Insurance/Insurtech Trends in Africa!
Having covered Europe, North America, Asia-Pacific and LatAm over the previous weeks, Insurance Nexus' international tour of Insurance and Insurtech trends has arrived in Africa: the world's fastest-growing continent in terms of population and second-fastest in terms of economic growth (behind only Asia-Pac).
Our Regional Profile on Africa comes in two parts, drawing on our inaugural Global Trend Map (download the complete thing here for free). As we have not been able to constitute tables of insurance challenges and priorities for Africa like we did for Europe, North America, Asia-Pacific and LatAm, this profile relies instead on testimony from our regional correspondents to paint a qualitative picture of local trends:
- Kenya-based George Otieno Ochieng, Claims Manager at Britam General Insurance Company
- Belhassen Tonat, Head of Non-Life at Munich Reinsurance Company of Africa Ltd in South Africa
On account of Africa’s immense size and variety, we begin with a high-level breakdown of the market across the continent, before expanding on four more specific themes:
1) Taking microinsurance from theory to practice
2) Insurance market development in Africa, including regulatory, educational and multinational initiatives
3) Leveraging tech to drive a lower price point for low-income market segments
4) Overall growth prospects for African Insurance
In today's post, we present our market overview and explore the first of these four themes; themes 2-4 will follow later this week in Part II.
Africa is a continent of 56 countries, with diverse demographics, a mix of evolving regulations and prospects for unprecedented growth. Africa’s estimated population of over 1.16 billion in 2015 is expected to double by 2050. In some states, more than half the population is under the age of 25, and life expectancy across the region is low (less than 50 years on average), presenting challenges and opportunities for insurance companies.
Sub-Saharan Africa — the evolution of insurance regulation, EY
The African market is very different from the other global regions we cover in the course of our Regional Profiles. Its population (approximately 1.2 billion at the time of writing) is second only to Asia-Pacific, and it is here as well that most of the world’s future population growth will occur, taking the continent’s population to 2.4 billion by 2050 (according to UN statistics).
The African population will reach some 2.4 billion by 2050, according to UN statistics ...
Africa bears comparison with Asia-Pacific from an emerging-market perspective; however, while we are seeing the growth of middle-class centres in Africa, this trend is both less pronounced and less generalised than in Asia-Pacific. To reflect this, and based on our conversations with correspondents in the region, we believe it makes sense to talk about three broad sub-regions: Sub-Saharan Africa (excluding South Africa), South Africa and North Africa.
Much of society in Sub-Saharan Africa is agrarian, with large swathes of the population engaged in low-income or subsistence farming, and this has a profound effect on the nature of insurance in the region. Britam's George Otieno Ochieng identified low levels of insurance penetration as the leading challenge faced by insurers in his native Kenya.
‘As we are talking, the penetration level of insurance in Kenya is at 2.9%,’ he explains. ‘That means there is a huge, huge gap that the insurance industry has to address.’
This trend applies to the rest of Sub-Saharan Africa and is, if anything, even more pronounced.
‘Kenya has higher penetration than the majority of countries in sub-Saharan Africa, followed by Nigeria. Nigeria has a huge population but unfortunately the level of insurance penetration is not as high compared to Kenya,’ Ochieng continues.
Munich Re's Belhassen Tonat, speaking about Sub-Saharan Africa from a South African perspective, is quick to agree on the importance of boosting penetration, not just in emerging but also in middle-class segments.
‘We have an increase in the populations, or the middle class, in many countries across Sub-Saharan Africa, where the needs of insurance are not yet exhausted,’ he comments. ‘There is a lot to do for the primary insurance company, for the insurers, to put the right products in front of this growing middle class in Sub-Saharan Africa.’
Penetration certainly lags in the middle class but the consideration applies, to a much greater extent, to the low-income masses who have not traditionally been insured. This micro-class (so-called because they represent the prime target for microinsurance) may not have pockets as deep as the middle class but they more than make up for this with their tremendous size. They therefore constitute an opportunity every bit as big as that represented by the middle class, and we frankly have good reason to believe it will be bigger.
There are considerable opportunities for further developing both general and life insurance in the continent. Products that can usefully be developed include, but are not limited to, health insurance, micro-insurance, agricultural insurance and other products that can alleviate poverty and promote small and medium enterprises (SMEs). One area of great interest is catastrophe insurance.
Making Finance Work for Africa (www.mfw4a.org)
Returning to our characterisation of the continent as a whole, South Africa is a definite case apart with its well-defined and technologically advanced middle class. Even though this only serves a minority of the population, we still have here a mature, established insurance market which is not quite matched by anything else on the continent:
‘The penetration level is high there compared to other parts of Africa at around 11%,’explains Ochieng. ‘The market there is fully grown, extensive, and that’s why you find a lot of international companies having their offices in South Africa – they look to it as a gateway to Africa, so they try to organise their offices there.’
‘The traditional way of selling insurance doesn’t appeal any more to the new generations, so it’s about finding new ways and incentives for people buying insurance. We’ve seen a lot of new concepts in the South African market: direct insurance is one, another is linking technology to insurance to talk to people in their language and speed up all the processes. At the end of the day, it’s about changing the image of insurers as being slow and forever behind the new technology trends, positioning insurance as a trendy product which responds to the needs of clients here.’
