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. The latter is a catch-all, 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.

Strong link between insurance penetration and GDP per capita levels

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 non-life 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.

This speaks to the investment opportunity for insurers in Africa, especially considering the continent’s young, growing population and robust economic growth rates in regions such as West Africa and East Africa.

Nonetheless, whereas the opportunity for insurers has presented itself in Africa, the importance of financial sector development, while deepening and improving the liquidity of domestic stock and bond markets in Africa, perhaps through development of regional markets, must be stressed. Although this is not a sufficient condition to develop economies, it is a necessary one.

Further, given the current deliberations of the B20 on sustainable development topics, including finance and infrastructure (particularly as it relates to mobilizing resources for sustainable development) it is worth picking up on the B20 South Africa theme of “Inclusive Growth and Prosperity Through Global Cooperation”.

In this context, insurers on the continent should collaborate with governments and social impact organisations on the continent, while embedding sustainable development principles into investment portfolios. Joint ventures should also be considered in order to pool resources for scalability.

Inclusive development and the expansion of financial access

It is important to learn the lessons from economic and insurance development in South Africa, which has a high level of insurance penetration with gross written premiums for life business of 9.5 percent of GDP in 2024 according to South Africa Reserve Bank data. This is on par with many of the world’s richest economies. Meanwhile, South African household’s interest in pension funds and insurers amounted to 112.2% of GDP in the same year.

However, despite South Africa’s highly developed insurance sector and its deep, liquid capital markets, the country is beset with a low level of GDP per capita relative to economies with a similar level of insurance penetration. The combination of high insurance penetration and low average GDP per capita points to inequality and the skewed distribution of income. This underscores the importance of inclusive development and the expansion of financial access.

The World Bank states financial inclusion implies that households and businesses must be able to access affordable and sustainable financial products and services. Its 2025 Global Financial Inclusion (Global Findex) database shows that although account ownership rates at a bank or similar financial institution (for ages 15+) varied greatly on the African continent in 2024, they are low relative to developed economies, even in large economies such as Egypt (35.3%) and Nigeria (59.7%).

In Sub-Saharan Africa (SSA) overall, of adults 15 years and older, less than 40% have an account at a bank or similar financial institution. Including mobile money accounts, the rate is still less than 60% compared with 95% in high income countries.

Developing domestic debt markets for issuance in local currency

The strong correlation between high savings rates and GDP growth is well documented. So, too, is the daunting funding gap the continent faces in pursuit of its sustainable development goals.  A wide range of funding options will need to be considered including ring-fencing proceeds from metal and mineral sales that accrue to the fiscus for economic development, making efficient use of donor and concessional funding, while encouraging public-private partnerships by reducing investment risk.

Concurrently, it would be helpful to develop domestic insurance markets. Insurers can play a central role to mobilise savings and foster growth. They promote efficient use of savings into sustainable development initiatives and infrastructure, while supporting entrepreneurial activity and building resilience through under-writing and indemnifying risk.

Often, however, emerging market economies turn to foreign funders to supplement insufficient domestic savings, thus running large current account deficits as they invest to grow. In Africa, increased access to international capital markets has resulted in higher levels of foreign currency debt issuance to raise capital.

There is nothing inherently wrong with this, provided savings are used to promote efficient investment that lifts potential economic growth. However, as persistent sovereign debt downgrades in recent years across Africa have shown, risks escalate if prudent macroeconomic policies are not pursued or if unexpected events such as the Covid-19 pandemic expose vulnerable fiscal positions.

Mechanisms employed to reduce debt burdens should not, however, preclude the condition of sustained sound macro-economic management including consumption expenditure restraint where needed and guardrails to prevent excessive bank funding of government spending.

At the same time, short-term insurers can be invaluable partners in managing long-term risks associated with climate change, supporting the agriculture sector, providing information around risk-mitigation and ensuring access to funding during disaster events.

The chicken and the egg

Correlation does not prove causality. We cannot claim insurance sector development drives economic growth. However, a developed insurance sector is ever-present where wealth is being built. At the very least, it contributes to the critical task of lowering barriers to information between savers and investors, lowering transaction costs and scrutinizing the effectiveness of the deployment of capital into sustainable investments.

Arthur Kamp is economist at Sanlam group

*** The views expressed here do not necessarily represent those of Independent Media or IOL.

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