpose is transfer of premiums and foreign exchange to their respective countries economies. This has been the pattern employed by prior European and Asian insurance carriers over the decades.
The failure of both the insurance industry and economic policymakers in Sierra Leone to establish and or attract a complimentary reinsurance company more than thirty years after the establishment of the National Insurance Company (NIC) continues to negatively impact economic activity and growth in that country.
As one of the first territories in West Africa during the British colonial era where insurance was introduced, Sierra Leone stood to emerge as a financial services center, with its institutions of higher learning dating over two centuries, providing the requisite technical expertise and manpower for the West African sub-region. However, since independence only stagnation and lack of innovation has and continues to characterize its financial services sector.
REINSURANCE AS A CATALYST FOR GLOBALIZATION
Globalization and international trade is mainly facilitated through the provision of adequate insurance, which through adequate reinsurance protection, ensures the equitable spread of risks. This principle of risk spreading enshrined in insurance ensures the avoidance of the probability of a single catastrophe loss impacting all or a large proportion of an insurance company’s entire book of business.
Reinsurance is defined as the transfer of insurance risk from one insurer to another, through a contractual agreement under which the ceding or primary insurer is indemnified by the reinsurer for some or all of the financial effects of loss exposures, covered by the primary insurer’s policies in the event of a loss. Thus, in common parlance reinsurance is often referred to as the insurance for insurance companies.
FUNCTIONS OF REINSURANCE
Through a reinsurance agreement, an insurance company is able to increase it’s large line capacity and thus underwrite large loss exposures that it otherwise would be unable to underwrite and or provide adequate coverage.
It also provides insurance companies with catastrophe protection, stabilization of loss experience and underwriting guidance and expertise.
Generally there are two types of reinsurance arrangements- a facultative reinsurance and treaty reinsurance, which can be written on either a pro-rata or excess of loss basis.
EMERGENCE OF DOMESTIC REINSURERS

Domestic reinsurance companies have emerged as recent additions to the insurance industry in Africa mostly since the 1970’s, when governments the continent over were urged to diversify and establish financial institutions independent of international insurance conglomerates.
Many of these reinsurance companies were created and managed by governments through wholey owned parastatals and provided with compulsory cessions of outgoing reinsurance and legal rights to participate in the country’s direct businesses. In the 1990’s the impact of political, economic reforms ushered in the early stages of privatization, liberalization and globalization and with the advent of World Trade Organization (WTO) liberalization rules many more countries and markets are poised to face critical problems of privatization and competition.
In the case of Sierra Leone, the establishment by government of the National Insurance Company (NIC) in 1973, with its Reinsurance Department, was designed to pave the way for emergence of an indigenous reinsurance carrier.
Mandatory and compulsory cessions were required from all insurance companies based on percentages of reinsurance placements and a workforce of trained reinsurance specialists emerged. Subsequent management lapses at the NIC however resulted in the closing of the reinsurance department in the early 1990’s without accomplishing the goal of creating a professional reinsurance company.
DISADVANTAGES OF NOT HAVING A REINSURANCE COMPANY

The absence of an indigenous or Sierra Leone-based reinsurance company means that an aggregate of over fifty percent of premiums collected in the country’s insurance market have over the past several decades been paid out to foreign reinsurers, most of whom are within the same West African geographic region.
With an economy consistently rated at the world’s bottom, the repatriation of millions of dollars as reinsurance premiums is untenable for sustained economic development. With most of these premiums remaining in the local market, capital can be induced into rebuilding and creating much needed jobs in the economy.
Large capital projects cannot be insured within the country as the adequacy of capacity to absorb such ventures insurances are clearly outside the Sierra Leone insurance companies capacities to absorb the inherent risks.
Aside from operating insurance companies within the country, foreign African reinsurers from Nigeria, South Africa and Ghana have for decades maintained a stranglehold on the reinsurance market in Sierra Leone. Reinsurers such as Africa Re, Nigeria Re and Ghana Re have and continue to be dominant players in the Sierra Leone insurance marketplace.
Since reinsurance premiums are paid in foreign currency, the country’s scarce foreign exchange reserves continue to be sent overseas creating not only adverse GDP growth but a dearth of resources for local economic activity
CONCLUSION
As we embark on shaping a better and prosperous Sierra Leonean economy, we must be guided and mindful of the fact that as the challenges involved are not new, we must therefore think anew and act anew to put to pasture the dogmas of our past.
Specifically, the dogmas of the past as insurance and reinsurance were viewed are today deemed inadequate in addressing the aftermath of the present challenges confronting the insurance industry in Sierra Leone.
It must however be pointed out that the low risk tolerance, lack of vision and small capacity shown by the indigenous insurance community has mostly resulted in the need for outside carriers, especially from Nigeria to penetrate the Sierra Leone insurance market.
The adverse consequences of such a short-sighted and myopic adventure lays bare the country’s entire financial sector into the hands of foreigners. This trend of foreign companies establishing wholey owned banks and insurance companies has the potential of mortgaging our nation’s future to foreign institutions whose solvency our regulators are not adequately equipped in monitoring and managing.
As a final thought, I am all in favor of foreign capital through purchase of shares or partnerships being infused into our financial services sector, what I remain opposed to however is the wholesale transfer that appears to be currently manifesting itself in the country, in which Nigerians and Ghanians seem to be having a field day at the expense of indigenous entrepreneurs and business. It is my desire and hope that this article can serve as a harbinger and wake up call to our regulators and policymakers to ensure that any emerging reinsurance company remains under the control and management of Sierra Leoneans.

Article Source: http://www.articlesbase.com/insurance-articles/sierra-leone-re-why-sierra-leone-needs-a-reinsurance-company-now-561342.html