The insurance market on the continent of Africa has changed and continues to change significantly – but it still has a long way to go.

Whilst it covers only 10% of the world's population, the G7 accounts for almost 65% of the world's insurance premiums. In 2012, individuals in emerging markets spent USD 3,700 less per capita on insurance premiums than those within the G7.

Of the regions deemed as "emerging markets" - whilst the more developed parts of Asia had the highest premiums per capita (USD 4,387.5), the continent of Africa was ranked last with USD 66.4. (i.e. only 1.5% of the premiums in the more developed parts of Asia).

It therefore comes as little surprise that the African insurance market is significantly less advanced than much of the rest of the world. The most common indicator of an advanced insurance sector is the insurance penetration ratio (i.e. the gross value of insurance premiums as a percentage of GDP). The reinsurer Swiss Re's 2013 Global Insurance Report measured Africa as having a penetration rate of 3.65%. This is far below the world average of 6.5%. Moreover, this figure is flattering to the continent as it includes the South African insurance market – one of the most advanced in the world.

Two main factors contribute to the state of Africa's insurance sector. The first is a general theme of distrust. Throughout the continent there is a lack of readily available information on a person's background. Government records can be sparse and official records imperfect. This makes it difficult to assess an individual's creditworthiness. This in turn has developed a mistrust of non face-to-face transactions. Across much of Africa there is a suspicion of the internet that has not troubled the Western markets. The anonymity of the web concerns domestic and foreign businesses, which fear scams and trickery. Indeed, to transact insurance on the internet in Mozambique or Angola (to name a few) one must fill in an online application and then actually visit the local insurance branch in person to make physical payments. The use of a system of standing order or direct debit is simply not possible.

The theme of corporate distrust is mutual. Whilst businesses and financial service providers are suspicious of their customers, African individuals are equally sceptical of their institutions. Whilst this cynicism is generally aimed towards the banks it spreads to the insurance sector as well. Perhaps as a result of these sentiments many African communities have developed their own unofficial methods of communal insurance.

This matter is further compounded by the potential risk of corruption in many African jurisdictions. Indeed, from a legal perspective, under-developed legislative and judicial systems fail to provide consumers and investors with the reassurance they require. In a business driven by trust and risk many are put off by the lack of security the local legal systems offer their insurers and insured.

The second and probably more important cause of Africa's less advanced insurance market is simply the poor economic track record of African countries. For years very low or non-existent growth and minimal economic stimulus has plagued the continent. However, it is for this reason that the future of the African insurance market is now so promising.

With few exceptions (notably the wealthy Middle East, where Islam forbids conventional insurance), there is a direct positive correlation between GDP per capita and premiums per capita. At first glance, this reflects poorly upon the continent. Africa has consistently recorded a lower GDP per capita than any other populated continent for as long as the statistics go back. This is clearly illustrated by the fact that over the last 60 years the countries of Africa have recorded an average per capita GDP growth of only 1.17%, whereas Asia have enjoyed average growth of 3.9%. In any event, indicators suggest that all this is now changing.

What is changing?

For the past ten years the African economy (taken as a whole) has grown between 5% and 7% per annum (well above the world average). During this period real income per person in Africa has increased by more than 30%. Africa has managed to maintain economic growth and macro-stability in spite of the global financial crisis and a turbulent euro zone. Almost all African countries outperform EU nations with regards to public debt. Goods and services that were once rare are now widely available. Three quarters of Africans have mobile phones, the same as India. Nigeria produces more films than America.

Considering Africa's favourable demographics and wealth of natural resources (including 60% of the world's uncultivated arable land), such rate of growth is not expected to slow any time soon.

From a pure insurance perspective, the operating environment is also becoming more favourable – increased stability and improvements in transparency and the rule of law are all contributing to a growth in regional insurance practices. This is shown in the high rate of market liberalisation that has been seen across Africa, as insurance companies have successfully lobbied governments to allow private entry into the previously state monopolised sectors.

The Angolan insurance market was only liberalised in 2002, opening the doors for the more adventurous insurance companies to enter first. Unsurprisingly, bigger names were not long to follow. The liberalisation of the Mozambican and Tanzanian insurance markets have proved equally successful whilst other countries such as the Democratic Republic of Congo and Somalia are on the brink of similar reform.

The general excitement surrounding the liberalisation of the African markets is not unfounded. Insurance market liberalisation has been proven to have considerable positive effects on economic health. For example, if households are unable to hedge potential losses of wealth and assets with insurance contracts, they are forced to save more to accommodate for events that may or may not occur in the future. If a significant proportion of the households behave in this way, the growth of consumer demand will be adversely affected, thus halting industrial and GDP growth. A competitive insurance facility is necessary to ensure the completeness of a market. Whilst in turn the completeness of a market is required to encourage a competitive insurance sector. It is this positive cycle that we are now beginning to witness across much of the African continent.

Given the vast changes in economic growth rates and the liberalisation of insurance markets over the past decade, the world is now beginning to view the insurance markets on the African continent with serious interest. As the reforms and growth continue, in the more under developed regions of Africa it seems inevitable that these changes will reduce mistrust of businesses and financial institutions and develop a reliable platform upon which the insurance industry can build. In the more developed regions of Africa the building has already begun.

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