Globalization VS M arket Protection: Effects on the West African Insurance I ndustry

1. Globalization VSMarket Protection: Effects on the West African Insurance Industry Paper delivered by Mrs. Oluseyi Ifaturoti Managing Director/CEO CrystaLife Assurance Plc. At West African Insurance Companies Association Educational Conference 21st – 23rdNovember,2010 Freetown, Sierra Leone.

3. Preamble • Globalization: Characteristics, Pros, and Cons • Market Protection: Benefits and Costs • An Overview of The West African Region • Globalization and The West African Insurance Industry • Case Study: Nigeria • Protecting The West African Insurance Market • The Future of the W/A Insurance Market • Conclusion and the Way Forward

4. Preamble Until the second half of 2008, the global economy was purring along with little or no bumps. For a period of about three decades, the fortunes of many nations and societies have irrevocably changed for the better. For the three decades these nations embraced the concept of globalization and free trade, their human development indices improved dramatically.

5. A lot of countries were able to modernize their economies by developing competitive advantages in modern technologies and other industries. • The foundation of this unprecedented economic growth and rapid transformation in many countries was laid in the seventies. And there is no doubt that the driving force behind global economics was globalization.

6. Wikipedia defines: Globalization as the process by which regional economies, societies, and cultures have become integrated through a global network of communication, transportation, and trade.

7. ORIGIN OF GLOBALIZATION The historical origins of globalization is still subject to on-going debate. While some scholars situate the origins of globalization in the modern era, others regard it as a phenomenon with a long history. The popular Wikipedia website states that the 19th century witnessed the advent of globalization into its modern form as industrialization allowed for the cheap production of household items using economies of scale, while rapid population growth created sustained demand for such commodities. However, this first phase of "modern globalization" began to break down at the beginning of the 20th century, with the first world war. The second wave of globalization began roughly after the Second World war with the Bretton Woods conference, an agreement by the world's leading politicians to lay down the framework for international commerce and finance, which led to the founding of several international institutions e.g. International Monetary Fund (IMF) and the General Agreement on Tariffs and Trade (GATT) which are intended to oversee the processes of globalization.

8. Globalization is the freedom and ability of individuals and firms to initiate voluntary economic transactions with residents of other countries. • - (The World Bank) • Globalization is the broadening and deepening linkages of national economies into a worldwide market for goods and services, especially capital. • –John Ohiorhenuan (Resident Coordinator, UNDP, South Africa) • Globalization is the tendency towards a worldwide investment environment, and the integration of national capital markets. • -(www.beingwarranbuffet.com)

9. Globalization involves: • one fundamental project: that of opening upthe economies of all countries freely and widely to the global market and its forces.

10. CHARACTERISTICS OF GLOBALIZATION Globalization is characterized byliberalizationof the world economies and economic activities that are free from institutional control and which fosters and promotes free market mechanism, private enterprise, open competition, professionalism and excellence in corporate governance Free Market Mechanism Globalization Liberalization

11. The Pros of Globalization • Investment and Capital Flows • Spread of Technical Know-How • Employment Opportunities • Increased Competition • Spread of Education • Reduction in the cost of production and distribution as a result of an improved technology

12. The Pros of Globalization (Cont’d) • Enhancement of productivity • Improved specialization in resource allocation • Improved transparency in the conduct of business • Increased volume of business • Scale of economy • Cultural Regeneration • Decentralization of power

13. The Cons • Exploitation of labor • Job insecurity • Local industries being taken over by foreign multinationals • Hostility between the host and the foreign nationals • Imposed reforms and capitalization

14. The Cons (Cont’d) • Cultural Violence • Terrorism • Promotion of a credit-based economics leading to an unsustainable growth of debt among developing nations • Widened arbitrary inequalities • Use of substantial and sophisticated legal and financial means by foreign investors to circumvent the bounds of local laws and standards.

15. Market Protection on the other hand refers to the advocacy, system, or theory of protecting domestic producersby impeding or limiting, as by tariffs or quotas, the importation of foreign goods and services.

16. Market protection also known as Protectionism is the economic policy of restraining trade between states, through methods such as tariffs on imported goods, restrictive quotas, and a variety of other government regulations designed to discourage imports, and prevent foreign take-over of domestic markets and companies. Protectionism is often regarded as a barrier to free trade which the advocates of globalization dread to hear.

