Although few regions of the world have such an acute need for a multitude of insurance products, Africa remains desperately under-insured, with a penetration rate of less than 3%. Finbarr Toesland explores the world of African insurance and discusses how this vital sector can redefine and reshape itself to begin fulfilling its great potential.
Africa’s insurance market shows early signs of a solid recovery from the impact of Covid-19. While the pandemic is set to shock the sector in the short term, ongoing effects of the novel coronavirus may play into longstanding industry trends that offer new opportunities. From a continuing shift to digital and a drive towards consolidation, the insurance sector across the continent is preparing for a reshaping.
Compared to both established insurance markets and emerging countries, Africa is at a relatively early stage of development for insurance. Total insurance penetration stood at only 2.78% in 2019, far below the global average of 7.23%, says the African Insurance Organisation. According to McKinsey, South Africa dominates the African insurance market, generating 70% of the continent’s insurance premiums at a value of $48.3bn. Life insurance, non-life insurance and reinsurance are the three main categories, with each nation performing very differently in the penetration rates of these product areas; for example, non-life insurance comprises 98% of the Angola market but only 20% of the South African sector.
There are undoubtedly challenges ahead for African insurers in the coming years as they rebound from the impacts of Covid, but the solid market fundamentals of African nations remain attractive for long-term growth.
Many traditional insurers have realised the urgent need to modernise and scale up their technological set-up in recent years. The ramifications of the pandemic include a higher demand for remote access to conventional in-person services, further boosting the trend of insurers offering a more comprehensive digital experience.
According to a report from McKinsey, respondents in all the African countries surveyed said they expect to use digital channels, such as online and mobile banking, more in the post-pandemic world. For example, 56% of Nigerians expect to use online banking more and 51% of Kenyans say they will use mobile more in the future.
As in any industry, putting the right product in front of the right customer is essential to not just surviving as a business, but thriving. With the African middle class growing across many African nations, the target market for insurance products is growing.
Eunice Kinungi, an experienced leader in the insurance industry with over 15 years of knowledge gained working with companies such as UAP Old Mutual and Resolution Health, has seen first-hand the challenges facing insurers.
“The continent still lacks flexible, affordable, and tailored policies that will unlock insurance for the African consumer. There needs to be a key focus at a macro level to unlock insurance’s potential for stirring economic growth by developing policies that support insurance growth,” she says.
Now working as Head of Insurance at the Kenya-based Insurtech firm, Lami Technologies, Kinungi is helping to provide an advanced technology platform for a range of businesses, including banks and tech companies, that enables them to integrate Lami’s API solution and seamlessly give their customers access to insurance products.
By working with leading companies in identity management and valuation, as well as embracing innovative technology such as cloud computing and automation, Lami’s products can be tailored to the exact needs of customers.
For Kinungi, a central aim of the Insurtech firm is to shift the perception of insurance. “Insurance unfortunately, does not have the best reputation and there is a general distrust of insurance companies perpetuated by poor customer service and unpaid claims,” she says. “Overturning this perception is an ongoing challenge for us, particularly as a new brand in the market.”
By replacing insurance jargon with common sense language, quickly settling claims and creating a more streamlined process, the company hopes to play a part in the insurance transformation in Kenya, and beyond. Kinungi says the company has seen the customer base grow steadily as customers begin to trust them more.
The approach Lami takes with digital insurance massively reduces overheads and increases efficiencies, whilst still offering the customer the service they want. “With the advance of technology, there is great potential to distribute retail insurance products that are packaged via digital aggregators. There is also a vast market under the SME sector which is quickly being taken over by start-ups. Technology and innovation will be the key drivers of insurance penetration,” says Kinungi.
Consolidation on the way?
Thomas Wiechers, Assistant Director, Risk & Resilience, at FSD Africa, a Nairobi-based non-profit company that promotes financial sector development across sub-Saharan Africa, points to the opportunity that new start-up Insurtech firms have to disrupt the industry, in part due to their lack of legacy systems that add to administrative complexity and costs.
Yet, start-up firms must also contend with their own challenges. “Regulatory hurdles, including capital requirements or qualification requirements for senior management, for the establishment of new insurance companies, are discouraging Insurtech in some markets,” he says.
Fragmentation is common in many markets, with a large number of insurers competing for a relatively small customer base. Consolidation could be a beneficial route for some countries, including Kenya, Ghana and Nigeria, as small local insurers typically do not have the financial resources to both invest in expansion activities and also face challenges to comply with capital and solvency requirements.
“There are several markets where market consolidation would likely lead to better customer service, better product value, better underwriting decisions and more market stability overall. This is, ultimately, a challenge and responsibility for regulators,” adds Wiechers.
