Given that the guiding principle of micro-insurance is the provision of insurance cover for people with low incomes, Africa offers an extensive and very promising market for the industry. In 2011 the World Bank reported that almost half of the continent’s population earned less than $1.25 per day.
Micro-insurance has received a lot of attention – and capital – as a result. However, the emergence of micro-insurance services and products has not been even across the continent, varying depending on supporting legislation, financial inclusion and broader consumer awareness. While some nations have adopted it readily as a central component of a wider financial inclusion drive, introducing legislation to support it and charging state authorities to promote it, in others growth has been more organic and, therefore, slower.
The availability of data for the fledgling industry similarly varies from one jurisdiction to another, but in 2016 the publication of a report entitled “The Landscape of Micro-insurance Africa 2015” carried out jointly by the Munich Re Foundation, the Micro Insurance Centre and the Micro Insurance Network revealed a mixed picture, with advanced economies providing high coverage ratios and emerging markets with negligible amounts of micro-insurance activity. A curious irony also arises from the results of this regional snapshot: in many cases it is more difficult to access micro-insurance in countries with the lower per capita income levels, where the concept is theoretically most suited.
At a headline level, the growth of the African micro-insurance industry over recent years has been impressive, with total written premiums in the continent rising from $387m in 2011 to reach $647m in 2015, according to the “Landscape of Micro-insurance Africa 2015” report.
More than 200 providers located in 36 of Africa’s 54 countries have issued micro-insurance policies to approximately 62m people. The majority of the continent’s micro-insurance consumers, around 46m, invest in life products, but between 2011 and 2015 the fastest growth rates have come from other business lines, such as health, with coverage extended to 8.4m people, property with 4.5m and agriculture with 1.1m DELIVERY CHANNELS: In terms of distribution, mass market channels, such as mobile network operators (MNOs), retailers and funeral parlours, are the single-biggest route to customers for the continent, accounting for around 45% of distribution in terms of lives covered, while dedicated microfinance institutions, which provide a broader array of services, account for approximately 14% of the market. Encouragingly, the high distribution costs that have arisen in other regions, such as South America, have not emerged as a problem in the African context: median commissions across all channels of distribution run at a relatively modest 10%, although in isolated instances rates as high as 50% have been reported.
With metrics such as these, the African micro-insurance industry might be said to be developing along an encouraging trajectory. According to the report, the aggregate micro-insurance coverage ratio in 2015 was 5.4%, which compares favourably to 4.33% coverage seen in Asia and Oceania and is not far short of the 7.9% of Latin America and the Caribbean. However, assessing the industry on the strength of aggregate data is of limited utility when it comes to a continent as diverse as Africa, and it is only by looking at the national level data that the true picture of the continent’s micro-insurance industry emerges.
One characteristic shared by nearly all of the African jurisdictions where micro-insurance has gained a foothold, is the speed of the industry’s recent expansion – in most cases driven by a realisation on the part of governments that the concept is a useful tool in the ongoing battle to increase financial inclusion. In Egypt, for example, the nascent industry has expanded by 33% since 2011, despite the relatively small role played by insurance in the wider arena of financial activity, on the back of efforts by successive administrations to broaden the range of financial tools for low-income households and businesses. The potential for continued growth across the continent is therefore a very real one.
Drilling a little deeper into the micro-insurance data that is available for Africa reveals a fragmented landscape. As is the case with many of the continent’s financial services, a handful of the more advanced economies account for a disproportionate percentage of the activity. South Africa has shown such enthusiasm for micro-insurance that it now covers around 64% of the population, by far the highest rate on the continent. Life insurance is the dominant line, with more than 30m lives covered, while around 6m customers are covered by credit life products.
As one of the most developed micro-insurance markets in the region, micro-insurance growth in South Africa over recent years has been steady in comparison to the triple-digit rates seen in less mature markets, running at around 10% between 2011 and 2014. This period has seen the emergence of new business lines in the micro-insurance mix, with property cover showing a significant increase in policy issuances from a nugatory 10,000 households to over 700,000. Personal accident cover has also emerged as a promising business line for South African microinsurers, with over 1.3m policies issued by 2014.
Looking at the distribution scenario in the country, one of the factors driving the industry’s early success becomes apparent. Over 50% of the lives covered by micro-insurance comes not from dedicated microfinance institutions but from mass channels, including retailers and funeral partners, which grant the industry a high level of access to the population.