The final sub-region we identified was North Africa. Here, we are generally dealing with higher-GDP economies than we find in Sub-Saharan Africa, although rural poverty is still widespread. Plenty of broader cultural differences exist too, with Islam for example representing the majority religion, although it is present of course across much of central Africa.
In North Africa, insurers struggle with penetration but not to the same extent as in Sub-Saharan Africa, placing them somewhere between the two poles represented by our other sub-regions:
‘In North Africa, the penetration levels are not as high as in South Africa. I would say about 4%, and we’re talking there about countries like Egypt, Morocco and Algeria,’expands Ochieng.
We can discern two broad approaches for insurers looking for opportunities in Africa. One is to target the middle class, which is small but rapidly expanding across much of the continent (and already firmly established in South Africa). The other is microinsurance, which ecosystem and non-ecosystem players alike continue to drive forwards through innovation and technology.
As the ‘middle-class opportunity’ in Africa responds to challenges (and utilises solutions) that are broadly aligned with those that we have explored in relation to our more developed markets, this Regional Profile on Africa leans towards microinsurance.
‘I would say they are both huge opportunities,’ comments Ochieng on the two broad approaches we have identified. ‘But the micro-class has more opportunities, more potential for growth, than the middle class. Because when you look at the micro-class, they are very big in terms of volume.’
Making Microinsurance Work
Microinsurance, also known as impact, inclusive, affordable or mass insurance, is by no means unique to Africa, other key markets being Asia-Pacific and LatAm. Indeed, due to the population size and some early movers, China and India between them already make up the lion’s share of the market. Microinsurance is currently estimated to reach approximately 265 million customers worldwide, with an annual growth rate in customers insured of 30% in Africa and 25% in Asia & Oceania.
Microinsurance is estimated to reach approximately 265 million customers worldwide, with an annual growth rate in customers insured of 30% in Africa and 25% in Asia & Oceania.
This is not just a sizeable opportunity, it is also a growing opportunity – and there appears to be no immediate ceiling in sight. Indeed, as early as 2010, Swiss Re reckoned that insurers could generate $40 billion of premiums from policyholders living on $4/day or less.
Microinsurance requires a radically different model from insurers if it is to be sustainable and profitable – and to make the difference it is promising to the lives of low-income policyholders. And rather than this detracting from insurers’ core business, it can actually be seen as a way for them to hedge their bets portfolio-wise. Their scale, their actuarial expertise and their wide-ranging business relationships are all unique strengths they can bring to bear on this new low-end market at a time when their grip on high-end markets threatens to be eroded by nimbler, customer-centric new entrants.
"With better data leading to an improved understanding of risk, insurers can make previously uninsurable risks insurable. This helps to address the huge protection gap between insured and uninsured risks that exists today. Emerging new markets, like microinsurance, expand the overall industry pie not only to the benefit of all market participants but more importantly to society at large."
Nick Martin, Fund Manager at Polar Capital Global Insurance Fund
Ochieng regards the micro-class and the middle-class not as silos but as part of a bigger picture of country-wide development:
‘One of the things that I believe is that even this micro-class will one day become middle class, so you end up growing them. If you develop a product for the micro-class and you develop a product for the middle class, then you grow with them together as a whole. That means you can reap more considerable benefit than those companies that are only concentrating on the contemporary insurance products that don’t correspond to the needs of the African continent.’
Microinsurance therefore represents a strategic investment for insurers in developing markets, regardless of where the bulk of their business currently comes from. Ochieng believes that we are beginning to witness a paradigm shift as more and more insurers move in this direction.
‘The insurance companies have seen that there’s a huge gap, and they need to concentrate on the low-end market where there is huge growth, a huge opportunity,’comments Ochieng. ‘But you have to really understand: what are these microproducts meant for? Which people are supposed to buy this product? What is their lifestyle? Where have they come from? What is their understanding of insurance?’
The first and most obvious requirement of the target market is an affordable premium price, affordable on both a gross-sum and a cash-flow basis, bearing in mind that many targets are living on less than $1/day. Premium price can be reduced by attaining massive scale, while the burden of payments can be eased by breaking them down into manageable instalments (so lots of small spread-out payments rather than large infrequent ones).
However, both these solutions – large numbers of policies broken down into large numbers of instalments – compound the distribution problem, which is already more severe in Africa, measured by conventional yardsticks, than elsewhere in the world.
‘When you multiply by the number of people, it’s enough money, but the problem is actually on the distribution costs,’ Tonat concedes. ‘For years now, we have been looking for ways to minimise the distribution cost for microinsurance products. Because we are talking about premiums in the range of $10-20 per year, for example. If, in order to distribute these products, you need 60-70% of the premium for the distribution channel, then that’s not economic at all and it goes to the loss of the microinsurance policyholders.’
Distribution must be paid for somehow, and the risk is of course that the price insurers can shave off premiums through scale gets added right back on in the form of distribution cost. So how are insurers to get over this hurdle?