Regulators in several countries have recently increased the capital requirements for insurers to encourage the formation of larger entities that can play a more solid role in the growth of the industry. For example, Nigeria’s National Insurance Commission (NAICOM) increased the minimum capital requirement for insurance companies from N2bn ($4.9m) to N8bn for life insurance businesses and from N3bn to N10bn for general insurers.
Countries in the West African Economic and Monetary Union (WAEMU) also saw the minimum amount of share capital required increase from CFA3bn ($1.8m) to CFA5bn. As the pandemic continues to have an impact on insurers, some smaller firms may not survive in the medium term.
“The economic effects from the pandemic will continue to increase pressure on corporate insurance business,” explains Jeremy Gray, Principal at the Cape Town based Centre for Financial Regulation and Inclusion (Cenfri), a think-tank supporting financial sector development and financial inclusion in Africa.
“At the same time, the limited focus on products that offer real value and speak to the needs of individuals together with poor claims experience has undermined trust across most retail markets over an extended period of time.”
Stagnant insurance firms that have few resources and technological expertise face challenges in diversifying their product mix and seeking further penetration in retail and business segments. Digital-first competitors are also set to compete with conventional players in a range of markets as technology is used as a key competitive advantage.
Strengthening and further formalising the insurance framework can pave the way for the long-term growth of the sector, according to Gray. “There is a big role for regulators to play to encourage innovation. Increasingly, insurance regulators across the continent are being given an explicit legislative mandate to encourage market development. This means they are now required to take steps to enable innovation,” he says.
Even in areas where a relatively strong market environment exists, effective communication of either regulatory grey areas or complex parts of new bills can prove vital to foster growth and insurer confidence. No one-size-fits-all regulatory structure is applicable to all the diverse markets found within Africa. For Gray, while formal sandboxes are growing in popularity, they may not be appropriate for most markets.
“However, enhanced flexibility, consistency and proactive communication with insurers and Insurtechs around innovation, emerging risks and their regulatory stance can present strong signals to market players that regulators are willing to embrace and enable innovative products,” he says.
While each region and country in Africa faces its own distinct set of challenges, many markets face similar problems in their development. The often intense competition between insurers on compulsory product lines, like motor insurance, drives prices down in some regions, leaving many customers to select their provider based on price only. An over-reliance on price can also result in service levels falling.
Despite the uncertainties and slow-down induced by the pandemic, the combination of a burgeoning innovation ecosystem across the insurance sector, an increasingly confident regulatory network and solid economic growth are all contributing to a strong outlook for insurance across the continent.
Insurers targeting countries in North Africa face different challenges from those seeking to reach customers in sub-Saharan Africa. While penetration rates are higher in North African countries than sub-Saharan African nations, at a global scale, they remain lower than the rates found in Western and Asian countries.
Building on solid financial growth in recent years, Morocco’s insurance sector has a positive outlook. Non-life premiums make up a 55% market share and are growing at a rate of 3.9% per year, much faster than life insurance. The most recent statistics show that life insurance premiums fell slightly by 0.2% last year, to $2.2bn, compared to non-life premiums, which reached a total of $2.8bn last year.
Growth is also expected to come from takaful (Islamic insurance), as Morocco’s parliament approved a law in 2019 that allowed takaful subsidiaries to be launched by insurance companies.
Egypt’s insurance industry is also set to record strong growth of 16% this year as micro insurance products expand the market, and travel insurance premiums increase. Insurers in this country are also leveraging the benefits of innovative technologies to offer flexible policies to customers.
In Tunisia, compulsory insurance for auto liability and various property-related insurance policies has supported limited growth in the market, but it remains a challenge for both conventional and digital firms to interest citizens in products that are not directly mandated by law.
As a result of the compulsory insurance, a great deal of the population seek out the lowest-cost products that meet the legal requirement, and not the most appropriate policies for their needs.
There are no restrictions on foreign companies entering the Tunisian insurance market, with new foreign insurers simply needing to register with the General Insurance Committee; once approved, they are able to compete on the same terms as local firms.
In both Anglophone and Francophone West Africa, non-life insurance is the dominant insurance type, with this product comprising 70% and 56% of the entire market in the respective regions. Anglophone West Africa has an extremely low insurance penetration rate of 0.3%, compared to 1.2% in Francophone Africa, according to McKinsey data.
The insurance oversight body, Conférence Interafricaine des Marchés d’Assurances (CIMA), was established in 1992 to improve the insurance process in the sub-Saharan region. By creating a single regulatory structure, the CIMA has been beneficial in promoting stability and encouraging professionalism in the industry. Yet, having a single system of regulation for 15 countries, located across the breadth of Africa, establishes a one-size-fits-all policy for a diverse range of markets, leading to some member states facing a complex framework.