This phenomenon illustrates the importance of local culture to the prospects of micro-insurance in any given African jurisdiction. In South Africa traditional burial schemes and stokvels (savings clubs), have traditionally made up a sizeable informal insurance sector, underpinned by a cultural demand that funeral ceremonies should be commensurate with an individual’s status – often at considerable expense. The government’s desire to bring this activity within the regulatory sphere has encouraged it to adopt a proactive stance with regard to micro-insurance legislation. In turn, a consumer base well accustomed to informally saving small amounts on a monthly basis towards funeral costs has had little difficulty adopting the more formal micro-insurance products which have been developed over the past decade.
This fortunate set of circumstances is, however, entirely absent in some of the continent’s other markets. The Egyptian economy, for example, shares a number of characteristics with that of South Africa, including sophisticated capital markets, a large and dynamic banking sector and a long history of financial activity, yet end-of-life traditions differ significantly, and there is no informal funeral savings market comparable to that of the stokvels.
Moreover, as with other Muslim-majority countries – where certain financial instruments, such as interest, contradict sharia precepts – the concept of insurance has historically seen slower uptake. Accordingly, micro-insurance in Egypt has yet to make a meaningful impression on the market, exhibiting a coverage ratio of just 0.3% and, unlike the broad reach of South Africa’s distribution model, its growth to date has been driven solely by dedicated microfinance institutions.
Between these two extremes, the development of micro-insurance in Africa’s national insurance markets has seen a variety of trajectories. Interestingly, much of the innovation seen as central for future growth is taking place in jurisdictions where micro-insurance coverage is still relatively modest.
The market in Kenya, for example, which is in a great many respects representative of the state of the micro-insurance industry in the East Africa region, in 2015 had a coverage ratio of just under 6% in what is a population of approximately 45m – the third-highest in the region, behind Uganda (6.1%) and the much smaller market of the Comoros (8.47%). This growth has occurred in spite of the country not having yet finalised draft legislation for the industry.
Even in the absence of a comprehensive regulatory framework, the growth of the industry has been impressive: between 2011 and 2014, the number of Kenyan lives covered by micro-insurance increased by 112%, according to data from the Micro-insurance Network. Of similar markets in the region only Uganda (70%) and Burundi (44%) came close to this rate.
Similarly to South Africa, the bulk of market growth in Kenya is traditionally accounted for by credit life and life micro-insurance, with around 1.7m people and 1.1m people covered in 2014, respectively, compared to 800,000 and just under 400,000 in 2008, according to data from the Munich Re Foundation published in April 2016. However, agricultural products have also seen rapid expansion, albeit from a low base. Starting from zero coverage in 2008 the number of people covered by agricultural micro-insurance rose to 50,000 people in 2011 and then 200,000 in 2014.
The country is also emerging as an early adopter of new micro-insurance concepts. According to research by the GSM Association (GSMA), a global trade body for mobile operators, Kenya has a variety of micro-insurance initiatives either under way or in the pilot stage. Among the new products on the Kenyan market is Kilimo Salama, a partnership between UAP Insurance and the Syngenta Foundation for Sustainable Agriculture, which acts as a weather index insurance vehicle to allow wheat and maize farmers to insure against excess rain or drought. Elsewhere, Kenya Oriental Insurance has opened a micro-insurance line for personal accident cover, while companies such as the CIC Insurance Group, First Mutual Life and GA Insurance have rolled out micro-insurance platforms in the more traditional segments of life, and life and savings.
Looking to West Africa, a different pattern emerges. Only Ghana, with a micro-insurance coverage ratio of 28.9%, has seen a significant movement of micro-insurance into the wider insurance space. This is in part driven by an increase in GDP per capita, which has buoyed incomes but not enough for many Ghanaians to access traditional insurance schemes, and can also be attributed to the development of a clear regulatory framework for the industry in 2013 and by the arrival in Ghana of a useful delivery channel in the form of mobile phone networks.
However, Ghana remains an outlier, particularly when compared to the rest of the region. While micro-insurance coverage in some countries, such as Togo, Burkina Faso and Benin, has crept into the 1% to 4% band, a large number of West African nations exhibit rates of less than 1%. Côte d’Ivoire is a good of example of such a jurisdiction, with a coverage ratio of 0.73% in 2014. Nearly 80% of the micro-insurance policies enacted in the country were delivered directly by microfinance institutions, a much larger proportion than that seen in more advanced microfinance jurisdictions, such as Kenya, where ordinary financial institutions have taken up the concept and distributed it to a wider customer base.
However, while the industry remains a fledgling one in Côte d’Ivoire, growth in recent years has been very encouraging. Between 2011 and 2014 micro-insurance coverage in the country expanded by 123%, a rate second only to Ghana (337%). This is largely in line with the impressive expansion demonstrated by a large number of the other markets in the region: Burkina Faso showed a 118% expansion of micro-insurance over the same period, while Sierra Leone and Benin showed 76% and 68%, respectively.