17. Some Methods of Market Protection • Tariffs • Import Quotas • Administrative Barriers • Direct Subsidies • Exchange Rate Manipulation • Restrictive licenses • Employment Law • Complex regulatory environment

18. Why Market Protection ? • Protecting the infant industry • Protecting jobs. • Increasing Revenue • Providing National security

19. Prior to 1980, many countries quite deliberately adopted policies that were designed to insulate their economies from the world market in order to give their domestic industries an opportunity to advance to the point where they could be competitive. • Even the likes of China, South Korea, and others became more developed using measures to protect their industries and so on, with various forms of controls.

20. “All Western European core economies had higher industrial protection than Brazil, China and India today when they had similar per capita income levels”. Dr. YilmazAkyüz,former Director of Division on Globalization and Development Strategies at United Nations Conference on Trade and Development (UNCTAD)

21. The Cost of Market Protection: The America Steel Industry In 2002, the U.S. government headed by President Bush slapped a 30 percent tariff on imported steel, making other steels 10 percent more expensive than U.S. steel. The American hubcap (wheel cover) industry who rely on steel for their material had to pay 20% more for the steel to produce their wheels. Since the government had not put a tariff on hubs, Japanese hubs into the market came cheaper than those produced in US. The result: Americans started buying from Japan, the industry faced declining revenue; some of the firms laid off workers whilst some completely went out of business.

22. Costs of Market Protection • Lack of technical Skill • Loss of jobs • Stunted Economic Growth • Higher Prices of goods and services • Higher taxes • Declining revenue • Lack of exposure • Lack of Innovation • Restriction of Consumers’ rights

24. The region is characterized by: • high level of illiteracy, • high rural population, • poor infrastructure, • poverty as many dwellers live below $1 per day • High dependency on industrialized economies for financial integration. • Low insurance penetration • Poor infrastructure • Galloping inflation

25. Globalization , Liberalization – Impact on the West African Region • Increase in the Foreign Direct Investment • Increase in the Volume of Insurance business • Exposure to the International financial market • Exposure to international crimes – financial , terrorists etc. • Provides for risk diversification and costs reduction as a result of new technology. • Improved quality of product and services • Reformation and Liberalization of the economy

26. DRIVERS OF GLOBALIZATION • According to the Swiss Re (Sigma No.4/2000), there are drivers for globalization and these are the: • Push Factors: are the motives behind the movement of foreign insurance companies • Global Trade • Growing Direct Investment • Potential Future Growth in developing/emerging markets • Saturation in developed economies • Efficiency Gains through diversification

27. Pull Factors: • Factors are the motives behind allowing the foreign companies to operate in local market: • Strong and Enduring regulatory framework • Strong Economic Growth • Availability of infrastructure facilities • Availability of large capital in the market to cover major risks

28. Illustration of the Benefits of a liberalized Insurance Industry Local Economy • Mobilization of domestic savings • Improvement in financial stability • Facilitation of production and trade • Improvement in the efficiency of capital allocation “Spill-over” effects Local Insurance Market • Improvement in service to customers • Improvement in the efficiency of the insurance market • Transfer of knowledge in the areas of technology and management Supervisory Authorities • Improvement in the quality of supervision Capital inflows Foreign Insurers Knowledge transfer Increase efficiency

29. Globalization and West Africa: A Case Study of Nigeria • Nigeria is a dominant player in the economic bloc of West Africa and accounts for 67% of the region’s Gross Domestic Product (GDP). The country has the sixth largest insurance market in Africa. The country became a member of the World Trade Organization (WTO) on 1 January 1995. • Since then Nigeria has been liberalizing its economy by doing the following: • Investment Policy Reforms • Import liberalization • Guided privatization • Administrative and legal reform measures • Capital Market reforms • Multilateral and regional agreements

30. The Consolidation Plan for Insurance Industry As part of plan by the Government to liberalize its insurance industry through the consolidation, on September 2005 the government announced the new minimum capital base as shown below; Business Type Old New % Increase Life 150million 2billion/US$13m 1,233 Non-Life 200million3billion/US$19.6m 1,400 Composite 350Million 5billion/US$32.9m1329 Reinsurance 350million 10billion/US$65.6m 2,757 Note: Exchange Rate As @ 15/12/2009 – N152.50 = $1.00

31. Aftermath of the Consolidation Exercise Foreign Direct Investment Attraction of both local and foreign investments is one of the benefits derived from the recapitalisationexercise. An estimated N600 million came into the insurance sector as direct foreign investment through the Nigeria Stock Exchange during the exercise. Financial Strength With improved financial strength, insurers were well-positioned to take advantage of the government’s local content policy (LCP) on the underwriting of oil and gas risks Therefore, the exclusivity given to Nigerian Insurance Companies now makes better sense since the Nigerian Insurers now have the wherewithal to provide greater coverfollowing the consolidation

32. Gross Premium Income of Nigeria Insurance Industry • The growth in the premium encouraged Nigerian Insurance companies to move offshore and establish offices in some other West African sub-region like Ghana, Gambia, e.t.c.