Traditional high-end insurance has long been wedded to the agency model, whereby potential customers must seek out an agent in person to initiate the process, and for microinsurance targets in Africa it is plain to see that this would neither be feasible (due to infrastructure) nor indeed cost-effective. However, there is also a long history in developed markets, at least in personal lines, of using affiliate channels as a lower-cost and higher-engagement way of reaching potential customers.
It is this approach that our correspondents believe makes the most sense for distributing microinsurance products in Africa, adapted of course to suit the needs of a largely rural, agriculturally based population.
‘There must be a public-private partnership for these sorts of ventures to be successful,’ explains Ochieng. ‘And, of course, you also have to reach a huge population for it to make sense for the insurers. Because the insurers look for the law of large numbers – if you don’t have the large numbers, then even taking this kind of risk itself won’t be easy.’
Instead of millions of individuals paying their premiums via millions of separate transactions, you instead have one entity that pays the insurer in less frequent, aggregated sums on their behalf. While these entities are often banks, supermarkets and telcos, sometimes as part of the same holding company as the insurer, Ochieng gives a couple of examples of what these partnerships look like in the context of Sub-Saharan Africa.
Take Syngenta for instance, which offers insurance against crop failure as a bundle with its primary seed-distribution business:
‘If you buy any seed from them, there is a slight charge for insurance that is already inbuilt in that particular price. So, the minute you buy from them, you are insured,’expands Ochieng.
Ochieng mentions a similar arrangement for livestock insurance, where the Kenyan government has partnered with the International Livestock Research Institute (ILRI).
Another way to achieve this massive low-cost distribution is mobile. Far from being just a feature of middle-class agglomerations, mobile phones are widespread across the continent, with many areas effectively leapfrogging the fixed-line stage of telecommunications evolution. This presents insurers with a ready-made distribution platform for reaching millions of potential policyholders at zero cost (since people already own the phones).
‘You’re talking about huge countries, and you won’t be able to find an agent or a broker in every corner,’ comments Tonat. ‘Mobile phones offer easier access to that remote population.’
Add to this the development of mobile-payments platforms and mobile can be not just an information and marketing channel but a full-stack solution covering both premium payments and claims pay-outs. As an example, Ochieng points to M-Pesa, launched back in 2007 by Kenyan operator Safaricom in conjunction with Vodafone.
‘M-Pesa has revolutionised things in terms of payments for premiums and for the settlement of claims,’ Ochieng remarks. ‘So, irrespective of where a person is sitting in the world or in Kenya, they can make a payment or receive a claims payment with their phone.’
At the end of 2015, 46% of the population in Africa subscribed to mobile services, equivalent to more than half a billion people. The region’s three dominant markets – Egypt, Nigeria and South Africa – together accounted for around a third of the region’s total subscriber base.
The Mobile Economy: Africa 2016, GSMA
Mobile effectively takes the costly moving parts out of distribution, and insurers can go further still to eliminate friction. Tonat gives an example from Malawi where farmers can initiate cover against a lack of rain for the next 20 days, all by scanning a QR code on a bag of seed.
‘These are people who are not used to insurance transactions, they are in far-remote areas and most probably have never been insured in the past,’ continues Tonat. ‘This illustrates how microinsurance can be facilitated by new technologies – even in Malawi, one of the world’s poorest countries, they still have the mobile phones that allow them access to insurance products.’
Tonat believes that mobile can fast-track the insurance industry in Sub-Saharan Africa, taking these countries straight from non-insurance to technology-driven insurance, complete with all the reliability and quick access that brings.
‘Insurers don’t need to go through the same development hassles which we have seen in Europe in the last 50 or 40 years, they can just jump straight to the next generation of insurance,’ he explains. ‘Rwanda is a perfect example of this. Despite having been in a civil war 20 years ago, they have been making huge developments in the last few years, jumping every year by what will have taken a European company 5 or 6.’
Tonat believes that East Africa in general has shown the way the continent needs to go, through its pioneering use of mobile:
‘If you look to Kenya or the East African countries, they’re dealing well with the mobile industries and mobile finance, so insurance companies should think about ways to inbuild their insurance products in this new means of communications, to reach more people than in the past.’
The benefits for insurers of investing in mobile partnerships and solutions are manifold, as the channel appeals just as well to the emerging middle class as it does to the more numerous micro-class: a low-income farmer’s distribution expedient is an urban millennial’s superior customer interface!
We will be releasing Part II of our Regional Profile on Africa later this week. Key focus areas, in further discussion with Britam's George Otieno Ochieng and Munich Re's Belhassen Tonat, include:
- Insurance market development in Africa, including regulatory, educational and multinational initiatives
- Leveraging tech to drive a lower price point for low-income market segments
- Overall growth prospects for African Insurance
If you don't want to wait, then simply download the full Trend Map here to access the complete Africa Profile, along with our other Regional Profiles and much more! Happy reading :)
For any inquiries relating to the Insurance Nexus Global Trend Map, this on-going content series or next year's edition, please contact:
Alexander Cherry, Head of Research & Content at Insurance Nexus (email@example.com)