The Expert Explains: What is the right way to boost insurance coverage in Africa?
Mauritius is seeking to position itself as a platform for companies to enter insurance markets in Africa. Insurance is considered a vital financial product to guard against unexpected events in much of the developed world, yet Africa’s share of the global market in insurance is miniscule Why is the market for insurance in Africa so underdeveloped, with the exception of South Africa?. For those who wish to dig deeper, here’s the explanation, straight from the desk of our expert guest contributor, Samantha Seewoosurrun, a reputed professional consultant in the financial services sector.
Mauritius is seeking to position itself as a platform for companies to enter insurance markets in Africa, which are currently highly fragmented. Leading French insurer AXA has already announced that it is setting up its regional headquarters in Mauritius, and South African firm Old Mutual is also setting up operations. Major international players such as Swiss Re, Prudential and Sanlam have also identified market opportunities and are buying insurers in Africa. So what are the key challenges to increasing insurance penetration in Africa? Can technology provide part of the solution? What about the issue of trust?
Insurance is considered a vital financial product to guard against unexpected events in much of the developed world, yet Africa’s share of the global market in insurance is miniscule. According to figures from Swiss Re, in 2013 Africa’s share of the global market was only 1.5%, and if South Africa was excluded then this figure plummets to just 0.4%.
Why is the market for insurance in Africa so underdeveloped, with the exception of South Africa? The most obvious answer is that most Africans struggle to meet their day-to-day needs and simply cannot afford it. However, KPMG has prepared an interesting analysis in a recent report on “Insurance in Africa” which points to a host of other factors which limit insurance penetration on the continent. These include a lack of trust in financial service providers, a lack of incentives for multinationals to develop the sector, and a lack of reliable information, which makes it difficult to assess people’s creditworthiness (and also risk, I would add).
Furthermore, according to KPMG, potential growth of insurance markets is also hampered by poor legal and judicial systems, a lack of human capital and expertise, shallow markets which make it difficult to capitalise insurance and reinsurance companies, and communities often use informal forms of insurance rather than informal methods.
Why is South Africa so different? South Africa has one of the highest insurance penetration rates in the world. KPMG’s report highlights that, while the financial sector is sophisticated overall, other reasons include a high level of competition within the market and a sizeable group of wealthy providers that can afford insurance, coupled with a sufficient degree of trust and a high level of risk awareness, possibly intensified by the high level of crime and car accidents in the country.
What about the product sets, in terms of life and non-life insurance? It seems that life insurance is unaffordable for the majority of African citizens, but the lack of data on mortality and longevity, as well as a lack of actuarial skills, are a major practical barrier to insurance companies acting on the African continent.
In terms of other types of insurance, the World Bank has pointed that in general, across developing countries, 17% of adults have health insurance but across the region of sub-Saharan Africa, Middle East and North Africa the figure is only 3%, and in fact agricultural insurance is slightly more popular, taken out by 6% of people in the region of Africa and the Middle East.
So what can be done to stimulate market growth, and can technology play a role? Given that the vast majority of Africans have no history of purchasing insurance policies, will the market develop if the process of buying insurance can be made as simple as a few clicks on a mobile phone?
This approach has been adopted by South African insurer Hollard Insurance, which has sealed distribution partnerships with a number of telecoms firms including Callsure in South Africa in 2008, Trustco in Namibia in 2008 and MTN and NSIA in Ghana in 2011.
Under these partnerships, telecoms companies take a commission after each payment is completed by a customer via mobile banking or airtime communication credit. It is certainly an innovative and cost effective distribution channel, and also neutral in terms of location, since people in rural areas with a mobile phone are equally able to take advantage of it. On the downside, do people really know what they are buying, particularly when ‘the devil in in the detail’ most often?
What about the issue of trust? If we make an international comparison, the EU is just updating its own legislation on insurance distribution, which dates back more than a decade, and is seeking to introduce new ways of ensuring that consumers know what they are doing when purchasing an insurance product. For example, the new legislation will provide for a new “Insurance Product Information Document” for consumers setting out the means for payment of the premium, exclusions and obligations on making a claim, amongst other factors.
If a lack of trust in providers really is a problem in Africa, those entering the insurance market should look carefully at their distribution models, and the respective roles of traditional brokers and technology. At the same time, African regulators should ensure that they strike the right balance between an enabling regime to foster market growth on the one hand and adequate consumer understanding and protection on the other.