33. The Total Investment:Nigerian Insurance Business (2004- 2008) N (billions) Source: 2009 Nigeria Insurance Digest

34. Nigerian Insurance Industry: Opened doors with Protectionist Measures • The Insurance Act 2003 • Registration Requirement • Section 72: Restriction of transactions of insurance business to Nigeria • Empowerment of the Commission (National Insurance Commission) • The Local Content Act • Section 49 of the Nigerian Content Act specifically stated that all operators, alliance partners and Nigerian indigenous engaged in any form of business, operations, or contract in the Nigerian oil and gas industry shall insure all insurable risks related to its oil and gas business, operations or contract within and through an insurance broker or brokerage firm or an insurer registered in Nigeria under the provision of Insurance Act 2003. • No risk should be placed offshore without the approval of the National Insurance Commission (NAICOM)

35. THE WEST AFRICAN INSURANCE INDUSTRY SHOULD CONSIDER……………. • Efficient insurance markets are an essential basis for emerging markets to achieve integration into the global economy and strong economic growth – KlimePoposki (Faculty of Tourism and Hospitality, University of St. KlimentOhridski, Bitola, Maccedonia). • Generally speaking, companies have to participate in the consolidation phenomenon in recent years to attain the global scale needed to compete, because it is impossible to achieve that scale through organic growth alone – Patrick G. Ryan • - (Chairman, President and CEO, Aon Corporation, Chicago, USA)

36. The West African Insurance Market : the Future • The huge potential of the insurance business has remained untapped in West Africa, largely attributable to the absence of an enabling environment for insurance, the lack of commitment to creating and implementing policies targeted at developing the industry and the problem of inadequate capital. • The future of our market should be paramount in the minds of all stakeholders so as to ensure stability and enduring contributions by the insurance to the nation building.

37. However, to ensure an enviable insurance industry in the region, we need to take the following radical steps: • Establish a robust and protective legal and regulatory system • Introduce Micro-insurance mechanisms to help to deepen the market especially among the low income (informal) sector of the region. • Develop indigenous information technologies suitable for the environment. • Develop innovative strategies to enhance the channels of distribution of products and services

38. The role of the media in the needed reformation of the insurance industry cannot be overemphasized as they would be helpful in the Massive education and enlightenment programmesneeded by the industry. • Build and enduring industry capacity capable of accommodating large risks and investments • Easy access to credible statistics that would enable insurance companies to design comprehensive policies to meet the needs of prospective clients.

39. The Story of The Three Blind men

40. CONCLUSION I believe that all economies even the developed ones like US, UK inspite of openness to globalization still have some measure of market protection e.g. the automobile industry in the US is protected by the high tariff imposed on vehicles from others parts of the world e.g. Japan. This is to ensure that the automobile industry continue to exist and contribute to their GDP. However, the issue is in the balance which should be maintained at an equilibrium that the economy does not deprive itself of the benefit of globalization. Africa is the future investment destination , it is becoming what we can term as the last frontier of investment. This is because of the growth potential of the African economies. Whereas the developed economies are matured now or approaching maturity. The continent and the West African sub-region has so much room for growth and development. Consequently, investors world wide are interested in the region and such would aid growth and development. Unnecessary or over protection of this would not augur well for this growth and economic expansion that we badly need.

41. Echoing the Lagos State Commissioner for Finance at the just concluded AIO Life Seminar in Lagos, - Africa is plagued by two things : Capital and Technology – and its time we put on our thinking caps on how to generate more income and mobilize profit. We must open our doors to one another, learn from each other and share experiences. Africa has a lot of untapped investible resources to take care of her capital needs.

42. According to Napoleon Hill in his classic boo “ Think and Grow rich”, he said one of the most common causes of failure is the habit of quitting when one is over taken by defeat. We all are guilty of this mistake and need to rise up to globalization. Furthermore, quoting Abraham Lincoln “ I will work and I will prepare and my time will come”. In the light of this, we need to get together so we can get wiser. With every convinction, in view of prevailing trends I want to attest that Africa – our time has come, lets come together and take on the world!

43. THANK YOU