Emergence of microinsurance and takaful to boost market penetration

Bolstered by the country’s large population and emerging middle class, the growth of Nigeria’s insurance sector appears inevitable with time – especially given the current, extremely limited level of insurance spending. Regulators are pursuing several reforms they hope will speed up the process, and the National Insurance Commission (NAICOM) has initiated changes and issued guidelines for new methods of insurance to that effect.

Aside from addressing regulatory concerns and compliance, the reforms focus on encouraging consumers to expand their coverage beyond legally mandated policy lines. New regulations on microinsurance, which came into force in early 2014, led to rapid growth in the segment. Takaful, or sharia-compliant insurance, appears to be next: NAICOM issued guidelines for takaful in April 2013 and inaugurated an advisory council in March 2015. The regulator’s proactive approach is being welcomed by the industry. “The biggest changes in the market upcoming will be those induced by the regulator, and we are watching to see the effect of them,’’ said Steve Odjugo, a regional director for Continental Re.

While NAICOM’s record as an agent of change has been mixed, this is partly due to a lack of political will in the country. Given its level of support, it is easy to imagine the regulator’s plans having more of an impact. One illustration of this challenge is the foot-dragging on the part of state agencies in bringing their own insurance accounts in line with NAICOM policies like No Premium No Cover. More than a year after NAICOM announced plans to enforce the law, which dates back to 2003, federal insurance customers had yet to comply. Another example is the Market Development Restructuring Initiative (MDRI), which sought to enforce compulsory policy lines and crack down on fraudulent insurers in a bid to improve public opinion of the industry and foster trust. Here too, enforcement has been difficult and the MDRI’s progress largely thwarted. According to NAICOM’s 2011-15 strategic plan, enforcing the rules as they stand will require cooperation from a range of government agencies. Until this happens, it falls to insurers to market compulsory categories if they want to boost growth in those areas.

The MDRI has become part of a wider NAICOM strategy to boost premiums growth and improve the quality of offerings. The plan centres on several goals, including deeper market penetration and higher revenue generation. NAICOM hoped to show results by the end of 2014 in terms of enforcing compulsory lines of insurance, and has been conducting public events across the country as well as coordinating with other agencies to garner support. To address the issue of fake insurance policies, NAICOM has worked with the Nigerian Insurance Association to develop a database that consumers can use to verify the validity of their policy, and has been collaborating with law enforcement agencies to ensure violators are arrested and prosecuted.


An area that could help bring insurance to the masses, albeit without huge growth in terms of premiums written, is microinsurance – scaled down versions of conventional products with lower premiums and levels of coverage. The potential market for these products in Nigeria is substantial, estimated at around 110m, according to NAICOM.

Guidelines have been published for the formation of microinsurance companies, mandating minimum paid-up capital of N150m ($915,000) for life microinsurers and N200m ($1.22m) for general microinsurers. The sum insured cannot exceed N1m ($6100) per policy, and microinsurers are barred from covering special risks, professional indemnity insurance or any third-party liability risks that exceeds N1m ($6100) – a stipulation to prevent the poaching of customers from existing insurers. Microinsurance licences also prohibit underwriting motor vehicles with over three wheels. Conventional insurers are entitled to form their own microinsurance operations within the same ownership group, but they must be separate companies with separate capital pools.

Microinsurance has already shown strong growth in policies sold via mobile phone platforms. According to NAICOM, around 100,000 subscribers were buying microinsurance coverage each month on MTN and Airtel networks, to reach a customer base of 600,000 by April 2014 – just six months after the launch of said products. For insurers and telecommunications companies alike, this is often a natural pairing with mutual benefits. In Nigeria MTN and Mansard Insurance have paired up to sell mobile microinsurance, as have Airtel and FBN Insurance. Whereas insurers often struggle to reach customers, this is a strength of mobile network operators (MNOs). For their part, insurers can leverage MNOs’ brands and bolster their efforts to retain customers.

Call for Creativity

Network operators are some of the most visible brands in African economies, thanks to their intensive advertising campaigns and omnipresent logos on the stands of small vendors and scratch-card sellers. As Nigerians tend to be price-sensitive consumers, in telecoms terms, this means maintaining pre-paid subscriptions with multiple providers. Consumers are often willing to switch between SIM cards to save money if one network is cheaper at the time a call is to be made.

With such competition, mobile operators across Africa are increasingly looking to add simple, menubased applications and services that can be stored on the SIM card and offer more value to customers in the hopes of building loyalty and increasing revenue. Simple forms of insurance, which could be provided for free to users that surpass a monthly spending threshold, are one option, with programmes offering basic coverage on this basis gaining popularity in Ghana, Senegal, Kenya and elsewhere.

Insurers and MNOs typically enlist a third party to develop and administer their mobile microinsurance programmes. A handful of business-to-business companies have the expertise to design policies simple enough to be bought via mobile devices, handle claims and manage other back-office functions. Two of the leaders in this field are MicroEnsure and Bima, which is owned by the Swedish investment firm Kinnevik. These are often organisations that have their roots in donor-funded development – MicroEnsure, for example, is a for-profit company that grew out of seed capital from the Bill & Melinda Gates Foundation. The challenge for the future will be to move from a loyalty-based model to one in which customers actively seek out the product and pay for it.


Introduced in the Nigerian market in 2013, takaful takes a pooled approach to coverage. Members pay in, take out when a claim is filed and share in any leftover profits at the end. Takaful is part of a larger portfolio of Islamic financial products popularised in recent decades, as charging interest rates or engaging in speculation or excessive risk taking is forbidden, instead offering sharia-compliant alternatives to conventional financial services.

Three takaful structures are now permitted in Nigeria: mudaraba, wakala and a hybrid of the two. Mudaraba is essentially an arrangement in which the company shares in profits or losses along with the customers, whereas the wakala structure allows providers to charge a fee for these services instead. Takaful firms are required to establish advisory councils of experts (ACEs), consisting of at least three members – two of which must be specialists in Islamic law and jurisprudence and one of which must be experienced in conventional product offerings. These members will advise the company on whether their products, financial reporting requirements and other affairs are in compliance with sharia. As Islam has no central authority, it is left up to insurers to decide for themselves by consulting with sharia scholars and other experts on these boards, and left up to consumers to evaluate the options on their own.

A takaful licence – whether for general or family takaful – requires N100m ($610,000) in paid-up capital. Conventional insurers can also offer these services through takaful windows, provided the takaful company’s capital and operating funds are ringfenced. One such example is Halal Takaful, offered by composite insurer Cornerstone Insurance.

In other parts of the world, Islamic finance is not marketed exclusively to Muslims. In the case of Nigeria, even if non-Muslims reject takaful for its religious connotations, as opposed to judging it on its merits as a financial service, the country still offers one of the largest Muslim populations in the world, for a market numbering over 80m.

For takaful operators in the country, the greatest challenge is likely to be cost. Global trends show that Islamic financial products are consistently more expensive than their conventional counterparts, chiefly because of the added cost of sharia compliance. This means that takaful operators need to choose between accepting a lower profit margin and convincing consumers to pay slightly more.