As with other regions, life and credit life insurance have provided much of the momentum behind this trend, followed by personal accident cover. In Togo, for example, nearly 330,000 lives were covered by life or credit life products in 2014, while the next biggest line – health insurance – covered just 3900. In markets such as Mali and Niger, life and health products have emerged as twin pillars of the domestic industry, covering roughly equal numbers of people. Other lines, such as property, credit life and agricultural cover have shown a more patchy expansion, but the potential for growth in these segments in a market such as Côte d’Ivoire – which has a population of 20.8m – is clear.
Yet despite the promise of micro-insurance in the African context, the challenges to its expansion are considerable. The most obvious is that of expense: the baseline cost of selling an insurance policy, implementing sustainable underwriting criteria and administering a subsequent claim does not change with the value of the policy. Transaction costs can be considerable and margins in micro-insurance are small. Generating a high volume of business is, therefore, a priority for micro-insurance operators in Africa, but this is a daunting prospect in an undeveloped market characterised by geographical diffusion and, in some cases, a lack of awareness regarding the benefits of insurance. Moreover, the challenges do not end when the business is secured. The collection of premiums is a particular concern for micro-insurers, given that their customers often have irregular cash flows and poor access to traditional payment mechanisms.
The increased use of technology in the micro-insurance industry is fast emerging as the most effective response to these challenges. The aggregate mobile penetration rate for Africa stood at around 67% in 2015, and the GSMA has projected that approximately 80% of sub-Saharan Africans will have access to mobile phones by 2020.
Micro-insurers are increasingly interacting with their client base through their handsets, particularly in the areas of customer services and marketing. While the area of payments is still dominated by manual processes, insurers are seeking to reduce their costs by utilising mobile technology to a certain extent. For example, the bulk of market growth in Kenya is traditionally accounted for by credit life and life micro-insurance, with 1.7m people and 1.1m people covered in 2014, respectively, compared to 800,000 and just under 400,000 in 2008, according to “The Landscape of Micro-insurance Africa 2015” report. Even in claims payment, a process which has tended to lag behind others in terms of mobile adoption, 30% of African micro-insurers are using the mobile channel. This new channel, in actuality, is made up of sub-channels, with MNOs offering a choice of routes to the customer.
Voice services are widely used by insurers to communicate with clients, according to the GSMA, and offer an obvious advantage in terms of sales and marketing. The SMS channel is a more complex undertaking, and often requires integration with an SMS aggregator, the software gateways which provide connectivity with mobile operators for content such as SMS messages and ringtones, at a price. Another channel offered by MNOs is Unstructured Supplementary Service Data protocol, which is available on even very low-end handsets and allows for secure, interactive processes, such as policy enrolment and administration.
Perhaps the area most resistant to the mobile solution is that of payments, but recent years have seen the emergence of a number of interesting mobile payment collection models. In countries with live mobile money platforms, for example, stored-value money accounts have been successfully rolled out by MNOs. Customers can use these accounts to make payments for their insurance policies in the same way that higher-income customers would use an ordinary bank account. Some micro-insurers have also teamed up with MNOs to enable customers to pay for their policies using their existing pre-paid or post-paid mobile account – a practice which has a lot of potential in Africa, as mobile penetration encroaches into even the lowest-income segments.
According to the GSMA another option for micro-insurers is to eschew the premiums collection completely, instead allowing MNOs to cover the cost of insurance on behalf of their customers as part of their loyalty schemes. This model is followed by Tigo Ghana in conjunction with Vangard Life. Insurance coverage is becoming a more common feature in MNOs’ loyalty schemes, particularly in countries with higher penetration rates, where retaining customers is paramount.
Harnessing mobile technology to drive micro-insurance growth is an enticing prospect for market participants. The wider uptake of the mobile channel will largely depend on pricing. The snapshot of the regional industry taken by the Munich Re Foundation, the Micro Insurance Centre and the Micro Insurance Network in 2015 found that one-third of micro-insurers had linked with an MNO to provide mobile services, while another third had made plans to do so. However, of those that had not made plans to take the mobile route, the cost of the model was frequently cited to explain their reluctance. Mobile micro-insurance services are certainly cheaper from the customer’s perspective, averaging $0.65 in annual premiums compared to $20 for non-MNO products, but insurers face a high investment cost at start-up and then the longer-term prospect of paying commission to their MNO partner. Working out a revenue-sharing model that is beneficial to both the insurer and the MNO will be vital to the segment’s future growth.