“Nigeria and Ghana, in West Africa, are important hubs – particularly given the size of their economies – however, much of the rest of West Africa is constrained by onerous and inflexible regulatory approaches under CIMA,” says Jeremy Gray, Principal of the Cape Town-based Centre for Financial Regulation and Inclusion (Cenfri).
“Whilst the CIMA zone may enable somewhat easier movement for insurers across countries, in practice the level of bureaucracy required to adapt [to] rules often holds innovation back amongst member countries,” he adds.
Despite the economic power of Nigeria and its growing middle class, life insurance in the country stands at just 0.1%. Due to the low rate of insurance in Africa’s largest nation of more than 200m people, major opportunities exist for this low penetration rate to grow substantially.
Expanding the availability of sharia-compliant takaful insurance products is one potential avenue to achieving development in the industry. Directly targeting formally employed people to increase insurance uptake could help grow this relatively untapped segment, with only 10.6% of this group of Nigerians possessing an insurance policy.
Ghana may not be the biggest insurance market on the continent but its current situation is largely underdeveloped, with 51 insurers making up less than 3% of total financial sector assets and serving just 6% of adults with a non-health-related insurance product. According to analysis by Cenfri, close to 5.5m further adults could potentially be served with insurance in Ghana.
Several deals have been struck in recent years to expand insurance penetration in Ghana, with insurance firm Hollard Ghana partnering with retailer, Melcom Ghana, to offer insurance through in-store Hollard-on-the-go booths.
Kenya’s insurance market is one of the most robust in East Africa, with the sector experiencing growth every year since 2013. Despite the track record of growth, insurers have experienced diminishing returns on their equity due to a mix of tight margins, slow premium growth and insurance fraud.
As the top five non-life insurers in Kenya account for 38% of the overall market, consolidation may be a possibility in the future to improve economies of scale and reduce some of the fragmentation found within the sector.
“East Africa is emerging as the most vibrant fintech hub on the continent, aside from South Africa. Political buy-in, a track record of successes, such as with mobile money, and a fairly good skills base mean countries like Kenya, Uganda and Rwanda are amongst those with the greatest innovation taking place,” explains Gray.
The Ugandan insurance market currently has an uptake of 1.4%, with a new Insurance Act being introduced in 2018 that expanded the Insurance Regulatory Authority’s (IRA’s) mandate. As part of this mandate, market development and innovation are promoted, with the pandemic leading regulators to shift their approach.
Many insurers were immediately faced with the need to digitise their operations as lockdown came into effect. While some had already begun their digital transformation journey, the more traditional firms that had not invested in cutting-edge technology saw disruption to their operations.
Regulators adapted their strategy to incorporate the new normal into the framework and ensure the most appropriate mechanisms were in place to encourage innovation and support insurers as they capitalise on the opportunities to modernise.
As Rwanda was the first African nation to implement a national lockdown due to the Covid pandemic, their insurance market was one of the first on the continent to feel the impacts of this dramatic change. During this first lockdown, the government of Rwanda did not consider insurance to be an essential sector, which led to an almost complete decline in physical insurance services. While this abrupt closure of operations for many insurers is set to have a negative short-to-medium-term effect, the market fundamentals of the country indicate that it will create a delay in growth rather than a substantial decline.
The insurance sector in South Africa is by far the most advanced and developed market across Africa. With a gross premium amount of $48.3bn that accounts for over 70% of the entire African insurance market, life insurance policies comprise the majority of South Africa’s insurance products, with 80% of premiums being related to this area.
An innovative use of technology forms the basis of the South African insurance market, with citizens responding well to purchasing the insurance they need through digital platforms. Not only have insurers found that automation and digitisation of the entire insurance process brings costs down, it also offers a more seamless experience for customers.
South African Insurtech start-up Naked is one of the leading African innovators in the insurance space. Since entering the market in 2018, this digital-only insurance platform has offered immediate coverage for homes and vehicles, as well as individual items. Unlike the often complex and unintuitive process of buying insurance from conventional financial providers, Naked uses AI and automation to reduce costs and improve the user experience.
The strategy taken by other nascent insurers can also be replicated by firms in other African countries. “The approach of Discovery in South Africa is a powerful model to learn from across markets – by integrating tangible short-term benefits, rewards and encouraging risk management behaviour leveraging IoT technologies (like smart watches and telematics in vehicles) they have, for many consumers, elevated themselves beyond simply an insurance provider and built far greater trust than more traditional providers,” says Gray. International insurers also have a strong presence in South Africa, increasing competition in the industry.
The Covid crisis has acutely impacted South Africa’s insurance sector, with the country already facing a downgrade of their credit rating and a damaging recession. According to analysis by McKinsey, the combination of these factors will see a sharp decline of 15% over the next two years in the gross written premiums (GWP) paid by citizens, with life insurance seeing a reduction of 18%.