Improvements and obstacles

“INSURERS SEE THREE MAIN AREAS FOR IMPROVEMENT to enhance insurance penetration. Firstly, the lack in insurance awareness is still the main obstacle. Consumers do not properly understand the benefits of the product...

There appears to be an agreement in the financial markets that insurance is underperforming in Africa; even more so in Nigeria, the continent’s largest economy by gross domestic product (GDP) and also by population size. In the wake of regulator-induced recapitalisation, a number of international insurers, looking at Nigeria’s population have come in and taken position, mainly through acquisitions; and there is talk that we will see more of such as another round of recapitalisation is upon the industry. Last year, Africa Insurance Barometer released a report on the state of the insurance industry across Africa. We here take a sneak view at what they saw as areas needing improvement and the obstacles that need to be overcome… Take a reading …

“INSURERS SEE THREE MAIN AREAS FOR IMPROVE MENT to enhance insurance penetration. Firstly, the lack in insurance awareness is still the main obstacle. Consumers do not properly understand the benefits of the product and its mechanisms. This is obviously an educational challenge that some insurers hope to address with more basic insurance products, such as microinsurance, but to a certain degree also compulsory insurance. Low financial literacy and inclusion in some markets and the limited use and penetration of bank accounts is felt to be closely related to the low uptake and understanding of insurance products as well. Finally, interviewees also recognise that consumers often do not trust insurers, largely because they do not believe in the concept to pay upfront for protection that only pays out in the event of a loss. However, insurers also point out that there is still a shocking number of players that refuse to pay claims in the event of a loss.

“Secondly, affordability remains a challenge. Insurers emphasise that for many consumers insurance is too expensive to buy or that in an environment of low disposable income or poverty there are still many other needs that have to be addressed before the protection of assets gains in importance. However, insurers are fully aware of these issues and try to reduce production or distribution cost through the use of technology but also by simplifying products. Finally, in

admit that products may also lack in appeal to reach consumers. Many insurance products have simply been transferred from mature markets to the African environment. However, as Africa’s middle classes expand and the continent’s insurers aim to access new consumer segments, the need for innovation and new product design becomes more apparent. As a consequence, insurers also invest into local talents to develop solution tailored to domestic needs.

“Support for micro-insurance with close to 60 % of interviewees pursuing a micro-insurance strategy is already quite high. However, the executives polled also point out that they specifically develop simplified, low-cost product solutions, for instance in credit life, which target the low-income market segment, but may not necessarily fulfil all criteria for a micro-insurance product. Still, more and more insurers see a growing business opportunity in accessing the mass market, partially driven by the price pressure in other segments but also by the opportunities that data and distribution cost to access this segment have come down. Finally, many insurers also see a need in micro-insurance to provide a first-hand experience with insurance products to consumers and thereby build confidence into the business concept and overcome the lack in awareness and understanding.

“However, still 40% of interviewees state that they do not pursue a micro-insurance strategy. Some of these companies are not convinced that the product can be produced, distributed or managed efficiently and generate an unsubsidised profit. Others emphasise that in certain jurisdictions regulation still does not support the concept, for instance by requiring insurers to set up a separate and independently capitalised legal entity to run a micro-insurance business – which may mean that such a product will not be commercially viable.

“Almost 50 % of all insurers interviewed for this year’s Barometer plan a geographic expansion into another African market in the next 12 to 24 months. The insurers pursuing such a strategy are keen to capitalise on the overall growth opportunity for Africa’s insurance market as the economy rebounds and the insurance market start to grow faster again. Secondly, the cost and barriers for such an expansion have come down as information of other markets is more easily available or accessible.

“However, a geographic expansion may not only be borne out of an opportunity but also out of a need as Africa’s insurers search for avenues to escape predominant price pressure in home markets or, alternatively, to gather scale beyond traditionally often small domestic markets and thereby to bring down operational costs. Still, as already stated previously, local regulation does not necessarily facilitate a geographic expansion as supervisors in some markets increase the hurdles for foreign insurers to operate in a market and limit access.”