An Insurer’s Unique Strategy to Spur Africa’s Development
Many investors still shy away from doing business in Africadue to high political risks. That's why the African Trade Insurance Agency has formulated a unique strategy to stimulate trade, investment and overall development.
Each African country seeking to become a member of the continent's only multilateral political risk and credit risk insurance agency must sign a participation agreement and subscribe for at least 75 shares, each valued at $100,000. Member states are on the hook for any action or inaction that results in ATI paying claims, according to ATI's acting CEO, Stewart Kinloch.
"I mean, lots of governments will tell you, 'You know, we're as honest as the day is long.' But they tend to be slightly more honest when you happen to have their cash in your back pocket," Kinloch explained.
ATI's strategy for reducing political risk and stimulating investment seems to be working as its "physical cash" element provides an edge that even traditional bilateral donor agreements don't have.
Since operations took off in 2004, ATI's internationally diverse staff of 26 has managed to secure $1.9 billion in investments across its nine member states - Burundi, the Democratic Republic of Congo, Kenya, Madagascar, Malawi, Rwanda, Tanzania, Uganda, and Zambia.
With the African Development Bank's recent $1 million investment, the agency is poised to extend its reach and efficiency.
According to Sherry Kennedy, ATI's communications and marketing officer, the company does not have minimum project size requirements allows ATI to extend its much-needed political risk and export credit insurance to the continent's small and medium-size enterprises.
ATI steers clear of organizations that deal in practices like child labor and arms. Potential clients are required to demonstrate high environmental standards, with ATI going as far as commissioning an environmental clearance report on a company if necessary. Once all relevant information has been turned in, it takes the agency about two to four weeks to underwrite a deal and issue a policy.
Interested companies can sign up for ATI's products online.
Political risk insurance
Given Africa's unpredictable political and financial climate, many businesses - particularly those in growing sectors like agriculture, telecommunications and technology - find it worthwhile to take on risk insurance.
One such company is South Africa's Industrial Development Corp., which turned to ATI for coverage against war, expropriation and currency convertibility when it sought to invest in a mining operation in the DRC.
The agency also offers a mobile assets cover and insurance against embargo, arbitrary award default, comprehensive non-payment, and unfair calling of bonds.
In the event of property damages from an act of war by the Lord's Resistance Army, for instance, ATI would pay claims to IDC.
Political violence, sabotage and terrorism cover
ATI introduced its political risk, terrorism and sabotage cover in September 2008 to accommodate the burgeoning demand for insurance around election time. Violence in Kenya following the nation's 2007 presidential election, for instance, resulted in a death toll of about 1,300 and billions of dollars down the drain.
Situations like this have potential investors running the other way. With ATI's cover, business may continue.
"I would love to think of a time when it won't be necessary because of, you know, the human tragedy that underpins a claim," Kinloch admitted. "For us it's an insurance claim, for anyone with claims on this sort of insurance, it's a tragedy."
In addition to offering protection, the insurance aims to increase financial-sector capacity within the Common Market for Eastern and Southern Africa region, ATI stressed in an Aug. 13, 2009, press release announcing the company had won Jubilee Insurance, East Africa's largest composite insurer, as a new client.
Now, banks are more likely to issue loans beyond five years - the typical election cycle within the COMESA region - as they have assurance that their loans will be paid back regardless of the political climate.
Kenya's UAP Insurance and APA Insurance - also based in Uganda - have signed up for the insurance, and Kinloch expects an uptake in demand as countries like Uganda prepare for upcoming elections.
Export credit insurance
While geared at all traders and exporters in Africa, ATI's export credit insurance package is especially beneficial to small and medium-size businesses operating on open account terms.
A Kenyan flower exporter, for example, runs the risk of default or not getting paid by its foreign partners when involved in an open account contract. It may also face payment delays and failures from insolvency or bankruptcy. ATI's export credit insurance covers these risks, and it may even shoulder pre-shipment costs.
In times of financial uncertainty, export credit insurance is also a viable option for entrepreneurs looking to expand their businesses, as it helps make businesses more credit-worthy and likely to secure favorable financing options. Should an export company be exposed to default, ATI would pay claims to the company's bank.
In an effort to make its export credit insurance product more accessible to Africa's exporters and businesses, ATI hopes to set up shop in Tanzania, the DRC and Rwanda by the end of 2010, with an underwriter and underwriter's assistant in each local office.
"ATI wasn't built to be an East African" export credit agency, Kinlock said. "I mean, it was built to be an African ECA."
Africa's insurance companies have access to better reinsurance options thanks to ATI's partnerships with leading insurance companies and syndicates like Lloyds of London, the ACE Group, Zurich Financial Services and Sovereign Insurance Group.
- Lloyds of London alone, the agency's largest reinsurer, ATI is able to provide up to $75 million in reinsurance financing. However, access to such reinsurance levels also depends on how much a member country invests in ATI.
"If Ghana comes on board, for instance, with their proposed $20 million investment, we would be able to leverage this amount by 10 to insure projects up to $200 million with co-insurance," Kennedy explained.
Organizations seeking increased access to African markets and reliable intelligence on the credit worthiness of potential partners may invest in ATI and thus become an ATI member.
Membership is offered to African and non-African states, private corporations, regional economic organizations, international development financial institutions and export credit agencies.
African member states or class "A" shareholders, which collectively represent at least 51 percent of ATI's capital stock, are required to invest in a minimum of 75 shares each. This investment determines the level of business that ATI supports within a member state, and most finance the investment by securing a World Bank loan.
Non-African member states and private corporations - classes "B" and "C," respectively - subscribe to a minimum of 100 shares each, while regional economic organizations, international development financial institutions and export credit agencies - or, class "D" shareholders - subscribe to at least one share, the equivalent of $100,000.
Membership is finalized once the required cash investment is made and the ATI participation agreement has been signed and ratified.
An example of a recent ATI member is the SACE Group, Italy's leading credit management agency. SACE cemented its membership on July 17, 2009, after subscribing to $10 million in ATI shares. As a result of its new status as an ATI member, SACE will gain access to ATI's sub-Saharan network and attain preferential creditor status ("de jure") for political risk coverage in ATI member states. Furthermore, SACE will receive support from ATI in offering export credit risk coverage to Italian companies.
International organizations like AfDB have demonstrated confidence in ATI's strategy and potential through a variety of partnerships. AfDB's $1 million Japan-sponsored technical assistance grant, for instance, is geared towards enhancing ATI's internal capacity and infrastructure. The bank may consider further investments based on the success of its grant.
ATI is also looking to establish memoranda of understanding and to build upon partnerships with export credit agencies like the U.S. government's Overseas Private Investment Corp. and China's Sinosure.
These MOUs grant foreign export credit agencies "a comfortable access point to increasing their business in Africa" and "ultimately increase trade and investments in Africa," Kennedy explained.
Some agreements, like ATI's "enhanced" MOU with OPIC, have a "capacity building component that could see staff exchanges between the two organizations," the communications and marketing officer added.
ATI will be finalizing agreements with the Export Credit Guarantee Co. of Egypt during a COMESA Investment Forum in April and also hopes to complete an MOU with the Saudi Fund for Development during the course of the year.
ATI hopes to be self-sustainable by 2011 - an ambitious goal for an insurance agency, but one ATI is confident to attain.
"I think that's probably something that I'm most proud of," Stewart Kinloch, the company's acting CEO, admitted. "You know, the number of investors that have said to us: "We can only make this happen because your insurance is there, and the unique structure that ATI has really brings investment in Africa from a possibility to a reality."
ATI will be on the look-out for "rounded individuals" with banking and insurance experience as it continues to grow